Financial Reporting and Analysis财务报告与分析-sm_ch07

Financial Reporting and Analysis财务 报告 软件系统测试报告下载sgs报告如何下载关于路面塌陷情况报告535n,sgs报告怎么下载竣工报告下载 与 分析 定性数据统计分析pdf销售业绩分析模板建筑结构震害分析销售进度分析表京东商城竞争战略分析 -sm_ch07 Chapter 7 Long-Term Debt-Paying Ability TO THE NET 1. Walt Disney Fiscal Year Ended September 30, 2001 a. SIC 7990 Services – Miscellaneous Amusement & Recreation b. Footnote 13 Commitments and Contingencies “Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on the Company’s results of operations, financial position or cash flows.” 2. Good Year Tire & Rubber a. Net periodic pension cost for the year ended December 31, 2001 (A) $ 138,200,000 Net Sales (B) $14,147,200,000 (A?B) b. Projected benefit obligation $ 5,215,000,000 Plan assets 4,176,200,000 Projected benefit obligation in excess of plan assets $ 1,038,800,000 c. Accumulated benefit obligation $ 3,959,000,000 Plan assets 3,183,900,000 Accumulated benefit obligation in excess of plan assets $ 775,100,000 3. Flowers Ratio for the 52 weeks ended December 29, 2001 1. Times interest earned 160 ($26,380,000)，$36,466,000$10,086,000 ,,.28$36,466,000，$36,466,000 2. Debt Ratio $186,214,000，$242,057,000，$49,783,000$478,054,000,,43.47% $1,099,691,000$1,099,691,000 3. Operating Cash Flow/Total Debt $79,923,000 ,16.72%$186,214,000，$242,057,000，$49,783,000 4. Times interest earned and operating cash flow/total debt are relatively low. Debt ratio appears to be in a better position than the other two ratios. 161 QUESTIONS 7- 1. Yes, profitability is important to a firm's long-term debt- paying ability. Although the reported income does not agree with cash available in the short run, eventually the revenue and expense items do result in cash movements. Because there is a close relationship between the reported income and the ability of the entity to meet its long-run obligations, the major emphasis when determining the long-term debt-paying ability is on the profitability of the entity. 7- 2. (1) Income statement. (2) Balance sheet. The income statement approach is important because in the long run, there is usually a relationship between the reported income that is the result of accrual accounting and the ability of the firm to meet its long-term obligations. The balance sheet indicates the amount of funds provided by outsiders in relation to those provided by owners of the firm. If a high proportion of the resources have been provided by outsiders, then this indicates that the risks of the business have been shifted to outsiders. 7- 3. A relatively high, stable coverage of interest over the years is desirable. A relatively low, fluctuating coverage of interest over the years is not desirable. 7- 4. No. The auto manufacturing business is known for its cyclical nature. The times interest expense, therefore, would fluctuate materially. We would expect the auto manufacturer to finance a relatively small proportion of its long-term funds from debt. 7- 5. A telephone company has its rate of return and, therefore, profits controlled by public utility commissions. We would expect the times interest earned to be moderate and relatively stable, which should be a relatively favorable times interest earned ratio. This stability allows for carrying a high portion of debt financing. 7- 6. A firm must pay for the interest capitalized; therefore, this interest should be included along with interest expense in order to obtain total interest. 162 163 7- 7. To get a better indication of a firm's ability to cover interest payments in the short run, the non-cash charges for depreciation, depletion, and amortization can be added back to the times interest earned numerator. The resulting income can be related to interest earned on a cash basis for a short-run indication of the firm's ability to cover interest. 7- 8. The financial statements are predominately prepared based upon historical cost. Seldom is the market value or liquidation value disclosed. 7- 9. No, the determination of the current value of the long-term assets is very subjective. The best that can be achieved is a reasonable relationship of long-term assets to long-term debt, based on historical cost or estimates of current value. 7-10. The intent of this ratio is to indicate the percentage of the assets that were financed by creditors. The ratio should indicate a reasonably accurate picture of how the assets were financed, but it will not be precise because all of the liabilities have been included, while the assets are at book value, which may be less than or more than their liquidation value. 