Nno accounting

Question 1.Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow.

Income Statement

For Fiscal Years Ended ($ millions)

2008

2007

2006

Sales

$ 61,471

$ 57,878

$ 51,271

Credit card revenues

1,896

1,612

1,349

Total revenues

63,367

59,490

52,620

Cost of sales

41,895

39,399

34,927

Selling, general and administrative expenses

13,704

12,819

11,185

Credit card expenses

837

707

776

Depreciation and amortization

1,659

1,496

1,409

Earnings before interest and income taxes

5,272

5,069

4,323

Net interest expense

647

572

463

Earnings before income taxes

4,625

4,497

3,860

Provisions for income taxes

1,776

1,710

1,452

Net earnings

$ 2,849

$ 2,787

$ 2,408

Balance Sheet

($ millions, except footnotes)

February 2, 2008

February 3, 2007

Assets

Cash and cash equivalents

$ 2,450

$ 813

Credit card receivables

8,054

6,194

Inventory

6,780

6,254

Other current assets

1,622

1,445

Total current assets

18,906

14,706

Property and equipment

Land

5,522

4,934

Buildings and improvements

18,329

16,110

Fixtures and equipment

3,858

3,553

Computer hardware and software

2,421

2,188

Construction-in-progress

1,852

1,596

Accumulated depreciation

(7,887)

(6,950)

Property and equipment, net

24,095

21,431

Other noncurrent assets

1,559

1,212

Total assets

$ 44,560

$ 37,349

Liabilities and shareholders' investment

Accounts payable

$ 6,721

$ 6,575

Accrued and other current liabilities

3,097

3,180

Current portion of long-term debt and notes payable

1,964

1,362

Total current liabilities

11,782

11,117

Long-term debt

15,126

8,675

Deferred income taxes

470

577

Other noncurrent liabilities

1,875

1,347

Shareholders' investment

Common stock

68

72

Additional paid-in-capital

2,656

2,387

Retained earnings

12,761

13,417

Accumulated other comprehensive income (loss)

(178)

(243)

Total shareholders' investment

15,307

15,633

Total liabilities and shareholders' equity

$ 44,560

$ 37,349

(a) Compute net operating profit after tax (NOPAT) for 2008. Assume that the combined federal and statutory rate is: 39%. (Round your answer to the nearest whole number.)

2008 NOPAT = Answer ($ millions) (b) Compute net operating assets (NOA) for 2008 and 2007.

2008 NOA = Answer ($ millions) 2007 NOA = Answer ($ millions)

(c) Compute Target's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2008. (Do not round until final answer. Round two decimal places. Do not use NOPM x NOAT to calculate RNOA.)

2008 RNOA = Answer% 2008 NOPM = Answer% 2008 NOAT = Answer

(d) Compute net nonoperating obligations (NNO) for 2008 and 2007.

2008 NNO = Answer ($ millions) 2007 NNO = Answer ($ millions) (e) Compute return on equity (ROE) for 2008. (Round your answers to two decimal places. Do not round until your final answer.)

2008 ROE = Answer% (f) Infer the nonoperating return component of ROE for 2008. (Use answers from above to calculate. Round your answer to two decimal places.)

2008 nonoperating return = Answer% (g) Which of the following statements reflects the best inference we can draw from the difference between Target's ROE and RNOA?

ROE > RNOA implies that Target has increased its financial leverage during the period.

ROE > RNOA implies that Target is able to borrow money to fund operating assets that yield a return greater than its cost of debt; the excess accrues to the benefit of Target's stockholders.

ROE > RNOA implies that Target's equity has grown faster than its NOA.

ROE > RNOA implies that Target has taken on too much financial leverage.

Question 2.Top of Form

Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow.

