Donna Jamison, a $2011$ graduate of the University of Florida, with $4$ years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon Inc, a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack foods market. D'Leon's president, Al Watkins, decided in $2015$ to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D'Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and stock price.

The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D'Leon's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president, vice president, and major stockholders (all of whom were local businesspeople), was most upset when directors learned how the expansion was going. Unhappy suppliers were being paid late; and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, Watkins was informed that changes would have to be made-and quickly; otherwise, he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was D'Leon's chairperson and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's help.

Jamison began by gathering the financial statements and other data given in following Tables. Assume that you are Jamison's assistant. You must help her answer the following questions for Campo.

Statement of Cash Flows, 2016

$$\small{ \begin{array}{lr} \textbf{Operating Activities}\\ \text{Net income}& (\$ 160,176)\\ \text{Depreciation and amortization} &116,960\\ \text{Increase in accounts payable}& 378,560\\ \text{Increase in accruals}& 353,600\\ \text{Increase in accounts receivable}& (280,960)\\ \text{Increase in inventories}& (572,160)\\ \text{Net cash provided by operating activities}& (\$ 164,176)\\ \textbf{Long-Term Investing Activities}\\ \text{Additions to property, plant, and equipment}& (\$ 711,950)\\ \text{Net cash used in investing activities} &(\$ 711,950)\\ \textbf{Financing Activities}\\ \text{Increase in notes payable}& \$ 436,808\\ \text{Increase in long-term debt}& 400,000\\ \text{Payment of cash dividends}& (11,000)\\ \text{Net cash provided by financing activities} &\$ 825,808\\ \textbf{Summary}\\ \text{Net decrease in cash} &(\$ 50,318)\\ \text{Cash at beginning of year} &57,600\\ \text{Cash at end of year}& \$ 7,282\\ \end{array}}$$

Income Statements

$$\small{ \begin{array}{lrr} &2016 &2015\\ \hline \text{Sales} &\$6,034,000& \$3,432,000\\ \text{Cost of goods sold} &5,528,000 &2,864,000\\ \text{Other expenses} &519,988& 358,672\\ \text{Total operating costs excluding depreciation and amortization}& \$6,047,988 &\$3,222,672\\ \text{Depreciation and amortization}& 116,960 &18,900\\ \text{EBIT}& (\$ 130,948) &\$ 190,428\\ \text{Interest expense}& 136,012 &43,828\\ \text{EBT} &(\$ 266,960) &\$ 146,600\\ \text{Taxes (40\\\%)} &(106,784) &58,640\\ \text{Net income}& (\$ 160,176)& \$ 87,960\\ \text{EPS} &(\$ 1.602) & \$ 0.880\\ \text{DPS} & \$ 0.110 & \$ 0.220\\ \text{Book value per share} & \$ 4.926 & \$ 6.638\\ \text{Stock price} & \$ 2.25 &\$ 8.50\\ \text{Shares outstanding} & 100,000 & 100,000\\ \text{Tax rate} & 40.00\% & 40.00\%\\ \text{Lease payments} &\$ 40,000& \$ 40,000\\ \text{Sinking fund payments} & 0 & 0\\ \hline \end{array}}$$

Statement of Stockholders’ Equity, 2016

$$\small{ \begin{array}{lcccc} &&\underline{\textbf{Common Stock}}\\ &&&\textbf{Retained} &\textbf{Total Stockholders’}\\ &\textbf{Shares} &\textbf{Amount}& \textbf{Earnings} &\textbf{Equity}\\ \hline \text{Balances, December 31}, 2015& 100,000& \$460,000 & \$203,768& \$ 663,768\\ \text{2016 Net income}& & & (160,176)\\ \text{Cash dividends}& & & (11,000)\\ \text{Addition (subtraction) to retained earnings}& & && (171,176)\\ \text{Balances, December 31}, 2016& 100,000& \$460,000 &\$ 32,592& \$ 492,592\\ \hline \end{array}}$$

Balance Sheets

$$\small{ \begin{array}{lrr} &2016& 2015\\ \hline \textbf{Assets}\\ \text{Cash} &\$ 7,282& \$ 57,600\\ \text{Accounts receivable}& 632,160& 351,200\\ \text{Inventories}& 1,287,360 &715,200\\ \text{Total current assets}& \$1,926,802& \$1,124,000\\ \text{Gross fixed assets}& 1,202,950& 491,000\\ \text{Less accumulated depreciation}& 263,160& 146,200\\ \text{Net fixed assets} &\$ 939,790 &\$ 344,800\\ \text{Total assets} &\$2,866,592& \$1,468,800\\ \textbf{Liabilities and Equity}\\ \text{Accounts payable} &\$ 524,160 &\$ 145,600\\ \text{Accruals}& 489,600 &136,000\\ \text{Notes payable}& 636,808 &200,000\\ \text{Total current liabilities} &\$1,650,568& \$ 481,600\\ \text{Long-term debt} &723,432 &323,432\\ \text{Common stock (100,000 shares)}& 460,000& 460,000\\ \text{Retained earnings} &32,592& 203,768\\ \text{Total equity} &\$ 492,592 &\$ 663,768\\ \text{Total liabilities and equity} &\$2,866,592 &\$1,468,800\\ \hline \end{array}}$$

D'Leon purchases materials on $30$-day terms, meaning that it is supposed to pay for purchases within $30$ days of receipt. Judging from its $2016$ balance sheet, do you think that D'Leon pays suppliers on time? Explain, including what problems might occur if suppliers are not paid in a timely manner.