7-11. No, the debt ratio would not be as high as the debt/equity ratio because the debt ratio relates total liabilities to total assets, while the debt/equity ratio relates total liabilities to shareholders' equity. The total asset figure is equal to both the liabilities and the shareholders' equity. 7-12. The balance sheet equation has assets = liabilities + shareholders' equity. Given any set of figures that agree with the basic balance sheet equation, the liabilities are the same, whether they are related to assets or shareholders' equity. For example, assets ($100,000) = liabilities ($40,000) + shareholders' equity ($60,000). Debt Ratio = $ 40,000 = 40% $100,000 $40,000,Debt/Equity Ratio = 66 2/3% $60,000 7-13. Industry averages tend to indicate the degree of debt that is considered to be acceptable for an industry. The industry 164 average does not necessarily indicate the degree of debt that an individual firm should have, but it is the best indication of a reasonable amount outside of the individual firm. 7-14. Operating leases simply require recording rent expense in the income statement accounts. Under a capital lease, the asset and related lease obligations are recorded on the balance sheet of the lessee. The lessee then records depreciation expense and interest expense as would be done if the asset had been acquired with a loan. 7-15. If a firm has not capitalized, its leases, then its debt ratios will be lower than those of a firm that has capitalized leases. Also, its times interest earned will be higher. These two factors overstate the debt position. 7-16. If leases are capitalized, then more interest expense must be covered. This causes a decline in times interest earned. 7-17. Pension claims have the status of tax liens, which gives them senior claim over other creditors. 7-18. When an employee is vested in the pension plan, she/he is eligible to receive some pension benefits at retirement regardless of whether they continue working for the employer. ERISA has had a major impact on reducing the vesting time. 7-19. Under the Employee Retirement Income Security Act, a contributor to a multiemployer pension plan may be liable, upon withdrawal from or upon termination of such plan, for its share of any unfunded liability. 7-20. An operating lease for a relatively long term is a type of long-term financing. Therefore, a part of the lease payment, in reality, is a financing charge called interest. When a portion of operating lease payments is included in fixed charges, it is an effort to recognize the true total interest that the firm is paying. 7-21. The Employee Retirement Income Security Act contains a feature that a company can be liable for its pension plan up to 30% of its net worth. Also, the pension claims have the same status as tax liens, which gives them senior claim over other creditors. 7-22. Short-term funds in total become part of the total sources of outside funds in the long run. Thus, short-term funds should be included in the debt ratio. Another view is that 165 the debt ratio is intended to relate long-term outside sources of funds to total assets, and short-term funds are not a valid part of long-term funds. The approach that includes short-term liabilities is the more conservative. 166 7-23. The bond payable account would represent a definite commitment that must be paid at some date in the future. This would be considered to be a "firm" liability. The reserve for rebuilding furnaces does not represent a "firm" commitment to pay out funds in the future,and when funds are used for rebuilding furnaces,this will be at the discretion of management. The reserve for rebuilding furnaces could be considered to be a "soft" liability account. 7-24. The specific assets that caused the deferred tax will likely be replaced by similar specific assets in the future and also the firm may expand. The replacement assets are likely to cost more than the original items. This would result in an additional deferred tax. This is the total firm view of deferred taxes and this view indicates that the deferred tax amount may not result in actual cash outlays in the future. In any specific year, there may be a cash outlay because the firm may not have acquired sufficient assets in that year in relation to the assets being expensed. 7-25. This tentatively indicates that this firm has higher risk in terms of paying commitments than it did in prior periods and in relation to competitors and the industry. 