(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor’s motives, hesitates to suggest to Tercek that the company’s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.
The Financial vice president is manipulating the company’s financial condition.
An ethical dilemma arises when two sets of human ideals are conflicting, both of which are desirable but cannot be fully realized. There is no such thing as a one-size-fits-all ethical solution; instead, many approaches address the balance of values in different ways for different people.
The controller points out that the financial vice president is misrepresenting the company's financial situation by implying that it had grown more efficient when, in reality, the better ratio was achieved by estimate manipulation. The controller, on the other hand, is hesitant since estimating does not follow strict, well-defined criteria.
The problem arises when Lilly is required to evaluate the benefits to the firm if its profit margin on sales looks to be substantially higher against the accountant's typical responsibility to disclose financial data properly (that is, in a manner that is consistent with the previous reporting).
Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to $850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.
Acid-test (quick) ratio
Accounts receivable turnover
Debt to assets ratio
Long-term debt to assets ratio
Sales to fixed assets (fixed asset turnover)
Sales as a percent of 2015 sales
Gross margin percentage
Net income to sales
Return on assets
Return on common stockholders’ equity
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?
A close friend of yours, who is a history major and who has not had any college courses or any experience in business, is receiving the financial statements from companies in which he has minor investments (acquired for him by his now-deceased father). He asks you what he needs to know to interpret and evaluate the financial statement data that he is receiving. What would you tell him?
What are the major types of subsequent events? Indicate how each of the following “subsequent events” would be reported.
Answer each of the questions in the following unrelated situations.
d) A company has current assets of $600,000 and current liabilities of $240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?
(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years
Accounts receivable (net)
Inventories (at cost)
Plant & Equipment (net of depreciation)
Liabilities and Stockholders’ Equity
Common stock (130,000 shares, $10 par)
Total liabilities and stockholders’ equity
Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.
A. Compute the following items for Bradburn Corporation.
5. Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2017 to 2018.
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