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earnings, but all are sold for the same price--$10 per pair. Actual sales of earnings for the last three months and budgeted sales for the next six months follow (in pairs of earnings):$ $$ \begin{matrix} \text{January (actual)} & \text{20.000} & \text{June (budget)} & \text{50.000}\\ \text{February (actual)} & \text{26.000} & \text{July (budget)} & \text{30.000}\\ \text{March (actual)} & \text{40.000} & \text{August (budget)} & \text{28.000}\\ \text{April (budget)} & \text{65.000} & \text{September (budget)} & \text{25.000}\\ \text{May (budget)} & \text{100.000}\\ \end{matrix} $$ $The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earnings sold in the following month. Suppliers are paid$4 for a pair of earnings. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: $$ \begin{matrix} \text{Variable:}\\ \text{Sales commissions} & \text{4\\% of sales}\\ \text{Fixed:}\\ \text{Advertising} & \text{\$ 200.000}\\ \text{Rent} & \text{\$ 18.000}\\ \text{Salaries} & \text{\$ 106.000}\\ \text{Utilities} & \text{\$ 7.000}\\ \text{Insurance } & \text{\$ 3.000}\\ \text{Depreciation} & \text{\$ 14.000}\\ \end{matrix} $$ Insurance is paid on an annual basis, in November of each year. The company plans to pm-chase $16,000 in new equipment during May and$40,000 in new equipment during June: both purchases will be for cash. The company declares dividends of$15,000 each quarter, payable in the first month of the following quarter. A listing of the company's ledger accounts as of March 31 is given below:$ $$ \begin{matrix} \text{Assets}\\ \text{Cash} & \text{\$ 74.000}\\ \text{Accounts receivable (\$26,000 February sales; \$ 320.000 March sales)} & \text{346.000}\\ \text{Inventory} & \text{104.000}\\ \text{Prepaid insurance} & \text{21.000}\\ \text{Property and equipment (net} & \text{950.000}\\ \text{Total assets} & \text{\$ 1.495.000}\\ \text{Liabilities and Stockholders' Equity}\\ \text{Accounts payable} & \text{\$ 100.000}\\ \text{Dividends payable} & \text{15.000}\\ \text{Common stock} & \text{800.000}\\ \text{Retained earnings} & \text{580.000}\\ \text{Total liabilities and stockholders' equity} & \text{\$ 1.495.000}\\ \end{matrix} $$ $The company maintains a maintains cash balance of$50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with a bank that allows the company to borrow in increments of $1.000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of$1.000), while still retaining at least $50.000 in cash. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: 1. a. A sales budget, by month and in total. b. A schedule of expected cash collections from sales, by month and in total. c. merchandise purchases budget in units and in dollars. Show the budget by month and in total. d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. 2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of$50.000. 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30.

The trial balance of the Pacilio Security Services Inc. as of January 1, 2019, had the following normal balances:

$$\begin{array}{lrr} \text{Cash}&&\$93,380\\ \text{Petty cash}&&\text{100}\\ \text{Accounts receivable}&&\text{21,390}\\ \text{Allowance for doubtful accounts}&&\text{2,485}\\ \text{Supplies}&&\text{180}\\ \text{Prepaid rent}&&\text{3,000}\\ \text{Merchandise inventory (23 @ \$280)}&&\text{6,440}\\ \text{Equipment}&&\text{9,000}\\ \text{Van}&&\text{27,000}\\ \text{Accumulated depreciation}&&\text{14,900}\\ \text{Salaries payable}&&\text{1,500}\\ \text{Common stock}&&\text{50,000}\\ \text{Retained earnings}&&\text{91,605}\\ \end{array}$$

During 2019, Pacilio Security Services experienced the following transactions:

1. Paid the salaries payable from 2018.

2. Paid $9,000 on May 2, 2019, for one year's office rent in advance.

3. Purchased$425 of supplies on account.

4. Purchased 145 alarm systems at a cost of $290 each. Paid cash for the purchase.

5. After numerous attempts to collect from customers, wrote off$2,060 of uncollectible accounts receivable.

6. Sold 130 alarm systems for $580 each plus sales tax of 5 percent. All sales were on account. (Be sure to compute cost of goods sold using the FIFO cost flow method.)

7. Billed$107,000 of monitoring services for the year. Credit card sales amounted to $42,000, and the credit card company charged a 4 percent fee. The remaining$65,000 were sales on account. Sales tax is not charged on this service.

8. Replenished the petty cash fund on June 30. The fund had $5 cash and has receipts of$60 for yard mowing, $15 for office supplies expense, and$17 for miscellaneous expenses.

9. Collected the amount due from the credit card company.

10. Paid the sales tax collected on $69,600 of the alarm sales.

11. Paid installers and other employees a total of$65,000 for salaries for the year. Assume the Social Security tax rate is 6 percent and the Medicare tax rate is 1.5 percent. Federal income taxes withheld amounted to $7,500. Cash was paid for the net amount of salaries due.

12. Pacilio now offers a one-year warranty on its alarm systems. Paid$1,950 in warranty repairs during the year.

13. On September 1 , borrowed $12,000 from State Bank. The note had an 8 percent interest rate and a one-year term to maturity.

14. Collected$136,100 of accounts receivable during the year.

15. Paid $15,000 of advertising expense during the year.

16. Paid$7,200 of utilities expense for the year.

17. Paid the payroll taxes, both the amounts withheld from the salaries plus the employer share of Social Security tax and Medicare tax, on $60,000 of the salaries plus$7,000 of the federal income tax that was withheld. (Unemployment taxes were not paid at this time.)

18. Paid the accounts payable.

19. Paid a dividend of $10,000 to the shareholders.

Adjustments

20. There was$165 of supplies on hand at the end of the year.

21. Recognized the expired rent for the office building for the year.

22. Recognized uncollectible accounts expense for the year using the allowance method. The company revised its estimate of uncollectible accounts based on prior years' experience. This year, Pacilio estimates that 2.75 percent of sales on account will not be collected.

23. Recognized depreciation expense on the equipment and the van. The equipment has a 5-year life and a $2,000 salvage value. The van has a 4-year life and a$6,000 salvage value. The company uses double-declining-balance for the van and straight-line for the equipment. (A full year's depreciation was taken in 2018, the year of acquisition.)

24. The alarm systems sold in transaction 6 were covered with a one-year warranty. Pacilio estimated that the warranty cost would be 3 percent of alarm sales.

25. Recognized the accrued interest on the note payable at December 31, 2019.

26. The unemployment tax on salaries has not been paid. Recorded the accrued unemployment tax on the salaries for the year. The unemployment tax rate is 4.5 percent. ($14,000 of salaries is subject to this tax.)

27. Recognized the employer Social Security and Medicare payroll tax that has not been paid on$5,000 of salaries expense.

Required

Close the temporary accounts to retained earnings.

Part I of this case, presented in previous chapter, discussed the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level; costs have been higher than were projected; and a large loss occurred in $2016$ rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's $2015$ and $2016$ balance sheets and income statements, together with projections for $2017$, are given in Tables below. In addition, the last table gives the company's $2015$ and $2016$ financial ratios, together with industry average data. The $2017$ projected financial statement data represent Jamison's and Campo's best guess for $2017$ results, assuming that some new financing is arranged to get the company "over the hump."

Jamison examined monthly data for $2016$ (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run.

Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

Balance Sheets

$$\small{ \begin{array}{lrrr} & \textbf{2017E} & \textbf{2016} & \textbf{2015}\\ \hline \textbf{Assets}\\ \text{Cash} &\$ 85,632 &\$ 7,282 &\$ 57,600\\ \text{Accounts receivable}& 878,000 &632,160 &351,200\\ \text{Inventories} &1,716,480 &1,287,360 &715,200\\ \text{Total current assets}& \$2,680,112& \$1,926,802 &\$1,124,000\\ \text{Gross fixed assets}& 1,197,160& 1,202,950& 491,000\\ \text{Less accumulated depreciation}& 380,120 &263,160& 146,200\\ \text{Net fixed assets} &\$ 817,040 &\$ 939,790& \$ 344,800\\ \text{Total assets}& \$3,497,152 &\$2,866,592 &\$1,468,800\\ \textbf{Liabilities and Equity}\\ \text{Accounts payable} &\$ 436,800 &\$ 524,160 &\$ 145,600\\ \text{Accruals} &408,000 &489,600 &136,000\\ \text{Notes payable}& 300,000& 636,808& 200,000\\ \text{Total current liabilities}& \$1,144,800 &\$1,650,568 &\$ 481,600\\ \text{Long-term debt}& 400,000& 723,432& 323,432\\ \text{Common stock}& 1,721,176& 460,000& 460,000\\ \text{Retained earnings}& 231,176& 32,592 &203,768\\ \text{Total equity} &\$1,952,352 &\$ 492,592 &\$ 663,768\\ \text{Total liabilities and equity} &\$3,497,152 &\$2,866,592 &\$1,468,800\\ \hline \end{array}}$$

$$\footnotesize{\text{Note: E indicates estimated. The 2017 data are forecasts.}}$$

Income Statements

$$\small{ \begin{array}{lrrr} & \textbf{2017E} & \textbf{2016} & \textbf{2015}\\ \hline \text{Sales}& \$7,035,600 &\$6,034,000 &\$3,432,000\\ \text{Cost of goods sold}& 5,875,992& 5,528,000& 2,864,000\\ \text{Other expenses}& 550,000& 519,988& 358,672\\ \text{Total operating costs excluding depreciation and amortization} &\$6,425,992 &\$ 6,047,988 &\$3,222,672\\ \text{EBITDA}& \$ 609,608& (\$ 13,988) &\$ 209,328\\ \text{Depreciation \& amortization}& 116,960& 116,960& 18,900\\ \text{EBIT} &\$ 492,648& (\$ 130,948) &\$ 190,428\\ \text{Interest expense} &70,008 &136,012 &43,828\\ \text{EBT} &\$ 422,640& (\$ 266,960) &\$ 146,600\\ \text{Taxes (40\\\%)}& 169,056 &(106,784)a &58,640\\ \text{Net income} &\$ 253,584 &(\$ 160,176)& \$ 87,960\\ \text{EPS} &\$ 1.014 &(\$ 1.602) &\$ 0.880\\ \text{DPS}& \$ 0.220&\$ 0.110 &\$ 0.220\\ \text{Book value per share} &\$ 7.809 &\$ 4.926 &\$ 6.638\\ \text{Stock price}& \$ 12.17 &\$ 2.25 &\$ 8.50\\ \text{Shares outstanding }&250,000 &100,000 &100,000\\ \text{Tax rate}& 40.00\% &40.00\% &40.00\%\\ \text{Lease payments}& \$40,000& \$40,000& \$40,000\\ \text{Sinking fund payments} &0& 0 &0\\ \hline \end{array}}$$

$$\footnotesize{\text{Note: E indicates estimated. The 2017 data are forecasts. a-The firm had sufficient taxable income in 2014 and 2015 to obtain its full tax refund in 2016.}}$$

Ratio Analysis

$$\small{ \begin{array}{lrrr} &&&&\textbf{Industry}\\ & \textbf{2017E} & \textbf{2016} & \textbf{2015}&\textbf{Average}\\ \hline \text{Current} &&1.2\times& 2.3\times &2.7\times\\ \text{Quick} &&0.4\times &0.8\times &1.0\times\\ \text{Inventory turnover}&& 4.7\times &4.8\times& 6.1\times\\ \text{Days sales outstanding (DSO)a}&& 38.2& 37.4& 32.0\\ \text{Fixed assets turnover} &&6.4\times &10.0\times &7.0\times\\ \text{Total assets turnover}&& 2.1\times &2.3\times& 2.6\times\\ \text{Debt-to-capital ratio}&& 73.4\% &44.1\%& 40.0\%\\ \text{TIE} &&-1.0\times& 4.3\times& 6.2\times\\ \text{Operating margin}&& -2.2\% &5.5\%& 7.3\%\\ \text{Profit margin}&& -2.7\% &2.6\% &3.5\%\\ \text{Basic earning power}&& -4.6\%& 13.0\%& 19.1\%\\ \text{ROA}&& -5.6\% &6.0\%& 9.1\%\\ \text{ROE}&& -32.5\% &13.3\%& 18.2\%\\ \text{ROIC}&& -4.2\%& 9.6\%& 14.5\%\\ \text{Price/earnings}&& -1.4\times &9.7\times& 14.2\times\\ \text{Market/book}&& 0.5\times& 1.3\times& 2.4\times\\ \text{Book value per share} &&\$4.93& \$6.64& \text{n.a.}\\ \hline \end{array}}$$

$$\footnotesize{\text{Note: E indicates estimated. The 2017 data are forecasts. a- Calculation is based on a 365-day year.}}$$

Calculate the $2017$ operating margin, profit margin, basic earning power (BEP), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC). What can you say about these ratios?