7-26. This would indicate an increase in risk as management will more frequently be faced with debt coming due. It also indicates that short-term debt is becoming a more permanent part of the financial structure of the firm. 7-27. This statement would be correct. A footnote will disclose the guaranteed bank loan. The overall potential debt position will not be obvious from the face of the balance sheet. 7-28. True. Significant potential liabilities may be described in the contingency footnote. If a contingency loss meets one, but not both, of the criteria for recording, and as a result is not accrued, disclosure by footnote is made when it is at least reasonably possible that there has been an impairment of assets or that a liability has been incurred. 7-29. Instead of having a potential additional liability from a pension plan, the plan may be overfunded. This may present an opportunity for the company to cancel the pension plan by paying off the pension obligations and transferring the remaining money in the pension plan to the company. 167 7-30. Most firms must accrue or set a reserve for postretirement benefits other than pensions. Firms can usually spread the catch-up accrual costs over twenty years or take the charge in one lump sum. This choice can represent a major problem when comparing financial results of two or more firms. 7-31 Concentration of credit risk (lack of diversification) is perceived as indicative of greater credit risk. Disclosure in this area allows investors, creditors, and other users to make their own assessments of credit risk related to concentration. 7-32. Off-balance-sheet means that the risk has not been recorded. There is a potential accounting loss from these obligations that is not apparent from the face of the balance sheet. 7-33. The disclosure of the fair value of financial instruments could possibly indicate significant opportunity or additional risk to the company. 168 PROBLEMS PROBLEM 7-1 Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Earnings Times Interets Earned,Interest Expense, Including Capitalized Interest Earnings before interest and tax: Net sales $1,079,143 Cost of sales ( 792,755) Selling and administration ( 264,566) $ 21,822 $21,822a. TimesInterestEarned,,5.06timesperyear$4,311 b. Cash basis times interest earned: $21,822，$40,000$61,822 ,,14.34timesperyear$4,311$4,311 PROBLEM 7-2 Recurring Earnings Excluding Interest Expense, Tax Expense, Equity Earnings, a. Times Interest Earned = and Minority Earnings Interest Expense, Including Capitalized Interest Income before income taxes $675 Plus interest 60 Adjusted income $735 Interest expense $ 60 Times Interest Earned = $735 = 12.25 times per year $60 Recurring Earnings, Excluding Interest Expense Tax Expense, Equty Earnings, and Minority Earnings，Interest Portion of RentalsFixed Charge Coverage,b. Interest Expense, Including Capitalized Interest，Interest Portion of Rentals 169 Adjusted income from (part a) $735 1/3 of operating lease payments (1/3 x $150) 50 Adjusted income, including rentals $785 Interest expense $ 60 1/3 of operating lease payments 50 $110 Fixed Charge Coverage = $785 = 7.14 times per year $110 PROBLEM 7-3 Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earning, a. Times Interest Earned = and Minority Earnings________________ Interest Expense, Including Capitalized Interest Income before income taxes and extraordinary charges $36 Plus interest 16 (1) Adjusted income 52 (2) Interest expense $16 Times Interest Earned: (1) divided by (2) = 3.25 times per year Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Earnings + Interest Portion b. Fixed Charge Coverage = Of Rentals______________________________ Interest Expense, Including Capitalized Interest + Interest Portion Of Rentals Adjusted income (part a) $ 52 1/3 of operating lease payments (1/3 x $60) 20 (l) Adjusted income, including rentals $72 Interest expense $16 1/3 of operating lease payments 20 (2) Adjusted interest expense $36 Fixed charge coverage: (1) divided by (2) = 2.00 times per year 170 PROBLEM 7-4 Total Liabilities$174,979,,41.2%a. Debt Ratio = Total Assets$424,201 Total Liabilities$174,979,,70.2%b. Debt/Equity Ratio = Stockholders' Equity$249,222 c. Ratio of Total Debt to Tangible Net Worth = Total Liabilities = $174,979 = $174,979 = 70.9% Tangible Net Worth $249,222 - $2,324 $246,898 d. Kaufman Company has financed over 41% of its assets