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Question 2 (25 points) Following are the Balance Sheet and Income Statement for Aritzia Inc

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Question 2 (25 points) Following are the Balance Sheet and Income Statement for Aritzia Inc. for 2020 with comparative figures provided for 2019 and 2018. Aritzia's statutory tax rate was 26.8% for 2020 and 26.9% for 2019. 3609 Aritzia Inc (TSX: ATZ) Balance Sheet Report Date Scale Cash & cash equivalent Accounts receivable Income taxes recoverable Inventory Prepaid expenses & other current assets Total current assets Property & equipment, net Intangibles Goodwill Right- Ollerussels Deferred to asses Total 03/01/2020 03/03/2019 02/25/2018 Thousands Thousands Thousands 36.411 43,443 6,856 11,587 6.700 14.775 1563 16.049 57.715 52.73 3.190 3,641 63.400 29.490 24.231 19.30 90,611 10525 03/01/2020 03/03/2019 02/25/2018 Thousands Thousands Thousands 117.750 100,007 112,475 Trade accounts payable 655 2,413 Omer non-trade payables 2.157 1.728 Employee benefits payable 112,183 TRR Accounts payable & accredits 10.000 10.422 15,207 Income taxes payable 231.37€ 235,067 210,758 Current portion of lease abilities 104,837 167,583 135,672 De?erted revenue 54,427 Total current liabhes 151.50 151,112 case lates 30 30 Cernant les 4.315 2,200 1.661 Deferred tax liblilies 20.170 7.606 8.517 Laur Liqui???? 1,003,715 €29,374 567.670 Long bi Tulates sa cara Controls Retained Gaming condit) Accumulated other comprehensive income luss) Total stareholders equally Totallisbiles & shareholders equity 3450 19.520 19,428 20,002 17.922 90.180 74.621 2.60 71.740 701290 2190 21 56476 682 G. MEN 100 320 353 374.300 629,374 1/1,120 1622 361 584 205 701 567.670 332055 1,036.715 Income Statement Report Date Scale Net revenue Cost of goods sold Gross profit Interest expense Other income expense) Income (less) before income taxes Income tax expense (benef) Net income (5) 03/01/2020 03/03/2019 02/26/2018 Thousands Thousands Thousands 500 500 874,286 743.267 577165 531,303 447,776 4037424 312,013 295,401 28,319 4,821 -5221 2186 206 -1, CO 111,660 27 35.544 32,922 30.150 90,594 78,728 57,083 Required: 1. Calculate the Return on Equity, Return on Assets and Return on Financial Leverage for the most recent 2 years. Did Aritzia's return on equity improve or get worse? What factor(s) caused this change? 2. Calculate three ratios that measure how efficiently Aritzia managed its operating assets in 2020 and 2019. For each ratio, did Aritzia's performance improve or get worse in 2020 compared to 2019? Required: 1. Calculate the Return on Equity, Return on Assets and Return on Financial Leverage for the most recent 2 years. Did Aritzia's return on equity improve or get worse? What factor(s) caused this change? 2. Calculate three ratios that measure how efficiently Aritzia managed its operating assets in 2020 and 2019. For each ratio, did Aritzia's performance improve or get worse in 2020 compared to 2019? 3. Calculate two ratios that measure Aritzia's profitability in 2020 and 2019. Do not re-use any of the ratios you were asked to calculate in required "1". For each measure, did Aritzia's performance improve or get worse in 2020 compared to 2019? 4. Calculate two ratios that measure Aritzia's liquidity in 2020 and 2019. For each measure, did Aritzia's performance improve or get worse in 2020 compared to 2019? Paragraph B I Uv A, v 10 + Question 3 (10 points) On December 31, 2019, Cleopatra Co. acquired 33 1/3% of Apollo Ltd.'s ordinary shares for $1.25 million. As Apollo Ltd's largest shareholder, Cleopatra Co. was given the right to appoint three representatives to Apollo Ltd.'s seven member board of directors. During 2020, the market value of Cleopatra's investment in Apollo Company increased to $1.542 million. For the year ended December 31, 2020, Apollo reported net income of $400,000. It also paid its shareholders a dividend of 25% of its 2020 income. Required: 1. How would you classify Cleopatra Co.'s investment in Apollo Ltd.? Explain. 2. What will Cleopatra report on its income statement for the investment in Apollo for 2020? Show calculations. 3. What will be the ending balance of Cleopatra's Investment account on December 31, 2020? Show calculations. 