The December 1, 20X4, account balances for the general and subsidiary ledgers are given in the Working Papers. Instructions:

1. Journalize the following transactions completed during December, 20X4. Use page 12 of a sales journal, page 12 of a purchases journal, page 12 of a general journal, page 12 of a cash receipts journal, and page 23 of a cash payments journal. Sparkle offers sales terms of 2/10, n/30. The sales tax rate is 6%. Source documents are abbreviated as follows: check, C; memorandum, M; purchase invoice, P; receipt, R; sales invoice, S; terminal summary, TS; debit memorandum, DM; credit memorandum, CM; NR, note receivable; NP, note payable. Dec. 1. Paid cash for rent, $1,750.00. C578.
2. Received cash on account from Ruocco Plastics, covering S637 for$3,250.00. R671.
3. Paid cash on account to Walbash Manufacturing, covering P324 for $620.00, less 2% discount. C579.
4. Paid cash for the maturity value of NP31, a 180-day, 9% note for$10,000.00 to First American Bank. C580.
5. Bought a printer/scanner for the office: cost, $1,200.00; estimated salvage value,$200.00; estimated useful life, 3 years; plant asset No. 998; serial number, MNT-9343. C581. Open a plant asset record for this office equipment. Sparkle Inc. uses the straight-line method of depreciation. C581.
6. Sold merchandise on account to Horton Company, $500.00, plus sales tax. S657.
7. Recorded cash and credit card sales,$5,430.00, plus sales tax, $325.80; total,$5,755.80. TS49.
8. Bought supplies on account from Draper Company, $362.40. M45. Posting. Post the items that are to be posted individually. Always post the journals in this order: sales journal, purchases journal, general journal, cash receipts journal, and cash payments journal.
9. Accepted a 90-day, 10% note from Nelson Co. for an extension of time on its account,$3,600.00. NR34.
10. Purchased merchandise on account from Glenson Company, $4,518.00. P332.
11. Sold merchandise on account to Ruocco Plastics,$480.00, plus sales tax. S658.
12. Wrote off Felton Industries’ past-due account as uncollectible, $2,460.00. M46.
13. Paid cash for supplies,$223.00. C582.
14. Received cash on account from Horton Company, covering S657 for $530.00, less 2% discount. R672.
15. Purchased merchandise on account from Hinsdale Supply Co.,$6,812.00. P333.
16. Recorded cash and credit card sales, $5,987.00, plus sales tax,$359.22; total, $6,346.22. TS50. Posting. Post the items that are to be posted individually.
17. Received cash for sale of a hand truck, plant asset No. 432,$1,400.00. M47 and R673.
18. Returned merchandise purchased from Glenson Company on P332, $198.00. DM34.
19. Paid cash liability for employee income tax,$324.00; social security tax, $742.00; and Medicare tax,$162.35. C583.
20. Paid cash for semimonthly payroll, $2,256.27 (total payroll,$2,820.00, less deductions: employee income tax, $158.00; social security tax,$174.84; Medicare tax, $40.89; health insurance,$190.00). C584.
21. Recorded employer payroll taxes, $250.45, for the semimonthly pay period ended December 15. Taxes owed are: social security tax,$174.84; Medicare tax, $40.89; federal unemployment tax,$4.48; and state unemployment tax, $30.24. M48.
22. Purchased merchandise on account from Buntin Supply Company,$4,833.00. P334.
23. Paid cash for electric bill, $346.20. C585.
24. Paid cash on account to Glenson Company, covering P332 for$4,518.00, less 2% discount. C586.
25. Received cash in full payment of Baker & Associates’ account, previously written off as uncollectible, $948.00. M49 and R674.
26. Paid cash for miscellaneous expense,$72.00. C587.
27. Sold merchandise on account to Hilldale School, $1,560.00. Hilldale School is exempt from sales tax. S659.
28. Recorded cash and credit card sales,$3,554.00, plus sales tax, $213.24; total,$3,767.24. TS51. Posting. Post the items that are to be posted individually.
29. Paid cash for merchandise, $357.00. C588.
30. Granted credit to Ruocco Plastics for merchandise returned,$120.00; plus sales tax, $7.20;$127.20 total. CM15.
31. Paid cash on account to Hinsdale Supply Co., covering P333 for $6,812.00. C589.
32. Received cash for the maturity value of NR32, a 90-day, 12% note for$5,800.00. R675.
33. Recorded cash and credit card sales, $2,337.00, plus sales tax,$140.22; total, $2,477.22. TS52. Posting. Post the items that are to be posted individually.
34. Sold merchandise on account to Horton Company,$2,500.00, plus sales tax. S660.
35. Purchased merchandise on account from Draper Company, $6,148.00. P335.
36. Signed a 90-day, 10% note, for$6,000.00 with Commercial National Bank. NP33 and R676.
37. Received cash for sale of a computer printer, plant asset No. 667, $150.00. M50 and R677. Update the plant asset record and record the sale.
38. Paid$500.00 on the outstanding balance of the SHF Corp. account. C590.
39. Ruocco Plastics dishonored NR33, a 60-day, 12% note, for $3,000.00. M51.
40. Recorded credit card fee expense,$418.00. M52.
41. Paid cash to replenish the petty cash fund, $84.96: supplies,$12.50; advertising, $50.00; miscellaneous,$22.37; cash short, $.09. C591.
42. Paid cash for semimonthly payroll,$2,206.86 (total payroll, $2,760.00, less deductions: employee income tax,$152.00; social security tax, $171.12; Medicare tax,$40.02; health insurance, $190.00. C592.
43. Recorded employer payroll taxes,$242.14, for the semimonthly pay period ended December 31. Taxes owed are: social security tax, $171.12: Medicare tax,$40.02; federal unemployment tax, $4.00; and state unemployment tax,$27.00. M53.
44. Recorded cash and credit card sales, $465.00, plus sales tax,$27.90; total, $492.90. TS53. Posting. Post the items that are to be posted individually.

The budget director of Gold Medal Athletic Co., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for March 2014:

a. Estimated sales for March:

$$\begin{array}{ll} \hspace{20pt}\text{Batting helmet . . . . . . . . . . . . . . . . . . . . . . . .}&\text{1,200 units at \$40 per unit}\\ \hspace{20pt}\text{Football helmet . . . . . . . . . . . . . . . . . . . . . . . . }&\text{6,500 units at \$160 per unit}\\ \end{array}$$

b. Estimated inventories at March 1:

$$\begin{array}{lllll} \text{Direct materials:}&&&\text{Finished products:}\\ \hspace{10pt}\text{Plastic . . . . . . . . . . . . . . .}&\text{90 lbs.}&&\hspace{10pt}\text{Batting helmet . . . . . . . . . . . .}&\text{40 units at \$25 per unit}\\ \hspace{10pt}\text{Foam lining . . . . . . . . . . .}&\text{80 lbs.}&&\hspace{10pt}\text{Football helmet . . . . . . . . . . .}&\text{240 units at \$77 per unit}\\ \end{array}$$

c. Desired inventories at March 31:

$$\begin{array}{lllll} \text{Direct materials:}&&&\text{Finished products:}\\ \hspace{10pt}\text{Plastic . . . . . . . . . . . . . . .}&\text{50 lbs.}&&\hspace{10pt}\text{Batting helmet . . . . . . . . . . . .}&\text{50 units at \$25 per unit}\\ \hspace{10pt}\text{Foam lining . . . . . . . . . . .}&\text{65 lbs.}&&\hspace{10pt}\text{Football helmet . . . . . . . . . . .}&\text{220 units at \$78 per unit}\\ \end{array}$$

d. Direct materials used in production:

$$\begin{array}{lllll} \text{In manufacture of batting helmet:}\\ \hspace{10pt}\text{Plastic . . . . . . . . . . . . . . . . .}&\text{1.20 lbs. per unit of product}\\ \hspace{10pt}\text{Foam lining . . . . . . . . . . . . .}&\text{0.50 lb. per unit of product}\\ \text{In manufacture of football helmet:}\\ \hspace{10pt}\text{Plastic . . . . . . . . . . . . . . . . .}&\text{3.50 lbs. per unit of product}\\ \hspace{10pt}\text{Foam lining . . . . . . . . . . . . .}&\text{1.50 lb. per unit of product}\\ \end{array}$$

e. Anticipated cost of purchases and beginning and ending inventory of direct materials:

$$\begin{array}{lllll} \hspace{10pt}\text{Plastic . . . . . . . . . . . . . . . . .}&\text{\$6.00 per lb.}\\ \hspace{10pt}\text{Foam lining . . . . . . . . . . . . .}&\text{\$4.00 per lb.}\\ \end{array}$$

f. Direct labor requirements:

$$\begin{array}{ll} \text{Batting helmet:}\\ \hspace{20pt}\text{Molding Department. . . . . . . . . . . . . . . . . .}&\text{0.20 hr. at \$20 per hr.}\\ \hspace{20pt}\text{Assembly Department . . . . . . . . . . . . . . . . . . }&\text{0.50 hr. at \$14 per hr.}\\ \text{Football helmet:}\\ \hspace{20pt}\text{Molding Department. . . . . . . . . . . . . . . . . .}&\text{0.50 hr. at \$20 per hr.}\\ \hspace{20pt}\text{Assembly Department . . . . . . . . . . . . . . . . . . }&\text{1.80 hrs. at \$14 per hr.}\\ \end{array}$$

g. Estimated factory overhead costs for March:

$$\begin{array}{lrlr} \text{Indirect factory wages}&\$\hspace{5pt}86,000&\text{Power and light}&\$\hspace{5pt}4,000\\ \text{Depreciation of plant and equipment}&{12,000 }&\text{Insurance and property tax}&{2,300}\\ \end{array}$$

h. Estimated operating expenses for March:

$$\begin{array}{lr} \text{Sales salaries expense}&\$\hspace{5pt}184,300\\ \text{Advertising expense}&{87,200}\\ \text{Office salaries expense}&{32,400}\\ \text{Depreciation expense—office equipment}&{3,800}\\ \text{Telephone expense—selling}&{5,800}\\ \text{Telephone expense—administrative}&{1,200}\\ \text{Travel expense—selling}&{9,000}\\ \text{Office supplies expense}&{1,100}\\ \text{Miscellaneous administrative expense}&{1,000}\\ \end{array}$$

i. Estimated other income and expense for March:

$$\begin{array}{lr} \text{Interest revenue}&\$\hspace{5pt}940\\ \text{Interest expense}&{872}\\ \end{array}$$

j. Estimated tax rate: 30%

Instructions

1. Prepare a sales budget for March.
2. Prepare a production budget for March.
3. Prepare a direct materials purchases budget for March.
4. Prepare a direct labor cost budget for March.
5. Prepare a factory overhead cost budget for March.
6. Prepare a cost of goods sold budget for March. Work in process at the beginning of March is estimated to be $15,300, and work in process at the end of March is desired to be$14,800.
7. Prepare a selling and administrative expenses budget for March.
8. Prepare a budgeted income statement for March.

The trial balance of Pacilio Security Services Inc. as of January 1, 2021 , had the following normal balances:

$$\begin{array}{lrr} \text{Cash}&&\$113,718\\ \text{Petty cash}&&\text{100}\\ \text{Accounts receivable}&&\text{39,390}\\ \text{Allowance for doubtful accounts}&&\text{4,662}\\ \text{Supplies}&&\text{210}\\ \text{Merchandise inventory (48 @ \$300)}&&\text{14,400}\\ \text{Equipment}&&\text{9,000}\\ \text{Van}&&\text{27,000}\\ \text{Building}&&\text{125,000}\\ \text{Accumulated depreciation}&&\text{28,075}\\ \text{Land}&&\text{25,000}\\ \text{Sales tax payable}&&\text{390}\\ \text{Employee income tax payable}&&\text{1,000}\\ \text{FICA - Social Security tax payable}&&\text{840}\\ \text{FICA - Medicare tax payable}&&\text{210}\\ \text{Warranty payable}&&\text{918}\\ \text{Unemployment tax payable}&&\text{945}\\ \text{Notes payable - Building}&&\text{92,762}\\ \text{Bonds payable}&&\text{50,000}\\ \text{Discount on bonds payable}&&\text{800}\\ \text{Common stock}&&\text{50,000}\\ \text{Retained earnings}&&\text{124,816}\\ \end{array}$$

During 2021, Pacilio Security Services experienced the following transactions:

1. Paid the sales tax payable from 2020.

2. Paid the balance of the payroll liabilities due for 2020 (federal income tax, FICA taxes, and unemployment taxes).

3. Issued 5,000 additional shares of the $5 par value common stock for$8 per share and 1,000 shares of $50 stated value, 5 percent cumulative preferred stock for$52 per share.

4. Purchased $500 of supplies on account.

5. Purchased 190 alarm systems at a cost of$310. Cash was paid for the purchase.

6. After numerous attempts to collect from customers, wrote off $3,670 of uncollectible accounts receivable.

7. Sold 210 alarm systems for$600 each plus sales tax of 5 percent. All sales were on account. (Be sure to compute cost of goods sold using the FIFO cost flow method.)

8. Billed $125,000 of monitoring services for the year. Credit card sales amounted to$58,000, and the credit card company charged a 4 percent fee. The remaining $67,000 were sales on account. Sales tax is not charged on this service.

9. Replenished the petty cash fund on June 30. The fund had$10 cash and receipts of $75 for yard mowing and$15 for office supplies expense.