Income Statement

For Fiscal Years Ended ($ millions)

2006

2005

2004

Sales

$ 51,271

$ 45,682

$ 40,928

Credit card revenues

1,349

1,157

1,097

Total revenues

52,620

46,839

42,025

Cost of sales

34,927

31,445

28,389

Selling, general and administrative expenses

11,185

9,797

8,657

Credit card expenses

776

737

722

Depreciation and amortization

1,409

1,259

1,098

Earnings before interest and income taxes

4,323

3,601

3,159

Net interest expense

463

570

556

Earnings before income taxes

3,860

3,031

2,603

Provisions for income taxes

1,452

1,146

984

Net earnings

$ 2,408

$ 1,885

$ 1,619

Balance Sheet

($ millions, except footnotes)

January 28, 2006

January 29, 2005

Assets

Cash and cash equivalents

$ 1,648

$ 2,245

Credit card receivables

5,666

5,069

Inventory

5,838

5,384

Other current assets

1,253

1,224

Total current assets

14,405

13,922

Property and equipment

Land

4,449

3,804

Buildings and improvements

14,174

12,518

Fixtures and equipment

3,219

2,990

Computer hardware and software

2,214

1,998

Construction-in-progress

1,158

962

Accumulated depreciation

(6,176)

(5,412)

Property and equipment, net

19,038

16,860

Other noncurrent assets

1,552

1,511

Total assets

$ 34,995

$ 32,293

Liabilities and shareholders' investment

Accounts payable

$ 6,268

$ 5,779

Accrued and other current liabilities

2,567

1,937

Current portion of long-term debt and notes payable

753

504

Total current liabilities

9,588

8,220

Long-term debt

9,119

9,034

Deferred income taxes

851

973

Other noncurrent liabilities

1,232

1,037

Shareholders' investment

Common stock

73

74

Additional paid-in-capital

2,121

1,810

Retained earnings

12,013

11,148

Accumulated other comprehensive income (loss)

(2)

(3)

Total shareholders' investment

14,205

13,029

Total liabilities and shareholders' equity

$ 34,995

$ 32,293

(a) Apply the basic DuPont model and compute the component measures for profit margin, asset turnover, and financial leverage. (Do not round until your final answer. Round your answers to two decimal places.) Net profit margin =Answer% Asset turnover =Answer Financial leverage =Answer (b) Compute ROE using financial information provided in the balance sheet and income statement. Do not use ROE = PM x AT x FL. (Do not round until your final answer. Round your answer to two decimal places.) ROE =Answer% (c) Compute adjusted ROA. Assume a tax rate of: 38.3%. (Do not round until your final answer. Round your answer to two decimal places.) Adjusted ROA =Answer%

Question 3.

Interpreting Accounts Receivable and Its Footnote Disclosure Following is the current asset section from the W.W. Grainger, Inc., balance sheet.

As of December 31 ($ 000s)

2012

2011

2010

Cash and cash equivalents

$ 452,063

$ 335,491

$ 313,454

Accounts receivable (less allowances for doubtful accounts of $19,449, $18,801, $24,552 respectively)

940,020

888,697

762,895

Inventories, net

1,301,935

1,268,647

991,577

Prepaid expenses and other assets

110,414

100,081

87,125

Deferred income taxes

55,967

47,410

44,627

Prepaid income taxes

40,241

54,574

38,393

Total current assets

$ 2,900,640

$ 2,694,900

$ 2,238,071

Grainger reports the following footnote relating to its receivables. Allowance for Doubtful Accounts: The following table shows the activity in the allowance for doubtful accounts.

For Years ended December 31 ($ 000s)

2012

2011

2010

Allowance for doubtful accounts- accounts receivable

Balance at beginning of period

$ 18,801

$ 24,552

$ 25,850

Provision for uncollectable accounts

9,504

4,761

6,718

Write-off of uncollectible accounts, less recoveries

(9,100)

(8,138)

(8,302)

Business acquisitions, foreign currency and other

244

(2,374)

286

Balance at end of period

$ 19,449

$ 18,801

$ 24,552

(a) What amount do customers owe Grainger at each of the year-ends 2010 through 2012?

($ 000s)

2012

2011

2010

Gross accounts receivable

$Answer

$Answer

$Answer

(b) What percentage of its total accounts receivable does Grainger deem uncollectible? Hint: Percentage of uncollectible accounts = Allowance for uncollectible accounts/Gross accounts receivable. Round your answers to two decimal places.

($ 000s)

2012

2011

2010

Percentage of uncollectible accounts to gross accounts receivable

Answer%

Answer%

Answer%

(c) What amount of bad debts expense did Grainger report in its income statement for each of the years 2010 through 2012?