by the use of funds from outside creditors. The Debt/Equity Ratio and the Debt to Tangible Net Worth Ratio are over 70%. Whether these ratios are reasonable depends upon the stability of earnings. PROBLEM 7-5 Ratio Times Total Debt/ Interest Debt Debt/ Tangible Transaction Earned Ratio Equity Net Worth 171 a. Purchase of buildings financed by mortgage - + + + b. Purchase inventory on short- term loan - + + + c. Declaration and payment of cash dividend 0 + + + d. Declaration and payment of stock dividend 0 0 0 0 e. Firm increases profits by cutting cost of sales + - - - f. Appropriation of retained earnings 0 0 0 0 g. Sale of common stock 0 - - - h. Repayment of long-term bank loan + - - - i. Conversion of bonds to common stock + - - - j. Sale of inventory at greater than cost + - - - 172 PROBLEM 7-6 a. Times Interest Earned: Times interest earned relates earnings before interest expense, tax, minority earnings, and equity income to interest expense. The higher this ratio, the better the interest coverage. The times interest earned has improved materially in strengthening the long-term debt position. Considering that the debt ratio and the debt to tangible net worth have remained fairly constant, the probable reason for the improvement is an increase in profits. The times interest earned only indicates the interest coverage. It is limited in that it does not consider other possible fixed charges, and it does not indicate the proportion of the firms resources that have come from debt. Debt Ratio: The debt ratio relates the total liabilities to the total assets. The lower this ratio, the lower the proportion of assets that have been financed by creditors. For Arodex Company, this ratio has been steady for the past three years. This ratio indicates that about 40% of the total assets have been financed by creditors. For most firms, a 40% debt ratio would be considered to be reasonable. The debt ratio is limited in that it relates liabilities to the book value of total assets. Many assets would have a value greater than book value. This tends to overstate the debt ratio and, therefore, usually results in a conservative ratio. The debt ratio does not consider immediate profitability and, therefore, can be misleading as to the firm’s ability to handle long-term debt. Debt to Tangible Net Worth: The debt to tangible net worth relates total liabilities to shareholders' equity less intangible assets. The lower this ratio, the lower the proportion of tangible assets that has been financed by creditors. Arodex Company has had a stable ratio of approximately 81% for the past three years. This indicates that creditors have financed 81% as much as the shareholders after eliminating intangibles from the shareholders contribution--for most firms, this would be considered to be reasonable. The debt to tangible 173 net worth ratio is more conservative than the debt ratio because of the elimination of intangible items. It is also conservative for the same reason that the debt ratio was conservative, in that book value is used for the assets and many assets have a value greater than book value. The debt to tangible net worth ratio also does not consider immediate profitability and, therefore, can be misleading as to the firm's ability to handle long-term debt. Collective inferences one may draw from the ratios of Arodex, Company: Overall it appears that Arodex Company has a reasonable and improving long-term debt position. The debt ratio and the debt to tangible net worth ratios indicate that the proportion of debt appears to be reasonable. The times interest earned appears to be reasonable and improving. The stability of earnings and comparison with industry ratios will be important in reaching a conclusion on the long-term debt position of Arodex Company. b. Ratios are based on past data. The future is what is important, and uncertainties of the future cannot be accurately determined by ratios based upon past data. Ratios provide only one aspect of a firm's long-term debt-paying ability. Other information, such as information about management and products, is also important. A comparison of this firm's ratios with ratios of other firms in the same industry would be helpful in order to decide if the ratios are reasonable. PROBLEM 7-7 Recurring Earnings, Excluding Interest a. 1. Times Interest Expense, Tax Expense, Equity Earnings, Earned = and Minority Earnings_________________ Interest Expense, Including Capitalized Interest $162,000 = 8.1 times per year $ 20,000 2. Debt Ratio = Total Liabilities Total Assets $193,000 = 32.2% 174 $600,000 3. Debt/Equity Ratio = Total Liabilities Stockholders' Equity $193,000 = 47.4% $407,000 175 4. Debt to Tangible Net Worth Ratio = Total Liabilities Tangible Net Worth $193,000 = 49.9% $407,000 - $20,000 b. New asset structure for all plans: Assets Current assets $226,000 Property, plant, and equipment 554,000 Intangibles 20,000 Total assets $800,000 Liabilities and Equity Plan A Current Liabilities $ 93,000 $200,000,000/100 = Long-term debt 100,000 2,000,000 shares Preferred stock 250,000 Common equity 357,000 No change in net income $800,000 Plan B Current liabilities $ 93,000 $200,000,000/10 = Long-term debt 100,000 20,000,000 shares Preferred stock 50,000 Common stock 120,000 Premium on common stock 300,000 Retained earnings 137,000 No change in net income $800,000 Plan C Current liabilities $ 93,000 Operating Income $162,000 Long-term debt 300,000 Interest expense 52,000* Preferred stock 50,000 110,000 Common equity 357,000 Taxes (40%) 44,000 $800,000 Net Income $ 66,000 * $20,000 + 16% ($200,000) = $52,000 1. Recurring Earnings, Excluding Interest Expense, Times Interest Tax Expense, Equity Earnings, and Minority Earnings Earned = Interest Expense, Including Capitalized Interest 176 Plan A Plan B Plan C $162,000$162,000$162,0008.18.13.1,,, timestimestimes$20,000$20,000$52,000 2. Debt = Total Liabilities Ratio Total Assets Plan A Plan B Plan C $193,000$193,000$393,000,24.1%,24.1%,49.1% $800,000$800,000$800,000 Total Liabilities3. Debt/Equity Ratio = Stockholders' Equity Plan A Plan B Plan C $193,000$193,000$393,000,31.8%,31.8%,96.6% $607,000$607,000$407,000 TotalLiabilities4. Debt to Tangible Net Worth = TangibleNetWorth Plan A Plan B Plan C $193,000$193,000$393,000 ,32.9%,329%,101.6%$407,000-$20,000$607,000-$20,000$607,000-$20,000 c. Preferred Stock Alternative: Advantages: 1. Lesser drop in earnings per share than under the common stock alternative. 2. Not the absolute reduction in earnings that accompanied the debt alternative. 3. There would be an improvement in the Debt Ratio, Debt/Equity Ratio, and Total Debt to Tangible Net Worth Ratio. 4. Does not have the reduced times interest earned that accompanied alternative of issuing long-term debt. Disadvantages: 177 1. An increase in the fixed preferred dividend charge that the firm must pay before any dividends can be paid to common stockholders. 178 Common Stock Alternative: Advantages: 1. No increase in fixed obligations. 2. There would be an improvement in the Debt Ratio, Debt/Equity Ratio, and the Total Debt to Tangible Net Worth Ratio. 3. Not the absolute reduction in earnings that accompanied the debt alternative. 4. Does not have the reduced times interest earned that accompanied alternative of issuing long-term debt. Disadvantages: 1. Maximum dilution in earnings per share of the three alternatives. Long-Term Bonds Alternative: Advantages: 1. Higher earnings per share than with common stock. Disadvantages: 1. Material decline in Times Interest Earned. 2.A material increase in the Debt Ratio, Debt/Equity Ratio, and Total Debt to Tangible Net Worth Ratio. 3. Absolute reduction in earnings. 4. Increase in the interest fixed charge that must be paid. d. The 10% preferred stock increased the preferred dividends which are not tax deductible; therefore, the cost of these funds is the 10% amount. The 16% bonds are tax deductible and, therefore, the after-tax cost is 9.6% (16% x (1-.40). Note to Instructor: You may want to take this opportunity to point out to the students that the alternative that should be selected is greatly influenced by the change in earnings and the specific debt structure. The conclusions in this problem would not necessarily be true with changed assumptions. 179 PROBLEM 7-8 Expense, Tax Expense, Equity Earnings, and Minority Earningsa. Times Interest Earned = Interest Expense Including Capitalized Interes Earnings from continuing operations before income taxes and equity earnings (1) Add back interest expense (1) $ 74,780,000 (2) Adjusted earnings (2) $ 37,646,000 $112,426,000 Times interest earned: [(2) divided by (1)] 1.99 times per year b. Earnings from continuing operations Plus: (1) Interest $ 65,135,000 Income taxes 37,394,000 (2) Adjusted earnings $140,175,000 Times interest earned: [(2) divided by (1)] 3.72 times per year c. Removing equity earnings gives a more conservative times interest earned ratio. The equity income is usually substantially more than the cash dividend received from the related investments. Therefore, the firm cannot depend on this income to cover interest payments. PROBLEM 7-9 Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Earningsa. 