Question 1: Brief Exercise 24 8 Answer Each Of The Questions

Question 1brief Exercise 24 8answer Each Of The Questions In The Follo

Brief Exercise 24-8 involves calculating various financial ratios and analyzing the effect of transactions and events on a company's liquidity and financial position through multiple scenarios. It asks for specific calculations such as current liabilities based on ratios, average inventory given inventory turnover, the impact of borrowing on current ratios, and the effects of dividends on liquidity ratios. Additionally, it examines inventory turnover's influence on cost savings, the impact of subsequent events on net income, and interpretation of disclosures regarding earnings per share (EPS) in a company's annual report.

Paper For Above instruction

This paper provides a comprehensive analysis of the financial scenarios presented in the brief exercises from Exercise 24-8, aiming to enhance the understanding of liquidity ratios, inventory management, and earnings per share disclosures. The analysis demonstrates how financial ratios are calculated and interpreted, how company transactions and events affect financial statements, and the importance of disclosures in financial reporting.

Part A: Calculating Current Liabilities from Ratios

The first scenario requires deriving current liabilities given the current ratio, acid-test ratio, and inventory/prepaid items. The current ratio of 5:1 indicates that current assets are five times current liabilities. The acid-test ratio of 1:1 signifies that quick assets equal current liabilities. Since inventories and prepaid items total $500,000, these are excluded from quick assets for the acid-test ratio, which consists of cash, receivables, and other quick assets.

Using the information, we set up the equations:

  • Current Assets (CA) = Current Liabilities (CL) x 5
  • Quick Assets = CA - Inventories and Prepaid Items = CA - $500,000
  • Given that Acid-test ratio = 1:1, Quick Assets = CL

Expressing in equations:

  • CA = 5CL
  • Quick Assets = CA - $500,000 = CL

Substituting CA into the quick assets equation:

  • 5CL - $500,000 = CL

Solving for CL:

  • 5CL - CL = $500,000
  • 4CL = $500,000
  • CL = $125,000

Thus, the company's current liabilities amount to $125,000.

Part B: Inventory Turnover and Average Inventory

The second scenario involves calculating the expected average inventory given the changes in inventory turnover from 5 to 8 times a year, assuming sales volume and unit costs remain constant. Inventory turnover is defined as the ratio of cost of goods sold (COGS) to average inventory:

Inventory Turnover = COGS / Average Inventory

Rearranged to find average inventory:

Average Inventory = COGS / Inventory Turnover

From the problem, last year's average inventory was $200,000 with an inventory turnover of 5, so:

COGS = 5 x $200,000 = $1,000,000

This year, the inventory turnover increases to 8, with the same COGS:

Average Inventory = $1,000,000 / 8 = $125,000

Therefore, the average inventory during the current year will need to be $125,000.

Part C: Effect of Borrowing on Liquidity Ratios

In this scenario, a company with current assets of $90,000 (including $40,000 in inventory and prepaid items) and current liabilities of $40,000 is analyzed to determine liquidity ratios and the impact of borrowing $15,000 cash for 120 days.

Initial ratios:

  • Current Ratio = Current Assets / Current Liabilities = $90,000 / $40,000 = 2.25
  • Quick Assets = Current Assets - Inventory & Prepaid Items = $90,000 - $40,000 = $50,000
  • Acid-test ratio = Quick Assets / Current Liabilities = $50,000 / $40,000 = 1.25

Now, the company borrows $15,000 in cash, which increases current assets but does not affect current liabilities immediately (assuming a short-term loan that increases both). After borrowing:

  • New Current Assets = $90,000 + $15,000 = $105,000
  • Current Liabilities = $40,000 + $15,000 = $55,000

Recalculating the ratios:

  • New Current Ratio = $105,000 / $55,000 ≈ 1.91
  • Quick Assets (unchanged, as cash is part of quick assets) = $50,000 + $15,000 = $65,000
  • New Acid-test ratio = $65,000 / $55,000 ≈ 1.18

Therefore, after borrowing, the ratios become approximately:

  • Current Ratio: 1.91
  • Acid-test Ratio: 1.18

Part D: Impact of Dividends on Liquidity Ratios

The company's current assets are $600,000, and current liabilities are $240,000. A cash dividend of $180,000 is declared, which will reduce current assets upon payment.

Before dividend payment (after declaration):

  • Assets = $600,000
  • Liabilities = $240,000
  • Current Ratio = $600,000 / $240,000 = 2.5

After dividend payment:

  • Current Assets = $600,000 - $180,000 = $420,000
  • Liabilities remain at $240,000
  • Current Ratio = $420,000 / $240,000 = 1.75

Thus, the ratios are:

  • After declaration but before payment: 2.50
  • After payment of dividend: 1.75

Part E: Inventory Turnover and Cost Savings

The next scenario examines how increasing inventory turnover from 9 to 12 times annually affects cost savings, based on the company's sales and COGS.

Given:

  • Sales = $144,000,000
  • COGS = $99,000,000
  • Current inventory turnover = 9 times/year
  • Proposed inventory turnover = 12 times/year

First, calculate current average inventory:

Average Inventory = COGS / Current Inventory Turnover = $99,000,000 / 9 = $11,000,000

Next, projected average inventory at the higher turnover:

Average Inventory = $99,000,000 / 12 ≈ $8,250,000

Cost savings would be the difference between current and projected inventories, multiplied by an appropriate cost rate. Generally, lower inventory levels reduce holding costs, including storage, insurance, and obsolescence. Assuming cost savings are directly proportional to inventory reduction:

Cost Savings = ($11,000,000 - $8,250,000) x Cost Rate

Without specific cost rate details, the dollar amount savings can be expressed as:

  • Expected Cost Savings ≈ $2,750,000 over the coming year.

This demonstrates that improving inventory turnover significantly reduces inventory holdings, leading to substantial cost savings, which increases profitability.

Part F: Effect of Subsequence Events on Net Income

Morlan Corporation's events include settling an estimated liability at a different amount than initially recorded and a flood loss occurring after year-end. The settlement at $170,000 (above the estimated $160,000) represents a loss of $10,000 that must be recognized in 2014 as an adjustment to expenses, reducing net income. The flood loss of $80,000, occurring after year-end, is a subsequent event that does not affect 2014 net income, but must be disclosed.

Therefore, the net income for 2014 is decreased by the additional $10,000 related to the liability settlement. The flood loss has no impact on 2014 net income but must be disclosed as a subsequent event affecting future financial positions.

Part G: Disclosures Regarding Earnings per Share (EPS)

The note on Ford Motor Corporation's EPS indicates that without certain potential share conversions and stock options, earnings per share would have been reduced by specific amounts, reflecting the dilutive effect of certain securities and stock-based compensation. The statement that net income per share was increased due to stock transactions shows adjustments for capital stock changes, providing transparency into factors influencing EPS figures. Such disclosures are crucial for investors to understand potential dilution or accretion in future periods and assess the company's earnings quality accurately.

References

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