Comparative financial statements for Weaver Company

Question 1 Comparative financial statements for Weaver Company follow:

Weaver Company Comparative Balance Sheet December 31, 2014 and 2013
	2014	2013
Assets
Cash	$	5	$	12
Accounts receivable		307		230
Inventory		156		195
Prepaid expenses		8		6

Total current assets		476		443

Property, plant, and equipment		508		429
Less accumulated depreciation		(86)		(71)

Net property, plant, and equipment		422		358

Long-term investments		27		33

Total assets	$	925	$	834

Liabilities and Stockholders’ Equity
Accounts payable	$	304	$	226
Accrued liabilities		72		79
Income taxes payable		72		64

Total current liabilities		448		369
Bonds payable		198		170

Total liabilities		646		539

Common stock		162		202
Retained earnings		117		93

Total stockholders’ equity		279		295

Total liabilities and stockholders’ equity	$	925	$	834

Weaver Company Income Statement For the Year Ended December 31, 2014
Sales			$	751
Cost of goods sold				446

Gross margin				305
Selling and administrative expenses				221

Net operating income				84
Nonoperating items:
Gain on sale of investments	$	6
Loss on sale of equipment		(3)		3

Income before taxes				87
Income taxes				23

Net income			$	64

During 2014, Weaver sold some equipment for $18 that had cost $31 and on which there was accumulated depreciation of $10. In addition, the company sold long-term investments for $12 that had cost $6 when purchased several years ago. A cash dividend was paid during 2014 and the company repurchased $40 of its own stock. Weaver did not retire any bonds during 2014.

rev: 09_17_2014_QC_54316

a	Using the information in (1) above, along with an analysis of the remaining balance sheet accounts, prepare a statement of cash flows for 2014. (List any deduction in cash and cash outflows as negative amounts.)

b	Using the indirect method, determine the net cash for operating activities for 2014. (Negative amount should be entered with a minus sign.)
c	Using the information in (1) above, along with an analysis of the remaining balance sheet accounts, prepare a statement of cash flows for 2014. (List any deduction in cash and cash outflows as negative amounts.)

Question 2 You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

Lydex Company Comparative Balance Sheet
	This Year	Last Year
Assets
Current assets:
Cash	$	1,040,000	$	1,280,000
Marketable securities		0		300,000
Accounts receivable, net		3,020,000		2,120,000
Inventory		3,680,000		2,300,000
Prepaid expenses		270,000		210,000

Total current assets		8,010,000		6,210,000
Plant and equipment, net		9,680,000		9,130,000

Total assets	$	17,690,000	$	15,340,000

Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities	$	4,090,000	$	3,140,000
Note payable, 10%		3,720,000		3,120,000

Total liabilities		7,810,000		6,260,000

Stockholders’ equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,380,000		1,580,000

Total stockholders’ equity		9,880,000		9,080,000

Total liabilities and stockholders’ equity	$	17,690,000	$	15,340,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales (all on account)	$	15,940,000	$	14,380,000
Cost of goods sold		12,752,000		10,785,000

Gross margin		3,188,000		3,595,000
Selling and administrative expenses		1,216,000		1,636,000

Net operating income		1,972,000		1,959,000
Interest expense		372,000		312,000

Net income before taxes		1,600,000		1,647,000
Income taxes (30%)		480,000		494,100

Net income		1,120,000		1,152,900
Common dividends		320,000		576,450

Net income retained		800,000		576,450
Beginning retained earnings		1,580,000		1,003,550

Ending retained earnings	$	2,380,000	$	1,580,000

To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:


Current ratio	2.3
Acid-test ratio	1.2
Average collection period	32	days
Average sale period	60	days
Return on assets	8.6	%
Debt-to-equity ratio	.69
Times interest earned ratio	5.8
Price-earnings ratio	10

rev: 09_17_2014_QC_54324, 12_11_2014_QC_CS-386

Garrison 15e Recheck 2015-1-19

Required:

You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

a.	The times interest earned ratio.
b.	The debt-to-equity ratio.
c.	The gross margin percentage.
d.	The return on total assets. (Total assets at the beginning of last year were $13,150,000.)
e.	The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,503,550. There has been no change in common stock over the last two years.)
f.	Is the company’s financial leverage positive or negative?