10. Collected the amount due from the credit card company.

11. Paid the sales tax collected on $105,000 of the alarm sales.

12. Collected$198,000 of accounts receivable during the year.

13. Paid installers and other employees a total of $96,000 for salaries for the year. Assume the Social Security tax rate is 6 percent and the Medicare tax rate is 1.5 percent. Federal income taxes withheld amounted to$10,600. No employee exceeded $110,000 in total wages. The net salaries were paid in cash.

14. On October 1, declared a dividend on the preferred stock and a$1 per share dividend on the common stock to be paid to shareholders of record on October 15, payable on November 1, 2021.

15. Paid $1,625 in warranty repairs during the year.

16. On November 1, 2021, paid the dividends that had been previously declared.

17. Paid$18,500 of advertising expense during the year.

18. Paid $6,100 of utilities expense for the year.

19. Paid the payroll liabilities, both the amounts withheld from the salaries plus the employer share of Social Security tax and Medicare tax, on$88,000 of the salaries plus $9,200 of the federal income tax that was withheld.

20. Paid the accounts payable.

21. Paid bond interest and amortized the discount. The bond was issued in 2020 and pays interest at 6 percent.

22. Paid the annual installment of$14,238 on the amortized note. The interest rate for the note is 7 percent.

Adjustments

23. There was $190 of supplies on hand at the end of the year.

24. Recognized the uncollectible accounts expense for the year using the allowance method. Pacilio now estimates that 1 percent of sales on account will not be collected.

25. Recognized depreciation expense on the equipment, van, and building. The equipment, purchased in 2018, has a five-year life and a$2,000 salvage value. The van has a four-year life and a $6,000 salvage value. The building has a 40-year life and a$10,000 salvage value. The company uses straight-line for the equipment and the building. The van is fully depreciated.

26. The alarm systems sold in transaction 7 were covered with a one-year warranty. Pacilio estimated that the warranty cost would be 2 percent of alarm sales.

27. The unemployment tax on the three employees has not been paid. Record the accrued unemployment tax on the salaries for the year. The unemployment tax rate is 4.5 percent and gross wages for all three employees exceeded $7,000.

28. Recognized the employer Social Security and Medicare payroll tax that has not been paid on$8,000 of salaries expense.

Required

Close the temporary accounts to retained earnings.

Part I of this case, presented in previous chapter, discussed the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level; costs have been higher than were projected; and a large loss occurred in $2016$ rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's $2015$ and $2016$ balance sheets and income statements, together with projections for $2017$, are given in Tables below. In addition, the last table gives the company's $2015$ and $2016$ financial ratios, together with industry average data. The $2017$ projected financial statement data represent Jamison's and Campo's best guess for $2017$ results, assuming that some new financing is arranged to get the company "over the hump."

Jamison examined monthly data for $2016$ (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run.

Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

Balance Sheets

$$\small{ \begin{array}{lrrr} & \textbf{2017E} & \textbf{2016} & \textbf{2015}\\ \hline \textbf{Assets}\\ \text{Cash} &\$ 85,632 &\$ 7,282 &\$ 57,600\\ \text{Accounts receivable}& 878,000 &632,160 &351,200\\ \text{Inventories} &1,716,480 &1,287,360 &715,200\\ \text{Total current assets}& \$2,680,112& \$1,926,802 &\$1,124,000\\ \text{Gross fixed assets}& 1,197,160& 1,202,950& 491,000\\ \text{Less accumulated depreciation}& 380,120 &263,160& 146,200\\ \text{Net fixed assets} &\$ 817,040 &\$ 939,790& \$ 344,800\\ \text{Total assets}& \$3,497,152 &\$2,866,592 &\$1,468,800\\ \textbf{Liabilities and Equity}\\ \text{Accounts payable} &\$ 436,800 &\$ 524,160 &\$ 145,600\\ \text{Accruals} &408,000 &489,600 &136,000\\ \text{Notes payable}& 300,000& 636,808& 200,000\\ \text{Total current liabilities}& \$1,144,800 &\$1,650,568 &\$ 481,600\\ \text{Long-term debt}& 400,000& 723,432& 323,432\\ \text{Common stock}& 1,721,176& 460,000& 460,000\\ \text{Retained earnings}& 231,176& 32,592 &203,768\\ \text{Total equity} &\$1,952,352 &\$ 492,592 &\$ 663,768\\ \text{Total liabilities and equity} &\$3,497,152 &\$2,866,592 &\$1,468,800\\ \hline \end{array}}$$

$$\footnotesize{\text{Note: E indicates estimated. The 2017 data are forecasts.}}$$

Income Statements

$$\small{ \begin{array}{lrrr} & \textbf{2017E} & \textbf{2016} & \textbf{2015}\\ \hline \text{Sales}& \$7,035,600 &\$6,034,000 &\$3,432,000\\ \text{Cost of goods sold}& 5,875,992& 5,528,000& 2,864,000\\ \text{Other expenses}& 550,000& 519,988& 358,672\\ \text{Total operating costs excluding depreciation and amortization} &\$6,425,992 &\$ 6,047,988 &\$3,222,672\\ \text{EBITDA}& \$ 609,608& (\$ 13,988) &\$ 209,328\\ \text{Depreciation \& amortization}& 116,960& 116,960& 18,900\\ \text{EBIT} &\$ 492,648& (\$ 130,948) &\$ 190,428\\ \text{Interest expense} &70,008 &136,012 &43,828\\ \text{EBT} &\$ 422,640& (\$ 266,960) &\$ 146,600\\ \text{Taxes (40\\\%)}& 169,056 &(106,784)a &58,640\\ \text{Net income} &\$ 253,584 &(\$ 160,176)& \$ 87,960\\ \text{EPS} &\$ 1.014 &(\$ 1.602) &\$ 0.880\\ \text{DPS}& \$ 0.220&\$ 0.110 &\$ 0.220\\ \text{Book value per share} &\$ 7.809 &\$ 4.926 &\$ 6.638\\ \text{Stock price}& \$ 12.17 &\$ 2.25 &\$ 8.50\\ \text{Shares outstanding }&250,000 &100,000 &100,000\\ \text{Tax rate}& 40.00\% &40.00\% &40.00\%\\ \text{Lease payments}& \$40,000& \$40,000& \$40,000\\ \text{Sinking fund payments} &0& 0 &0\\ \hline \end{array}}$$

$$\footnotesize{\text{Note: E indicates estimated. The 2017 data are forecasts. a-The firm had sufficient taxable income in 2014 and 2015 to obtain its full tax refund in 2016.}}$$

