Galley Corp., a merchandiser, recently completed its 2011 operation...

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Galley Corp., a merchandiser, recently completed its 2011 operations. For the (1) all sales credit Problem 12-4A sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, year, (3) all purchases are of Statement of cash flows inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, (5) Other (indirect method) Expenses are all cash expenses, and (6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company's balance sheets and income statement follow. P1 P2 P3 GALLEY CORPORATION Comparative Balance Sheets December 31, 2011 and 2010 2011 2010 Assets Cash $ 174,000 $117,000 Accounts receivable 93,000 81,000 Merchandise inventory 609,000 534,000 GALLEY CORPORATION Income Statement Equipment 333,000 297,000 For Year Ended December 31, 2011 Accum. depreciation-Equipm: (156,000) (102,000) Total assets $1,053,000 $927,000 Sales $1,992,000 Liabilities and Equity Cost of goods sold 1,194,000 Accounts payable $ 69,000 $ 96,000 Gross profit 798,000 Income taxes payable 27,000 24,000 Operating expenses Common stock, $2 par value 582,000 558,000 Depreciation expense $ 54,000 Other expenses 501,000 555,000 Paid-in capital in excess 198,000 162,000 Income before taxes of par value, common stock 243,000 Retained earnings 177,000 87,000 Income taxes expense 42,000 Total liabilities and equity $1,053,000 $927,000 Net income $ 201,000 Additional Information on Year 2011 Transactions a. Purchased equipment for $36,000 cash. b. Issued 12,000 shares of common stock for $5 cash per share. C. Declared and paid $111,000 in cash dividends. Required Prepare a complete statement of cash flows; report its cash inflows and cash outflows from operating ac- Check Cash from operating tivities according to the indirect method. activities, $144,000 Selected year-end financial statements of McCord Corporation follow. (All sales were on credit; selected Problem 13-4A balance sheet amounts at December 31, 2010, were inventory, $32,400; total assets, $182,400; common Calculation of financial stock, $90,000; and retained earnings, $31,300.) statement ratios P3 McCORD CORPORATION Income Statement For Year Ended December 31, 2011 Sales $348,600 Cost of goods sold 229,150 Comments: 119,450 5,800 48,050 McCORD CORPORATION Balance Sheet December 31,2011 Assets Liabilities and Equity Cash $ 9,000 Accounts payable $ 16,500 Short-term investments 7,400 Accrued wages payable 2,200 Accounts receivable, net 28,200 Income taxes payable 2,300 Notes receivable (trade)* 3,500 Long-term note payable, secured 31,150 by mortgage on plant assets 62,400 Merchandise inventory Common stock 90,000 Prepaid expenses 1,650 Retained earnings 59,800 Plant assets, net 152,300 Total liabilities and equity $233,200 Total assets $233,200 * These are short-term notes receivable arising from customer (trade) sales. Required Compute ratio, (2) acid-test ratio, (3) days' sales uncollected, (4) inventory ratio, turn- Check Acid-test ratio, 2.3 to over, (5) the following: (1) current debt-to-equity ratio, (7) times interest earned, stockholders' (8) profit equity. margin Inventory turnover, 7.2 (9) total asset days' turnover, sales in inventory, (10) return (6) on total assets, and (11) return on common 3 As Baldwin Company controller, you are responsible for informing the board of directors financial activities. At the board meeting, you present the following information. / 2011 2010 2009 Sales trend percent 147.0% 135.0% 100.0% Selling expenses to sales 10.1% 14.0% 15.6% Sales to plant assets ratio 3.8 to I 3.6 to I 3.3 to I Current ratio 2.9 to I 2.7 to I 2.4 to I Acid-test ratio 1.1 to I 1.4 to I 1.5 to I 7.8 times 9.0 times 10.2 times Inventory turnover 7.0 times 7.7 times 8.5 times Accounts receivable turnover 2.9 times 2.9 times 3.3 times Total asset turnover 10.4% 11.0% 13.2% Return on total assets 10.7% 11.5% 14.1% Return on stockholders' equity 3.6% 3.8% 4.0% Profit margin ratio After the meeting, the company's CEO holds a press conference with analysts in which she mentions the following ratios. 2011 2010 2009 Sales trend percent 147.0% 135.0% 100.0% Selling expenses to sales 10.1% 14.0% 15.6% Sales to plant assets ratio 3.8 to 1 3.6 to I 3.3 to I Current ratio 2.9 to I 2.7 to I 2.4 to I Required 1. Why do you think the CEO decided to report 4 ratios instead of the 11 prepared? 2. Comment on the possible consequences of the CEO's reporting of the ratios selected.

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I think that the CEO decided to report the four ratios because they are the only ones that give the impression that the company’s performance is improving. The other seven ratios give the impression that the Baldwin Company’s performance has been deteriorating. Without looking at the remaining ratios, one would easily conclude that the company has significantly improved its management of cost of sales and selling and administrative expenses resulting in improved profitability. Similarly, one would easily conclude that the company’s liquidity position has improved...

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