Accounting

 

I. Statement of Cash Flows	Blue Lake Corporation Income Statement For the Year ended
	December 31, 2021
Net Sales	$100,000
Cost of goods sold	40,000
Gross profit	$ 60,000
Selling & administrative expenses	22,000
Depreciation expense	5,000
Interest expense	2,000
Loss on sale of assets	3,000
Income tax expense	4,000
Net income	$ 24,000

 

Changes in Current assets and current liabilities for 2021:

 

Cash and cash equivalents increase by $10,000 Net Accounts receivable increase by $8,000 Merchandise inventory increased by $4,000 Accounts payable increased by $6,000

Prepaid expenses decreased by $2,000 Deferred revenue decreased by $5,000 Interest payable increased by $1,000

 

 

1. Required: Prepare the Operating section of the Statement of Cash Flows using the indirection method.

Complete the template on the following page. (15 pts)

 

Blue Lake Corporation 2021 Statement of Cash Flows

 

Cash flows from operating activities:

 

 

II. Transaction Effects of Financial Statements

 

Please note that 1-A, 2-A, 3-A, and 4-A are related questions.

 

	Transaction	A	L	E	CA	CL	OCF	ICF	FCF	Rev	Exp
1-A	Paid $12M in upfront payment to Beyonce, prior to her concert in LA. Her concert take place next accounting period.
1-B	Paid $12K in rents upfront to a landlord, prior to utilizing the office space. Employees will move into the new office next period.
2-A	Concert tickets are sold for $74 million prior to Beyonce’s concert. Her concert take place next accounting period.
2-B	Sold gift cards worth $74 (expect redemption within 1 year)
3-A	Beyonce’s concert is successfully hosted at Hollywood Bowl. Contractors set the stage in the morning of the concert but are not paid $200K until next period.
3-B	A magazine company sends out this month’s magazines worth of $1K (inventory) to its subscribers who prepaid $20K for the subscription last period.
4-A	Contractor who set the stage for the Beyonce concert are paid $200K.
4-B	Employees who worked during prior month are paid salaries totaling $200K on the 1st day of the current period.

 

 

 

 

1. Transaction Effects of Financial Statements (contd)

 

Please consider 5-(ii) and 5(iii) as separate transactions following 5-(i).

 

	Transaction	A	L	E	CA	CL	OCF	ICF	FCF	Rev	Exp
5-(i)	Sold a minivan on credit for $30K. However, 2% of prior credit sales resulted in bad debt. Relying on the prior data, the company record bad debt expense. Inventory cost of a minivan was 20K.
5-(ii)	Collected $30K of accounts Receivable
5-(iii)	The minivan driver got into a car accident and cannot repay $30K.
6	Pay accounts payable of $120
7	Pay $980K to R&D employees for research done this current period

 

 

• Financial Statement – Lululemon

 

For all of the questions in this section, refer to Lululemon Inc.’s financial excerpts from the 10-K report for the year ended February, 2020 (“fiscal 2019”). “2019” refers to fiscal year 2019 in the following questions. All amounts in thousands.

 

1. Lululemon incurred $1,755,910 in Cost of Goods sold in fiscal year 2019. Circle one. (3 pt) TRUE FALSE

 

 

2. Lululemon spent $ 283,048 in capital expenditure during 2019. Circle one. (4 pt) TRUE FALSE

 

 

3. Depreciation and amortization expense generated operating cash inflow of $161,933 during 2019. Circle One. (4 pts)

 

TRUE                                FALSE

 

 

 

4. How did the balance on “Inventories” change solely due to operations in 2019? What amount? Which direction? Hint: Use the statement of cash flows. (6 pts)

 

            CIRCLE ONE           

 

AMOUNT                                                INCREASE                DECREASE

 

 

Question #5 is NOT related to Lululemon.

5. At the end of the most recent fiscal year, a company had non-current assets of 700, non- current liabilities of 870, and total equity of 550. What was their working capital? (5 pts)

Hint: Assets = Liabilities + Equity

à Current Assets + Non-Current Assets = Current Liab. + Non-Current Liab. + Equity

 

IIV. Financial Ratios (16 pts)

The Gap, Inc. (GAP) is one of Lululemon’s competitors. Compute Lululemon’s financial ratios and compare them to those of GAP. Use the ratio definitions as discussed in class. “2019” refers to fiscal year 2019.

