The Management Discussion and Analysis section of an annual report addresses corporate performance for the year and sometimes uses financial ratios to support its claims.

Address: www.ibm.com/investor/tools/index.phtml, or go to www.wiley.com/college/weygandt

Steps

1. Choose How to read annual reports (in the Guides section).
2. Choose Anatomy.

Instructions Using the information from the above site, answer the following questions. (a) What are the optional elements that are often included in an annual report?

Selected financial data of Target Corporation and Wal-Mart Stores, Inc. for a recent year are presented here (in millions).

Instructions (a) For each company, compute the following ratios.

What is a ratio? What are the different ways of expressing the relationship of two amounts? What information does a ratio provide?

Over the past 50 years, there has been a strong negative correlation between average annual income and the record time to run 1 mile. In other words, average annual incomes have been rising while the record time to run 1 mile has been decreasing. Do you think increasing incomes cause decreasing times to run the mile? Explain.

Condensed balance sheet and income statement data for Landwehr Corporation appear below.

$$\begin{array}{c} \textbf{MESSERSMITH COMPANY}\\ \textbf{Balance Sheets}\\ \textbf{December 31}\\ \end{array}$$

$$\begin{array}{c} \textbf{MESSERSMITH COMPANY}\\ \textbf{Income Statement}\\ \textbf{For the Years Ended December 31}\\ \end{array}$$

$$\begin{array}{lcc} &\underline{2017}&\underline{2016}\\ \text{Net sales}&\$850,000&\$790,000\\ \text{Cost of goods sold}&\underline{620,000}&\underline{575,000}\\ \text{Gross profit}&230,000&215,000\\ \text{Operating expenses}&\underline{187,000}&\underline{173,000}\\ \text{Net income}&\underline{\underline{\$43,000}}&\underline{\underline{\$42,000}}\\ \end{array}$$

$Additional information:

1. Inventory at the beginning of 2016 was$118,000.
2. Total assets at the beginning of 2016 were $630,000.
3. No common stock transactions occurred during 2016 or 2017.
4. All sales were on account. Accounts receivable, net at the beginning of 2016, were$88,000.
5. Notes payable are classified as current liabilities.

Instructions (b) Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2017, and (2) as of December 31, 2018, after giving effect to the situation. Net income for 2018 was $50,000. Total assets on December 31, 2018, were$700,000.

The U.S. National Center for Health Statistics compiles data on the length of stay by patients in short-term hospitals and publishes its findings in Vital and Health Statistics. Data from a sample of 39 male patients and 35 female patients on length of stay (in days) are displayed in the following histograms:

a) What would you change about these histograms to make them easier to compare?

b) Describe these distributions by writing a few sentences comparing the duration of hospitalization for men and women.

c) Can you suggest a reason for the peak in women's length of stay?

An article in a newspaper states that the proportion of traffic accidents involving road rage is higher this year than it was last year, when it was 15%. Reconstruct the information of the study in terms of a hypothesis test. Discuss possible hypotheses, possible issues about the sample, possible levels of significance, and the “absolute truth” of the conclusion.

If six cents of every dollar of Peoples’ revenue is net income in 2017, what is the dollar amount of 2017 revenue?

A random sample of 49 measurements from one population had a sample mean of 10, with sample standard deviation 3. An independent random sample of 64 measurements from a second population had a sample mean of 12, with sample standard deviation 4. Test the claim that the population means are different. Use level of significance 0.01. Compute $\bar{x}_{1}-\bar{x}_{2}$ and the corresponding sample test statistic.

The comparative condensed income statements of Emley Corporation are shown below.

$$\begin{array}{c} \textbf{EMLEY CORPORATION}\\ \textbf{Comparative Condensed Income Statements}\\ \textbf{For the Years Ended December}\\ \end{array}$$

$$\begin{array}{lcc} &\underline{2017}&\underline{2016}\\ \text{Net sales}&\$660,000&\$600,000\\ \text{Cost of goods sold}&\underline{483,000}&\underline{420,000}\\ \text{Gross profit}&177,000&180,000\\ \text{Operating expenses}&\underline{125,000}&\underline{120,000}\\ \text{Net income}&\underline{\underline{\$52,000}}&\underline{\underline{\$60,000}} \end{array}$$

Instructions (b) Prepare a vertical analysis of the income statement data for Emley Corporation in columnar form for both years.

The comparative condensed income statements of Emley Corporation are shown below.

$$\begin{array}{c} \textbf{EMLEY CORPORATION}\\ \textbf{Comparative Condensed Income Statements}\\ \textbf{For the Years Ended December}\\ \end{array}$$

$$\begin{array}{lcc} &\underline{2017}&\underline{2016}\\ \text{Net sales}&\$660,000&\$600,000\\ \text{Cost of goods sold}&\underline{483,000}&\underline{420,000}\\ \text{Gross profit}&177,000&180,000\\ \text{Operating expenses}&\underline{125,000}&\underline{120,000}\\ \text{Net income}&\underline{\underline{\$52,000}}&\underline{\underline{\$60,000}} \end{array}$$

Instructions (a) Prepare a horizontal analysis of the income statement data for Emley Corporation using 2016 as a base. (Show the amounts of increase or decrease.)

If Peoples Company had net income of $390,000 in 2017 and it experienced a 24.5% increase in net income for 2018, what is its net income for 2018?

Condensed balance sheet and income statement data for Landwehr Corporation appear below.

$$\begin{array}{c} \textbf{MESSERSMITH COMPANY}\\ \textbf{Balance Sheets}\\ \textbf{December 31}\\ \end{array}$$

$$\begin{array}{c} \textbf{MESSERSMITH COMPANY}\\ \textbf{Income Statement}\\ \textbf{For the Years Ended December 31}\\ \end{array}$$

$$\begin{array}{lcc} &\underline{2017}&\underline{2016}\\ \text{Net sales}&\$850,000&\$790,000\\ \text{Cost of goods sold}&\underline{620,000}&\underline{575,000}\\ \text{Gross profit}&230,000&215,000\\ \text{Operating expenses}&\underline{187,000}&\underline{173,000}\\ \text{Net income}&\underline{\underline{\$43,000}}&\underline{\underline{\$42,000}}\\ \end{array}$$

$Additional information:

1. Inventory at the beginning of 2016 was$118,000.
2. Total assets at the beginning of 2016 were $630,000.
3. No common stock transactions occurred during 2016 or 2017.
4. All sales were on account. Accounts receivable, net at the beginning of 2016, were$88,000.
5. Notes payable are classified as current liabilities.

Instructions (a) Indicate, by using ratios, the change in liquidity and profitability of Messersmith Company from 2016 to 2017. (Note: Not all profitability ratios can be computed.)

As the CPA for Gandara Manufacturing Inc., you have been asked to develop some key ratios from the comparative financial statements. This information is to be used to convince creditors that the company is solvent and will continue as a going concern. The data requested and the computations developed from the financial statements follow.

Instructions With the class divided into groups, complete the following.

Gandara Manufacturing Inc. asks you to prepare a list of brief comments stating how each of these items supports the solvency and going-concern potential of the business. The company wishes to use these comments to support its presentation of data to its creditors. You are to prepare the comments as requested, giving the implications and the limitations of each item separately. Then prepare a collective inference that may be drawn from the individual items about Gandara’s solvency and going-concern potential.