4. Identify one ratio that is mis-stated because of the method used to account for Cleopatra's investment in Apollo. Explain why. Paragraph BI U v ? BY of + Question 3 (10 points) On December 31, 2019, Cleopatra Co. acquired 33 1/3% of Apollo Ltd.'s ordinary shares for $1.25 million. As Apollo Ltd's largest shareholder, Cleopatra Co. was given the right to appoint three representatives to Apollo Ltd.'s seven member board of directors. During 2020, the market value of Cleopatra's investment in Apollo Company increased to $1.542 million. For the year ended December 31, 2020, Apollo reported net income of $400,000. It also paid its shareholders a dividend of 25% of its 2020 income. Required: 1. How would you classify Cleopatra Co.'s investment in Apollo Ltd.? Explain. 2. What will Cleopatra report on its income statement for the investment in Apollo for 2020? Show calculations. 3. What will be the ending balance of Cleopatra's Investment account on December 31, 2020? Show calculations. 4. Identify one ratio that is mis-stated because of the method used to account for Cleopatra's investment in Apollo. Explain why. Paragraph BI U v ? BY of + Question 4 (10 points) Three years ago Zhang Medical, Limited. acquired a computer-controlled milling machine to use in its medical device manufacturing operations at a cost of RMB 25 million. The firm expected the machine to have an five-year useful life and no salvage value. The company uses a double declining balance rate of 40% when depreciating this asset. Due to the rapid technological change in the industry, at the end of Year 3, Zhang estimates that: • Based on generating future cash flows of RMB 2.0 million in each year for the next two years, the machine has a value in use of RMB 3.7 million; and Based on the quoted market prices of similar assets, Zhang estimates that at the end of Year 3 the machine has a fair value of RMB 5.2 million and the cost of selling it would be RMB 0.8 million making the fair value less costs to sell equal to RMB 4.4 million. Required: 1. What is the carrying value of the machine at the end of Year 3 before impairment, if any, is recorded? Show calculations. 2. Zhang Limited uses IFRS. Should Zhang recognize an impairment of this asset at the end of Year 3? Explain why or why not? If yes, what is the amount of the impairment loss that should be recognized? Show calculations. 3. At the end of Year 3, what is the carrying value of the machine on Zhang's balance sheet? Show calculations. Paragraph ? ? Uv A + v Question 5 (10 points) Costanza, Inc., an American company whose shares are listed on the NYSE, reports the information below in its 2020 annual report. Costanza Inc, is required to report under US GAAP and has chosen the LIFO method to report its inventory. 01-Jan-20 31-Dec-20 Inventory value at LIFO 1,824,000 1,912,000 LIFO reserve 284,000 460,000 Inventory value at FIFO $2,108,000 $2,372,000 Costanza's Sales for 2020 totaled $12,800,000. Cost of goods sold under LIFO totaled $5,400,000 You are an analyst and have been asked to compare the profitability and inventory management of Costanza Inc. with Kramer AG a German based competitor that reports using IFRS. Based on Kramer's most recently published statements, Kramer's Gross Profit Margin was 58.5% and its Inventory Turnover was 2.55 times. Required: 1. Using the information extracted from Costanza's financial statements above calculate Gross Profit Margin and Inventory Turnover adjusted so that they are based on the same GAAP as Kramer's. Which company performed better for each measure? Show calculations 2. If US GAAP had not been adjusted in your analysis, how would each of the two ratios have been mis-stated? Explain. Do not re-calculate the ratios, just indicate if the result would have been over or under stated. Paragraph ? ? UA + Question 6 (10 points) Alley Inc. contracts to lay marble in a new museum over a three-year period. The company's accountants record the following details relating to the project: Contract details (€ millions): • Contract price 240.0 • Estimated cost 168.0 • Estimated profit 72.0 Spending Pattern During Construction (€ millions): • Year 1 - 84.0 • Year 2 - 50.4 • Year 3 - 33.6 Billings During Construction (€ millions): • Year 1 - 80.0 • Year 2 - 60.0 • Year 3 - 100.0 Required: 1. Alley Inc. prepares its financial statements using IFRS. Compute the amount of revenue, expense and income for each year using the percentage-of- completion method. Show calculations. 