($ 000s)

2012

2011

2010

Bad debts expense (titled Provision for Uncollectible Accounts)

$Answer

$Answer

$Answer

(d) Which of the following statements most closely describes what we observe in our answer to part (b)?

The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2012. The allowance decreased because the gross accounts receivable has increased and the allowance account has decreased.

The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2012. This means that Grainger is over-stating its bad debt expense in the current year.

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. The allowance is increasing appropriately because write-offs of uncollectible accounts are also increasing.

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. This means that the allowance was too low in prior years.

(e) If Grainger had kept its 2012 allowance for uncollectible accounts at the same percentage of gross accounts receivable as it was in 2010, by what amount would its profit have changed (ignore taxes)? Answer($ 000s) (f) Which of the following statements about Grainger's allowance for uncollectible accounts and the related bad debts expense is false?

Since 2010, Grainger has decreased its allowance for uncollectible accounts as a percentage of gross receivables.

Grainger's current allowance account appears adequate since it is two times the level of current-year write-offs.

Since 2010 Grainger has decreased it allowance for uncollectible accounts by increasing its write-offs.

Grainger's bad debt expense decreased from 2010 to 2011, but then increased again in 2012.

Question 4

Interpreting and Applying Disclosures on Property and Equipment Following are selected disclosures from the Evett and Sternard Company (a specialty chemical company) 2007 10-K.

Land, Building and Equipment, Net

(in millions)

2007

2006

Land

$ 146

$ 142

Buildings and improvements

2,000

1,900

Machinery and equipment

6,155

5,721

Capitalized interest

352

340

Construction in progress

271

218

Land, Building and Equipment, Gross

8,924

8,321

Less: Accumulated depreciation

5,908

5,481

Total

$ 3,016

$ 2,840

The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvement (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset ... When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future cash flows associated with the asset's planned future use and eventual disposition of the asset, if applicable ... We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset's fair value ... For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges. (a) Compute the PPE (land, buildings and equipment) turnover for 2007 (Sales in 2007 are $8,897 million). (Round your answer to two decimal places.) Answer If the median PPE turnover rate for all publicly traded companies is approximately 5.03 in 2007, what does Evett and Sternard's turnover rate tell us about the company?

Evett and Sternard is less capital intensive than the median publicly traded company.

Evett and Sternard is the same capital intensive as the median publicly traded company.

The PPE turnover rate does not tell us anything about how capital intensive Evett and Sternard is.

Evett and Sternard is more capital intensive than the median publicly traded company.

(b) Evett and Sternard reported depreciation expense of $412 million in 2007. Estimate the useful life, on average, for its depreciable PPE assets. (Round your answer to two decimal places.) Answeryears (c) By what percentage are Evett and Sternard's assets "used up" at year-end 2007? (Round your answer to two decimal places.) Answer% Which of the following statements best captures the implication that the assets "used up" computation has for forecasting cash flows?

Evett and Sternard's assets are not particularly "used up" according to this computation. We, therefore, do not expect adverse implication for future cash flow.

A percentage "used up" substantially above 50% indicates that the assets are closer to the end of their useful lives. This means that the depreciation expense will decrease and this in turn will have a positive impact on future cash flows.

The assets "used up" computation can not tell us anything about future cash flows.

A percentage "used up" substantially above 50% indicates that the assets are closer to the end of their useful lives and will require replacement. Such a situation would negatively impact future cash flows.

(d) Evett and Sternard reports an asset impairment charge in 2007. Which of the following statements best captures the implications of asset impairment charges (write-offs)?

Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as recurring (operating) items because future write-downs are inevitable.

Plant assets are deemed to be impaired if the undiscounted expected future cash flows from those assets are not sufficient to recover their net book value. We should treat these write-downs as recurring (operating) items because future write-downs are inevitable.

Plant assets are deemed to be impaired if the undiscounted expected future cash flows from those assets are not sufficient to recover their net book value. Because assets impairment charges are arguably nonrecurring, one might use this to justify treating them as transitory items for analysis purposes.

Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as transitory.

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