1. Times Interest Earned = Interest Expense, Including Capitalized Interest $95,000$170,000 ,9.5 times ,5.3 times $10,000$32,000 Total Liabilities$160,000$575,000 2. Debt Ratio = ,,44.9%,58.4%Shareholders' Equity$356,000$985,000 TotalLiabilities$160,000$575,000,,81.6% 3. Debt Equity = ,140.2% Shareholders'Equity$196,000$410,000 180 4. Debt to Tangible Net Worth = Total Liabilities$160,000 ,,86.5%Shareholders' Equity-Intangibles$196,000-$11,000 $575,000 ,147.4%$410,000,$20,000 b. No, Barker Company has a times interest earned of 5.3 times while the industry average is 7.2 times. This indicates that Barker Company has less than average coverage of its interest. Also, Barker Company has a much higher than average debt/equity, and debt to tangible net worth ratio. c. Allen Company has a better times interest earned, debt ratio, debt/equity, and debt to tangible net worth. PROBLEM 7-10 a. 1. Times Interest Earned = 2004: $280,000 - $156,000 = 7.29 times per year $17,000 2003: $302,000 - $157,000 = 9.06 times per year $16,000 2002: $286,000 - $154,000 = 8.80 times per year $15,000 2001: $270,000 - $150,000 = 8.28 times per year $14,500 2000: $248,000 - $147,000 = 4.39 times per year $23,000 181 Recurring Earnings, Excluding Interest, Tax Expense, Equity Earnings, and Minority Earnings + 2. Fixed Charge Coverage = Interest Portion of Rentals Interest Expense, Including Capitalized Interest + Interest Portion of Rentals 2004: $280,000 - $156,000 + $10,000 = 4.96 times per year $17,000 + $10,000 2003: $302,000 - $157,000 + $9,000 = 6.16 times per year $16,000 + $9,000 2002: $286,000 - $154,000 + $9,500 = 5.78 times per year $15,000 + $9,500 2001: $270,000 - $150,000 + $10,000 = 5.31 times per year $14,500 + $10,000 2000: $248,000 - $147,000 + $9,000 = 3.44 times per year $23,000 + $9,000 3. Debt Ratio = Total Liabilities Total Assets 2004: $88,000 + $170,000 = 46.07% $560,000 2003: $89,500 + $168,000 = 46.48% $554,000 2002: $90,500 + $165,000 = 46.14% $553,800 2001: $90,000 + $164,000 = 46.31% $548,500 2000: $91,500 + $262,000 = 65.83% $537,000 182 4. Debt/Equity = Total Liabilities Shareholders' Equity 2004: $88,000 + $170,000 = 85.43% $302,000 2003: $89,500 + $168,000 = 86.85% $296,500 2002: $90,500 + $165,000 = 85.65% $298,300 2001: $90,000 + $164,000 = 86.25% $294,500 2000: $91,500 + $262,000 = 192.64% $183,500 5. Debt to Tangible Net Worth = Total Liabilities Shareholders' Equity - Intangible Assets 2004: $88,000 + $170,000 = 91.49% $302,000 - $20,000 2003: $89,500 + $168,000 = 92.46% $296,500 - $18,000 2002: $90,500 + $165,000 = 90.83% $298,300 - $17,000 2001: $90,000 + $164,000 = 91.20% $294,500 - $16,000 2000: $91,500 + $262,000 = 209.79% $183,500 - $15,000 b. Both the times interest earned and the fixed charge coverage are good. The times interest earned is substantially better than the fixed charge coverage because of the operating leases. Both of these ratios materially declined in 2004. The debt ratio, debt/equity, and debt to tangible net worth materially improved between 2000 and 2001. During the period 2001-2004, these ratios were relatively steady and appeared to be good. The debt to tangible net worth ratio is not as good as the debt/equity ratio because of the influence of intangibles. 183 184 CASES CASE 7-1 EXPENSING INTEREST NOW AND LATER (This case provides an opportunity to review capitalized interest.) a. 2001 2000 1999 Income statement interest expense $153,000,000 $204,000,000 $255,000,000 Capitalized interest 95,000,000 97,000,000 $ 84,000,000 Total interest $248,000,000 $301,000,000 $339,000,000 b. 2001 2000 1999 Interest expense on income statement $153,000,000 $204,000,000 $255,000,000 c. 2001 2000 1999 Interest added to the cost of property plant, and equipment $ 95,000,000 $ 97,000,000 $ 84,000,000 d. It is capitalized in fixed assets and becomes part of the depreciation expense when the fixed asset is depreciated. e. In the period when interest is capitalized, income is increased. Income is later decreased when the asset is depreciated. CASE 7-2 CONSIDERATION OF LEASES (This case provides the opportunity to review the influence of operating and capital leases.) a.1. Times Interest Earned 2. Fixed Charge Coverage $119,299-$93,438-$19,358$6,503 ,,829. Times 185 $119,299-$93,438-$19,358+1/3 ($596) , $555 + $229$784 $555 + $229 + 1/3 ($596) 3. Debt Ratio $6,503 + $198.7$6,701.7 $26,881 ,,, Times59.23% 4. Debt/Equity 6.82 $45,384 $26,881 ,14528%. b. Debt ratio considering operating leases $555 + $229 + $198.7$982.7 $18,503 c. Debt ratio without operating leases 59.23%. $26,881+2/3 ($4,424)$29,830.32Debt ratio considering operating leases 61.72%. The influence of operating leases on the debt ratio was less than 5%. Many would consider this to be immaterial. ,,.72% d. The amounts would be the same at the time of the initial 61entry. Subsequent to the initial entry the asset is depreciated, while the liability is reduced as payments are made. CASE 7-3 LOCKOUT $45,384+2/3 ($4,424)$48,333.32(This case provides an opportunity to review an interesting commitments and contingencies footnote of the Boston Celtics.) The footnote must be subjectively incorporated into the analysis. This is part of the art of analysis. To quote form the footnote: “Although the ultimate outcome of this matter cannot be determined at this time, any loss of games as a result of the absence of a collective bargaining agreement or the continuation of the lockout will 186 have a material advance effect on the partnership’s financial condition and its results of operations.” In the long run the lockout may be positive as aggregate salaries may be reduced . 187 CASE 7-4 MANY EMPLOYERS (This case provides an opportunity to review a multi-employer pension plan. Consider assigning the related case “Play It Safe.”) a. 2001 2000 1999 Contributions (a) $ 158,000,000 $ 154,000,000 $ 144,000,000 Sales (b) $34,301,000,000 $31,976,900,000 $28,859,900,000 Contributions/Sales (a?b) .46% .48% .50% Contributions appear to be immaterial in relation to sales, but it should be noted that Safeway is in an industry that has relatively low profit margins. b. The total liability cannot be determined. To quote from the case: “These plans are generally defined benefit plans; however, in many cases, specific benefit levels are not negotiated with or known by the employer – contributors.” … “The information required to determine the total amount of this contingent obligation, as well as the total amount of accumulated benefits and net assets of such plans, is not readily available. During 1988 and 1987, the Company sold certain operations. In most cases, the party acquiring the operation agreed to continue making contributions to the plans. Safeway is relieved of the obligations related to these sold operations to the extent that the acquiring parties continue to make contributions.” 188 CASE 7-5 PLAY IT SAFE (This case provides an opportunity to review a pension footnote. In this case the fair value of plan assets is materially more than the benefit obligation. Consider assigning the related case “Many Employers”. The related case indicates that significant pensions were under multi-employer plans.) a. 2001 2000 1999 Pension expense (A) Net pension Net pension Net pension income income income Operating revenue (B) $34,301,000,000 $31,976,000,000 $28,859,900,000 Pension expense/ Operating revenue (A?B) There was a net pension income of $27,300,000 in 2001, $77,300,000 in 2000 and $35,100,000 in 1999. b. 2001 2000 1999 Pension expense (A) Net pension Net pension Net pension income income income Income before income taxes (B) $2,095,000,000 $1,866,500,000 $1,674,000,000 Pension expense/ Income before income taxes (A?B) There was a net pension income of $27,300,000 in 2001; $77,300,000 in 2000 and $35,100,000 in 1999. c. Benefit obligation $1,286,900,000 Fair value of plan assets $1,782,800,000 Overfunded $ 495,900,000 There is significant overfunding. The overfunding has resulted in net pension income in 2001, 2000, and 1999. d. Discount rate used to determine the projected benefit obligation. 2001 2000 1999 Combined weighted average rate 7.4% 7.6% 7.7% The discount rate was approximately the same as the rate cited by Accounting Trends & Techniques in this chapter. 189 (A lower discount rate results in a higher benefit obligation. The lowering of the discount rate results in a higher benefit obligation.) 