 

6. The following table presents the current ratio and the quality of earnings ratio of GAP at the end of 2019. Fill in the table by computing the ratios of Lululemon at the end of 2019. Round your answers to two decimal places. (8 pts)

 

	Current Ratio
GAP	1.96
LULULEMON

• Which of the two companies, GAP or LULULEMON, appears safer in terms of being able to meet its short-term obligations? (Circle either GAP or )

 

GAP                                                    LULULEMON

 

 

7. The following table gives the decomposition of GAP’s 2019 return-on-assets (ROA). Complete the table by filling in the decomposition of Lululemon’s ROA. Use the given definitions. Round your answers to two decimal places. (8 pts)

 

	Profit margin	×	Asset Turnover	=	ROA
	Net Income Revenues	×	Revenues Total Assets	=	Net Income Total Assets
GAP	6.05%	×	2.06	=	12.47%
LULULEMON		×		=

 

• Which of the two companies, GAP or LULULEMON, has better operating performance, as measured by Asset Turnover? (Circle either GAP or )

 

GAP                                                    LULULEMON

1. Statement of Cash Flows

 

Blue Lake Corporation

Income Statement for the Year ended

December 31, 2021

 

Net Sales                                                                                 $100,000

Cost of goods sold                                                                      40,000

Gross profit                                                                             $  60,000

Selling & administrative expenses                                              22,000

Depreciation expense                                                                    5,000

Interest expense                                                                            2,000

Loss on sale of assets                                                                    3,000

Income tax expense                                                                      4,000

Net income                                                                              $  24,000

 

Changes in Current assets and current liabilities for 2021:

 

Cash and cash equivalents increase by $10,000

Net Accounts receivable increase by $8,000

Merchandise inventory increased by $4,000

Accounts payable increased by $6,000

Prepaid expenses decreased by $2,000

Deferred revenue decreased by $5,000

Interest payable increased by $1,000

 

 

1. Required: Prepare the Operating section of the Statement of Cash Flows using the indirection method. Complete the template on the following page. (15 pts)

Blue Lake Corporation

2021 Statement of Cash Flows

 

Cash flows from operating activities:

Net income                                                     $ 24,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense                                     5,000 Loss on sale of property and equipment      3,000 Change in: Accounts receivable                                      (8,000) Inventory                                                       (4,000) Accounts payable                                           6,000 Prepaid expenses                                            2,000 Deferred revenue                                          (5,000) Interest payable                                              1,000   Net cash provided by operating activities   $24,000

 

1. Transaction Effects of Financial Statements

 

Please note that 1-A, 2-A, 3-A, and 4-A are related questions.

 

	Transaction	A	L	E	CA	CL	OCF	ICF	FCF	Rev	Exp
1-A	Paid $12M in upfront payment to Beyonce, prior to her concert in LA. Her concert take place next accounting period.	-12+12 =0			-12+12 =0		-12
1-B	Paid $12K in rents upfront to a landlord, prior to utilizing the office space. Employees will move into the new office next period.	-12+12 =0			-12+12 =0		-12
2-A	Concert tickets are sold for $74 million prior to Beyonce’s concert. Her concert take place next accounting period.	+74	+74		+74	+74	+74
2-B	Sold gift cards worth $74 (expect redemption within 1 year)	+74	+74		+74	+74	+74
3-A	Beyonce’s concert is successfully hosted at Hollywood Bowl. Contractors set the stage in the morning of the concert but are not paid $200K until next period.	-12M	-74M   +200K	+74M -12M -200K	-12M	-74M   +200K				+74M	12M +200K
3-B	A magazine company sends out this month’s magazines worth of $1K (inventory) to its subscribers who prepaid $20K for the subscription last period.	-1K	-20K	+20K -1K	-1K	-20K				+20K	1K
4-A	Contractor who set the stage for the Beyonce concert are paid $200K.	-200K	-200K		-200K	-200K	-200K
4-B	Employees who worked during prior month are paid salaries totaling $200K on the 1st day of the current period.	-200K	-200K		-200K	-200K	-200K

 

 

 

 

 

1. Transaction Effects of Financial Statements (contd)

 

Please consider 5-(ii) and 5(iii) as separate transactions following 5-(i).