Ratio Analysis

$$\small{ \begin{array}{lrrr} &&&&\textbf{Industry}\\ & \textbf{2017E} & \textbf{2016} & \textbf{2015}&\textbf{Average}\\ \hline \text{Current} &&1.2\times& 2.3\times &2.7\times\\ \text{Quick} &&0.4\times &0.8\times &1.0\times\\ \text{Inventory turnover}&& 4.7\times &4.8\times& 6.1\times\\ \text{Days sales outstanding (DSO)a}&& 38.2& 37.4& 32.0\\ \text{Fixed assets turnover} &&6.4\times &10.0\times &7.0\times\\ \text{Total assets turnover}&& 2.1\times &2.3\times& 2.6\times\\ \text{Debt-to-capital ratio}&& 73.4\% &44.1\%& 40.0\%\\ \text{TIE} &&-1.0\times& 4.3\times& 6.2\times\\ \text{Operating margin}&& -2.2\% &5.5\%& 7.3\%\\ \text{Profit margin}&& -2.7\% &2.6\% &3.5\%\\ \text{Basic earning power}&& -4.6\%& 13.0\%& 19.1\%\\ \text{ROA}&& -5.6\% &6.0\%& 9.1\%\\ \text{ROE}&& -32.5\% &13.3\%& 18.2\%\\ \text{ROIC}&& -4.2\%& 9.6\%& 14.5\%\\ \text{Price/earnings}&& -1.4\times &9.7\times& 14.2\times\\ \text{Market/book}&& 0.5\times& 1.3\times& 2.4\times\\ \text{Book value per share} &&\$4.93& \$6.64& \text{n.a.}\\ \hline \end{array}}$$

$$\footnotesize{\text{Note: E indicates estimated. The 2017 data are forecasts. a- Calculation is based on a 365-day year.}}$$

Why are ratios useful? What are the five major categories of ratios?

Depkline plc is a pharmaceutical company headquartered in the United Kingdom. Exhibit 7.26 presents financial statement ratios for Depkline for 2011, 2012, and 2013. Respond to each of the following questions.

Cartoo, Taggle, and Wilmet Cross-Section ROA Profitability Analysis (Problem 26)

$$\begin{array}{llll} \textbf{ROA}\\ & 2011 & 2012 & 2013 \\ \hline \text { Cartoo } \ldots \ldots \ldots \ldots & 3.8 \% & 3.4 \% & 3.4 \% \\ \text { Taggle. } \ldots \ldots \ldots & 7.0 \% & 7.2 \% & 6.4 \% \\ \text { Wilmet } \ldots \ldots \ldots & 8.5 \% & 8.0 \% & 7.8 \% \end{array}$$

$$\begin{array}{lllllll} & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 \\ \hline \text { Cartoo } \ldots \ldots \ldots \ldots & 2.5 \% & 2.4 \% & 2.3 \% & 1.5 & 1.4 & 1.5 \\ \text { Taggle. } \ldots \ldots \ldots & 4.7 \% & 4.8 \% & 4.6 \% & 1.5 & 1.5 & 1.4 \\ \text { Wilmet } \ldots \ldots \ldots & 3.7 \% & 3.5 \% & 3.4 \% & 2.3 & 2.3 & 2.3 \end{array}$$

$$\begin{array}{lccccccccc} & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 \\ \hline \text { Sales} & 100.0 \% & 100.0 \% & 100.0 \% & 100.0 \% & 100.0 \% & 100.0 \% & 100.0 \% & 100.0 \% & 100.0 \% \\ \text { Other Revenues. } & 1.5 & 1.4 & 1.5 & 2.7 & 2.8 & 3.1 & 1.1 & 1.2 & 1.2 \\ \text { Cost of Goods Sold } & (80.4) & (80.6) & (80.7) & (68.1) & (68.1) & (68.2) & (76.9) & (76.6) & (76.5) \\ \text { Advertising } & (1.5) & (1.4) & (1.5) & (2.0) & (2.0) & (1.9) & (0.5) & (0.6) & (0.5)\\ \text{Selling and}\\ \quad\text{Administrative}& (15.2)& (15.1) &(15.1) &(24.1) &(23.9) &(24.4) &(17.7)& (18.1) &(18.4)\\ \text{Income Taxes} &(1.3) &(1.3) &(1.2)& (3.2) &(3.3)& (3.3)& (2.0)& (2.0) &(2.0)\\ \text{Profit Margin}&2.5\%& 2.4\%& 2.3\%& 4.7\%& 4.8\% &4.6\%& 3.7\%& 3.5\% &3.4\%\\ \text{Receivable Turnover}&13.8 &12.8 &13.3 &9.6& 9.8 &8.6& 141.2 &125.4 &115.3\\ \text{Inventory Turnover}& 10.0 &10.2 &10.3 &6.2 &6.5 &6.4& 7.7 &8.0 &8.3\\ \text{Fixed-Asset Turnover}&3.8 &3.9 &3.9 &2.7 &2.7& 2.5 &3.9 &3.8 &3.7\\ \textbf{Percentage of Total}\\ \textbf{Assets:}\\ \text{Receivables}& 11\%& 12\%& 10\%& 16\%& 16\%& 17\%& 2\%& 2\%& 2\%\\ \text{Inventory} &12 &11 &12 &16 &16 &15 &22 &22 &20\\ \text{Fixed Assets}& 37& 37& 37& 56& 59& 56& 59& 60& 61\\ \text{Other}&40 &40 &41 &12 &9 &12 &17 &16 &17\\ \text{Total}& 100\%& 100\%& 100\%& 100\%& 100\% &100\%& 100\%& 100\%& 100\%\\ \end{array}$$