You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $110 per share and that at the end of last year it was $78. For both this year and last year, compute: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

a.	The earnings per share.
b.	The dividend yield ratio.
c.	The dividend payout ratio.
d.	The price-earnings ratio.
e.	The book value per share of common stock.

3.	You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.)

a.	Working capital.
b.	The current ratio.
c.	The acid-test ratio.
d.	The average collection period. (The accounts receivable at the beginning of last year totaled $1,750,000.)
e.	The average sale period. (The inventory at the beginning of last year totaled $2,110,000.)
f.	The operating cycle.
g.	The total asset turnover. (The total assets at the beginning of last year totaled $14,690,000.)

Question 3 Wesco Incorporated’s only product is a combination fertilizer/weedkiller called GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores.

Zwinger Nursery plans to sell a similar fertilizer/weedkiller compound through its regional nursery chain under its own private label. Zwinger does not have manufacturing facilities of its own, so it has asked Wesco (and several other companies) to submit a bid for manufacturing and delivering a 35,000-pound order of the private brand compound to Zwinger. While the chemical composition of the Zwinger compound differs from that of GrowNWeed, the manufacturing processes are very similar.

The Zwinger compound would be produced in 1,000-pound lots. Each lot would require 38 direct labor-hours and the following chemicals:

Chemicals	Quantity in Pounds
AG-5	300
KL-2	200
CW-7	180
DF-6	320

The first three chemicals (AG-5, KL-2, and CW-7) are all used in the production of GrowNWeed. DF-6 was used in another compound that Wesco discontinued several months ago. The supply of DF-6 that Wesco had on hand when the other compound was discontinued was not discarded. Wesco could sell its supply of DF-6 at the prevailing market price less $0.11 per pound selling and handling expenses.

Wesco also has on hand a chemical called BH-3, which was manufactured for use in another product that is no longer produced. BH-3, which cannot be used in GrowNWeed, can be substituted for AG-5 on a one-for-one basis without affecting the quality of the Zwinger compound. The BH-3 in inventory has a salvage value of $440.

Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below:

Raw Material	Pounds in Inventory	Actual Price per Pound When Purchased	Current Market Price per Pound
AG-5	26,000	$0.68	$0.78
KL-2	5,300	$0.53	$0.58
CW-7	8,500	$1.25	$1.45
DF-6	9,900	$0.41	$0.63
BH-3	4,700	$0.70	(Salvage)

The current direct labor wage rate is $16 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predetermined overhead rate for the current year, based on a two-shift capacity with no overtime, is as follows:


Variable manufacturing overhead	$	4.80	per DLH
Fixed manufacturing overhead		7.60	per DLH

Combined predetermined overhead rate	$	12.40	per DLH

Wesco’s production manager reports that the present equipment and facilities are adequate to manufacture the Zwinger compound. Therefore, the order would have no effect on total fixed manufacturing overhead costs. However, Wesco is within 490 hours of its two-shift capacity this month. Any additional hours beyond the 490 hours must be done in overtime. If need be, the Zwinger compound could be produced on regular time by shifting a portion of GrowNWeed production to overtime. Wesco’s direct labor wage rate for overtime is $24 per hour. There is no allowance for any overtime premium in the predetermined overhead rate.

Required:
1.	Wesco has decided to submit a bid for the 35,000 pound order of Zwinger’s new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order without reducing its net operating income. (Round intermediate calculations and final answer to 2 decimal places.)

2.	Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 35,000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two-shift capacity. However, production could be scheduled so that 60% of each Zwinger order could be completed during regular hours. As another option, some GrowNWeed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices.
	Wesco’s standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 35,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed. Hint: Calculate the price considering the possibility of this order being regular.(Round intermediate calculations and final answer to 2 decimal places.)

Comparative financial statements for Weaver Company

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