2. If Alley Inc.. was not able to reliably estimate progress on the job, what method of revenue recognition would they use? 3. Compute the amount of revenue, expense income Alley would report for each year if it was not able to reliably estimate progress on the job. Show calculations. Paragraph ? ? Uv A ? o@ + v Question 7 (10 points) On January 1, 2020 Pet Chow Inc.. issued bonds with a face value of $20 million and a coupon rate of 7% for 20 years. The market rate of interest at the time they were issued was 8%. The bonds pay interest annually. Required: 1. Compute the amount for which the bonds were sold. Show Calculations. PV factor for an ordinary annuity of 20 annual payments at 7% annual rate, 10.59401; PV factor for $1 due in 20 years at 7% annual rate,0.25842; PV factor for ordinary annuity of 20 annual payments at 8% annual rate, 9.81815; PV factor for $ 1 due in 20 years at 8% annual rate, 0.21455. 2. How much Interest Expense will Pet Chow Inc. report in 2020. Show Calculations. 3. What will the carrying value of the bonds be on Pet Chow Inc's December 31, 2020? Show Calculations. 4. Assume that during 2020 general interest rates fall and Pet Chow's credit rating improves. As a result Pet Chow Inc. decides to repurchase its debt for $24.8 million and refinance it at more favorable rates, What is the gain or loss on the repurchase of Pet Chow's debt? Show Calculations. Paragraph B I UA, lili + ... Question 8 (5 points) Hugo Ltee. prepared the following aging of its receivables at December 31. Age of Accounts Receivables Balance Estimated % Uncollectible 0-30 days 490,667 1.00% 31 to 60 day 256,000 5.00% 61 to 90 days 90,667 13.00% 91 to 120 days 55,467 18.00% Over 121 days 29,867 75.00% Total $ 922,667 During the year, $33,365 of receivables were written off. The balance at the beginning of the year in the allowance account was $ 31,680. Required: 1. How much will Hugo report as uncollectible accounts expense for the year? 2. How much is the net realizable value of Hugo's receivables at year end? Paragraph B I UA + Aritzia Inc (TSX: ATZ) Balance Sheet 03/03/2019 Thousands 100,897 4,355 Report Date Scale Cash & cash equivalents Accounts receivable Income taxes recoverable Inventory Prepaid expenses & other current assets Total current assets Property & equipment, net Intangible assets Goodwill Right-of-use assets Other assets Deferred tax assets Total assets 03/03/2019 Thousands 35,411 11,687 15,638 62,736 3,644 02/25/2018 Thousands 43,443 6,709 16,043 66,195 03/01/2020 Thousands 117,750 6,555 2,157 94,034 10,880 231,376 184,637 63,867 151,682 380,360 4,315 20,478 1,036,715 02/25/2018 Thousands 112,475 2,413 1,728 78,833 15,307 210,756 135,672 61,387 151,682 112,183 18.422 235,857 167,593 64,427 151,682 03/01/2020 Thousands 36,084 6,856 14,775 57,715 3,198 63,440 29,490 153,843 447,087 9,451 19,529 19,308 24,231 90,611 105,029 Trade accounts payable Other non-trade payables Employee benefits payable Accounts payable & accrued liabilities Income taxes payable Current portion of lease liabilities Deferred revenue Total current liabilities Lease liabilities Other non-current liabilities Deferred tax liabilities Lease obligations Long-term debt Total liabilities Share capital Contributed surplus Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders equity Total liabilities & shareholders equity 69,828 20,002 59,566 17,922 2,209 7,606 629,374 1,664 6,517 567,678 74,740 704,650 219,050 57,221 56,476 -682 332,065 1,036,715 74,624 255,065 199,517 65,806 109,339 99,460 281,977 171,130 76,522 38,613 -564 285,701 567,678 -353 374,309 629,374 Income Statement Report Date Scale Net revenue Cost of goods sold Gross profit Interest expense Other income (expense) Income (loss) before income taxes Income tax expense (benefit) Net income (loss) 03/01/2020 Thousands 980,589 -577,165 403,424 -28,319 2,185 126,138 -35,544 90,594 03/03/2019 Thousands 874,296 -531,383 342,913 -4,821 395 111,650 -32,922 78,728 02/25/2018 Thousands 743,267 -447,776 295,491 -5,221 -1,890 87,283 -30,190 57,093 Ratio Formulae Accounts receivable turnover = Sales revenue/Average accounts receivable Asset turnover = Sales revenue/Average total assets Current ratio = Current assets/Current liabilities Debt to equity = Total liabilities/Total equity Expense to sales - Individual expense items/Sales revenue Gross profit margin = (Sales revenue - Cost of goods sold)/Sales revenue Inventory turnover = Cost of goods sold/Average inventory Operating cash flow to current liabilities - Operating cash flow/Average current liabilities Profit margin = Earnings without interest expensel/Sales revenue Property, plant and equipment turnover = Sales revenue/Average PP&E Quick ratio = (Cash + ST investments + Receivables)/Current liabilities Return on assets = Earnings without interest expensel1)/Average total assets Return on equity = Net income/Average total equity Return on financial leverage = Return on equity - Return on assets Times interest earned = Earnings before interest