190 Expected return on plan assets 2001 2000 1999 United States Plans 9.0% 9.0% 9.0% Canadian Plans 8.0% 8.0% 8.0% These rates are slightly lower than the rate cited by Accounting Trends & Techniques cited in this chapter. Note that there was no change in the rate between 1999 and 2001. Rate of compensation increase 2001 2000 1999 United States Plans 5.0% 5.0% 5.0% Canadian Plans 5.0% 5.0% 5.0% The rates used were reasonable in relation to the rates cited in Accounting Trends & Techniques, as cited in the chapter. (Safeway rates are slightly higher.) A decrease in the rate of compensation projected would decrease the projected benefit obligation. An increase in the rate of compensation projected would increase the projected benefit obligation. CASE 7-6 RETIREMENT PLANS REVISITED (This case provides an opportunity to review the influence of pension plans.) a. Defined contribution b. 1. Pension expense to operating revenue. 1996 1995 1994 $3,200,000$3,500,000$3,700,000 $1,031,548,000$992,106,000$869,975,000 .31% .35% .43% 2. Pension expense to income before income taxes. 1996 1995 1994 191 Pension expense $3,200,000 $3,500,000 $3,700,000 (A) Income before $50,925,00$59,663,00$69,870,00 income taxes (B) 0 0 0 [A?B] 6.28% 5.87% 5.30% Opinion: The pension costs do not appear to be material in relation to operating revenue. Pension costs would possibly be considered to be material in relation to income before income taxes. c. "The company has a retirement plan which covers most regular employees and provides for annual contributions at the discretion of the board of directors." The board appears to be exercising its discretion, since pension expense has declined in 1995 and 1996. CASE 7-7 FAIR VALUE OF FINANCIAL INSTRUMENTS (This case provides an opportunity to review fair value of financial instruments.) Two of the financial instrument liabilities have an estimated fair value greater than the carrying value. Carrying Estimated Amount Fair Value Notes payable to shareholders $24,178,000 $24,442,000 Subordinated notes payable, including current portion $ 9,185,000 $11,867,000 Based on estimated fair value the liabilities are more than the booked amount. 192 CASE 7-8 COMMUNICATIONS (This case provides an opportunity to view a five year period using vertical common-size.) a. 1. Andrew Corporation R Consolidated Balance Sheet Vertical Common-Size (In Part) September 30 2001 2000 1999 1998 1997 Liabilities and Stockholders Equity Current Liabilities Notes payable 5.1 5.6 .5 2.0 2.1 Accounts payable 6.9 7.2 6.5 4.8 5.4 Restructuring reserve -- -- 1.8 .0 .3 Accrued expenses and other liabilities 2.9 2.3 3.2 2.5 2.7 Compensation and related expenses 3.0 3.7 3.3 4.7 4.2 Income taxes -- .7 -- 2.3 2.4 Liabilities and related to discontinued operations -- -- -- -- .5 Current portion of long-term debt 3.0 1.9 1.2 .7 .7 Total current liabilities 20.9 21.3 16.5 17.1 18.4 Long-term Debt, less current position 4.4 3.1 2.8 2.1 1.5 Minority interest 4.7 8.1 7.3 5.6 5.2 Stockholders’ equity 0 1.1 .8 .8 1.3 Common stock .1 .1 .2 .2 .1 Additional paid-in capital 7.7 7.8 8.4 7.8 7.5 Accumulated other comprehensive income <5.2> ( 4.4) ( 3.3) ( 1.1) ( .7) Retained earnings 95.9 93.1 102.3 95.3 79.2 Treasury stock at cost <28.5> <30.3> <34.9> <27.7> <12.5> Total stockholders’ equity 70.0 66.4 72.7 74.5 73.7 Total liabilities and stockholders’ equity 100.0 100.0 100.0 100.0 100.0 2. - Notes payable increased materially - Current portion of long-term debt increased materially - Deferred liabilities increased materially - Minority interest was eliminated - Accumulated other comprehensive income increased materially b. 1. Debt ratio 2001 2000 1999 1998 1997 Total liabilities $257,082 $274,252 $182,000 $174,125 $182,031 Total assets $857,732 $817,197 $666,090 $682,903 $691,154 30.0% 33.6% 27.3% 25.5% 26.3% 2. Debt/Equity 2001 2000 1999 1998 1997 193 Total liabilities $257,082 $274,252 $182,000 $174,125 $182,031 Total assets $600,650 $542,945 $484,010 $508,778 $509,123 42.8% 50.5% 37.6% 34.2% 35.8% c. The Andrew Corporation has relatively low debt. The relative R debt increased 1997 and 2000, and then declined somewhat in 2001. 194 TMTHOMSON ANALYTICS 1. This Thomson Analytics exercise provides for a comment on the trend in selected debt ratios for the Boeing Company. 2. This Thomson Analytics exercise provides for a comment on the trend in selected debt ratios for Anheuser-Busch and Adolph Coors. -It also requires a comparison between the debt ratios of Anheuser Busch and Adolph Coors. 3. This Thomson Analytics exercise provides for a comment on the trend in selected debt ratios for Gateway Computer, Apple Computer, Dell Computer, and Hewlett-Packard. It also requires a comparison of the debt ratios of these four firms. 195