 

	Transaction	A	L	E	CA	CL	OCF	ICF	FCF	Rev	Exp
5-(i)	Sold a minivan on credit for $30K. However, 2% of prior credit sales resulted in bad debt. Relying on the prior data, the company record bad debt expense. Inventory cost of a minivan was 20K.	+30K -600 (increase in AFDA) -20K		+30K -600     -20K	+30K -600 (increase in AFDA) -20K					30K	600 +20K
5-(ii)	Collected $30K of accounts receivable	+30K -30K			+30K -30K		30K
5-(iii)	The minivan driver got into a car accident and cannot repay $30K.	-30K +30K (decrease in AFDA)			-30K +30K (decrease in AFDA)
6	Pay accounts payable of $120	-120	-120		-120	-120	-120
7	Pay $980K to R&D employees for research done this current period	-980K		-980K	-980K		-980K				980K

 

 

 III. Financial Statement – Lululemon

 

For all of the questions in this section, refer to Lululemon Inc.’s financial excerpts from the 10-K report for the year ended February, 2020 (“fiscal 2019”). “2019” refers to fiscal year 2019 in the following questions. All amounts in thousands.

 

1. Lululemon incurred $1,755,910 in Cost of Goods sold in fiscal year 2019. Circle one. (3 pt)

 

TRUE                         FALSE

 

See Income Statement.

 

 

2. Lululemon spent $ 283,048 in capital expenditure during 2019. Circle one. (4 pt)

 

TRUE                         FALSE

 

True. See CF from Investing Activities in the Statement of Cash Flow.

 

 

3. Depreciation and amortization expense generated operating cash inflow of $161,933 during 2019. Circle One.  (4 pts)

 

TRUE                                FALSE

 

Depreciation is added to net income to undo the effect of the expense on cash.  It does not add to cash, but it also does not reduce cash.  Also, there is no tax implication of book depreciation because the tax method for depreciating assets is completely separate.

 

 

4. How did the balance on “Inventories” change solely due to operations in 2019? What amount? Which direction? Hint: Use the statement of cash flows. (6 pts)

 

            CIRCLE ONE                       

 

AMOUNT            ______117,591_________                 INCREASE               DECREASE

 

The decrease in operating cash flows on the SCF for this line item indicates that this asset account increased.

 

 

 

 

Question #5 is NOT related to Lululemon.

5. At the end of the most recent fiscal year, a company had non-current assets of 700, non-current liabilities of 870, and total equity of 550. What was their working capital? (5 pts)

Hint: Assets = Liabilities + Equity

à Current Assets + Non-Current Assets = Current Liab. + Non-Current Liab. + Equity

 

CA + NCA = CL + NCL + E

CA – CL = NCL + E – NCA

720 = 870 – 700 + 550

 

 

 

IIV. Financial Ratios (16 pts)

The Gap, Inc. (GAP) is one of Lululemon’s competitors. Compute Lululemon’s financial ratios and compare them to those of GAP. Use the ratio definitions as discussed in class.  “2019” refers to fiscal year 2019.

 

6. The following table presents the current ratio and the quality of earnings ratio of GAP at the end of 2019. Fill in the table by computing the ratios of Lululemon at the end of 2019. Round your answers to two decimal places. (8 pts)

 

	Current Ratio
GAP	1.96
LULULEMON

• Which of the two companies, GAP or LULULEMON, appears safer in terms of being able to meet its short-term obligations? (Circle either GAP or LULULEMON.)

 

 

GAP                                                    LULULEMON

 

 

7. The following table gives the decomposition of GAP’s 2019 return-on-assets (ROA). Complete the table by filling in the decomposition of Lululemon’s ROA. Round your answers to two decimal places. (8 pts)

	Profit margin	×	Asset Turnover	=	ROA
		×		=
GAP	6.05%	×	2.06	=	12.47%
LULULEMON		×		=

 

• Which of the two companies, GAP or LULULEMON, has better operating performance, as measured by Asset Turnover? (Circle either GAP or LULULEMON.)

 

 

GAP                                                    LULULEMON

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