Cartoo, Taggle, and Wilmet Cross-Section ROE Profitability Analysis (Problem 26)

$$\begin{array}{llll} & 2011 & 2012 & 2013 \\ \hline \text { Cartoo......... } & 23.6 \% & 20.8 \% & 18.6 \% \\ \text { Taggle......... } & 17.7 \% & 18.7 \% & 18.4 \% \\ \text { Wilmet } \ldots \ldots \ldots & 22.2 \% & 21.2 \% & 20.4 \% \end{array}$$

$$\begin{array}{llllllllll} & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 \\ \hline \text { Cartoo } \ldots \ldots \ldots \ldots & 2.5 \% & 2.4 \% & 2.3 \% & 1.5 & 1.4 & 1.5 & 6.5 & 6.0 & 5.6 \\ \text { Taggle. } \ldots \ldots \ldots & 4.7 \% & 4.8 \% & 4.6 \% & 1.5 & 1.5 & 1.4 & 2.6 & 2.5 & 2.7 \\ \text { Wilmet } \ldots \ldots \ldots \ldots & 3.7 \% & 3.5 \% & 3.4 \% & 2.3 & 2.3 & 2.3 & 2.6 & 2.6 & 2.6 \end{array}$$

Cartoo, Taggle, and Wilmet Cross-Section Risk Analysis (Problem 26)

$$\begin{array}{lccccccccc} & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 & 2011 & 2012 & 2013 \\ \hline \text { Short-Term Liquidity } & & & & & & & & & \\ \text { Current Ratio } \ldots \ldots \ldots \ldots & 0.65 & 0.66 & 0.67 & 1.50 & 1.32 & 1.60 & 0.90 & 0.90 & 0.81 \\ \text { Quick Ratio } \ldots \ldots \ldots \ldots \ldots & 0.36 & 0.37 & 0.36 & 0.76 & 0.63 & 0.89 & 0.19 & 0.20 &0.16 \\ \text { Cash Flow from Operations to } \\ \quad \text { Current Liabilities Ratio } & 19.4 \% & 16.4 \% & 19.4 \% & 50.0 \% & 47.0 \% & 36.0 \% & 38.3 \% & 40.1 \% & 36.9 \%\\ \text { Days Receivable } \ldots \ldots \ldots & 26 & 29 & 27 & 38 & 37 & 42 & 3 & 3 & 3 \\ \text { Days Inventory } \ldots \ldots \ldots \ldots & 36 & 36 & 36 & 59 & 56 & 57 & 48 & 46 & 44 \\ \text { Days Payable } \ldots \ldots \ldots \ldots & 95 & 96 & 91 & 62 & 59 & 57 & 36 & 37 & 37 \\ \textbf { Long-Term Liquidity }\\ \text { Liabilities to Assets Ratio..... } & 82.1 \% & 80.6 \% & 80.0 \% & 61.0 \% & 59.5 \% & 67.0 \% & 63.2 \% & 60.8 \% & 62.5 \% \\ \text { Long-Term Debt Ratio } \ldots \ldots & 26.3 \% & 25.9 \% & 25.7 \% & 29.0 \% & 25.7 \% & 36.5 \% & 25.3 \% & 23.4 \% & 24.5 \% \\ \text { Debt-Equity Ratio } \ldots \ldots \ldots & 146.8 \% & 133.4 \% & 128.6 \% & 74.5 \% & 63.5 \% & 110.7 \% & 68.7 \% & 59.8 \% & 65.5 \% \\ \begin{array}{c} \text { Cash Flow from Operations to } \\ \quad \text { Total Liabilities Ratio } \ldots \ldots \end{array} & 11.2 \% & 10.1 \% & 11.8 \% & 20.8 \% & 21.5 \% & 15.3 \% & 21.0 \% & 21.6 \% & 20.0 \% \\ \text { Interest Coverage Ratio } \ldots \ldots & 6.6 & 6.5 & 6.0 & 8.9 & 8.5 & 7.9 & 13.1 & 11.3 & 10.4\\ \end{array}$$

Cartoo, Taggle, and Wilmet Selected Other Financial Data (Problem 26)

$$\begin{array}{lrrr} &\textbf{2011}&\textbf{2012}&\textbf{2013}\\\hline \textbf{Growth Rate in Sales [same store]}\\ \quad\text{Cartoo}& 1.0\% [0.9\%]& 5.2\% [1.2\%] &6.8\% [1.8\%]\\ \quad\text{Taggle}& 12.2\% [5.6\%] &12.9\% [4.8\%] &6.3\% [3.0\%]\\ \quad\text{Wilmet}& 9.8\% [3.4\%]& 11.7\% [2.0\%]& 8.6\% [1.6\%]\\ \textbf{Number of Stores}\\ \quad\text{Cartoo}& 7,003& 7,358& 7,906\\ \quad\text{Taggle}& 1,397& 1,488& 1,591\\ \quad\text{ Wilmet}& 6,141& 6,779& 7,262\\ \textbf{Square Footage (000s)}\\ \quad\text{Cartoo}& 156,216 &164,354 &181,899\\ \quad\text{Taggle}& 178,260 &192,064 &207,945\\ \quad\text{Wilmet}& 741,897& 806,988& 869,341\\ \textbf{Sales per Square Foot}\\ \quad\text{Cartoo}& \$582 &\$587 &\$618\\ \quad\text{Taggle}& \$288 &\$301 &\$296\\ \quad\text{Wilmet}& \$416 &\$428 &\$431\\ \textbf{Sales per Store}\\ \quad\text{ Cartoo} &\$12,988,587 &\$13,103,550 &\$14,224,804\\ \quad\text{ Taggle}& \$36,700,787 &\$38,896,505 &\$38,636,706\\ \quad\text{ Wilmet}& \$50,308,582 &\$50,891,282 &\$51,573,396\\ \textbf{Square Feet per Store}\\ \quad\text{Cartoo}& 22,307 &22,337 &23,008\\ \quad\text{Taggle}& 127,602 &129,075 &130,701\\ \quad\text{Wilmet}& 120,810& 119,042 &119,711\\ \textbf{Inventory per Square Foot}\\ \quad\text{Cartoo}& \$49& \$46 &\$52\\ \quad\text{Taggle} &\$33 &\$33 &\$33\\ \quad\text{Wilmet}& \$43 &\$42 &\$40\\ \textbf{Fixed Assets per Square Foot}\\ \quad\text{Cartoo} &\$156 &\$154 &\$163\\ \quad\text{Taggle} &\$115 &\$118 &\$125\\ \quad\text{Wilmet} &\$115 &\$117 &\$122\\ \textbf{Sales per Employee}\\ \quad\text{Cartoo} &\$242,942 &\$248,590 &\$269,992\\ \quad\text{Taggle} &\$178,458 &\$193,443 &\$197,592\\ \quad\text{Wilmet} &\$201,925 &\$213,617 &\$209,818\\ \end{array}$$

d. What are the likely reasons for the pattern of changes in the two cash flow ratios during the three-year period from 2012 to 2013?