expense and taxes/Interest expense (1) Earnings without interest expense = Net income + Interest expensex (1-Statutory tax rate) Aritzia Inc (TSX: ATZ) Balance Sheet 03/03/2019 Thousands 100,897 4,355 Report Date Scale Cash & cash equivalents Accounts receivable Income taxes recoverable Inventory Prepaid expenses & other current assets Total current assets Property & equipment, net Intangible assets Goodwill Right-of-use assets Other assets Deferred tax assets Total assets 03/03/2019 Thousands 35,411 11,687 15,638 62,736 3,644 02/25/2018 Thousands 43,443 6,709 16,043 66,195 03/01/2020 Thousands 117,750 6,555 2,157 94,034 10,880 231,376 184,637 63,867 151,682 380,360 4,315 20,478 1,036,715 02/25/2018 Thousands 112,475 2,413 1,728 78,833 15,307 210,756 135,672 61,387 151,682 112,183 18.422 235,857 167,593 64,427 151,682 03/01/2020 Thousands 36,084 6,856 14,775 57,715 3,198 63,440 29,490 153,843 447,087 9,451 19,529 19,308 24,231 90,611 105,029 Trade accounts payable Other non-trade payables Employee benefits payable Accounts payable & accrued liabilities Income taxes payable Current portion of lease liabilities Deferred revenue Total current liabilities Lease liabilities Other non-current liabilities Deferred tax liabilities Lease obligations Long-term debt Total liabilities Share capital Contributed surplus Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders equity Total liabilities & shareholders equity 69,828 20,002 59,566 17,922 2,209 7,606 629,374 1,664 6,517 567,678 74,740 704,650 219,050 57,221 56,476 -682 332,065 1,036,715 74,624 255,065 199,517 65,806 109,339 99,460 281,977 171,130 76,522 38,613 -564 285,701 567,678 -353 374,309 629,374 Income Statement Report Date Scale Net revenue Cost of goods sold Gross profit Interest expense Other income (expense) Income (loss) before income taxes Income tax expense (benefit) Net income (loss) 03/01/2020 Thousands 980,589 -577,165 403,424 -28,319 2,185 126,138 -35,544 90,594 03/03/2019 Thousands 874,296 -531,383 342,913 -4,821 395 111,650 -32,922 78,728 02/25/2018 Thousands 743,267 -447,776 295,491 -5,221 -1,890 87,283 -30,190 57,093 Question 2 (25 points) Following are the Balance Sheet and Income Statement for Aritzia Inc. for 2020 with comparative figures provided for 2019 and 2018. Aritzia's statutory tax rate was 26.8% for 2020 and 26.9% for 2019. Required: 1. Calculate the Return on Equity, Return on Assets and Return on Financial Leverage for the most recent 2 years. Did Aritzia's return on equity improve or get worse? What factor(s) caused this change? 2. Calculate three ratios that measure how efficiently Aritzia managed its operating assets in 2020 and 2019. For each ratio, did Aritzia's performance improve or get worse in 2020 compared to 2019? 3. Calculate two ratios that measure Aritzia's profitability in 2020 and 2019. Do not re-use any of the ratios you were asked to calculate in required "1". For each measure, did Aritzia's performance improve or get worse in 2020 compared to 2019? 4. Calculate two ratios that measure Aritzia's liquidity in 2020 and 2019. For each measure, did Aritzia's performance improve or get worse in 2020 compared to 2019? Paragraph B I Uv A, v 10 + Ratio Formulae Accounts receivable turnover = Sales revenue/Average accounts receivable Asset turnover = Sales revenue/Average total assets Current ratio = Current assets/Current liabilities Debt to equity = Total liabilities/Total equity Expense to sales - Individual expense items/Sales revenue Gross profit margin = (Sales revenue - Cost of goods sold)/Sales revenue Inventory turnover = Cost of goods sold/Average inventory Operating cash flow to current liabilities - Operating cash flow/Average current liabilities Profit margin = Earnings without interest expensel/Sales revenue Property, plant and equipment turnover = Sales revenue/Average PP&E Quick ratio = (Cash + ST investments + Receivables)/Current liabilities Return on assets = Earnings without interest expensel1)/Average total assets Return on equity = Net income/Average total equity Return on financial leverage = Return on equity - Return on assets Times interest earned = Earnings before interest expense and taxes/Interest expense (1) Earnings without interest expense = Net income + Interest expensex (1-Statutory tax rate) Face Value Yield To Maturity Coupon Rate Coupon Payment Number of Payments per Year Term Number of Payments Bond Price $20,000,000 8.00% 7.00% $1,400,000 1 20 20 ############ Part 1 Bond Arount ############ Part 2 Interest Expense $1,400,000 Part 3 Carrying Value ############ Part 4 Gain on repurchase $4.8 Iillion