Posted: April 24th, 2016

Which company appears to be performing better?

EXERCISE 7-18: Cash Collections – Direct Method

Emily Enterprises’ comparative balance sheets included accounts receivable of $224,600 at December 31, 2011, and $205,700 at December 31, 2012. Sales reported on Emily’s 2012 income statement amounted to $2.25 million. What is the amount of cash collections that Emily will report in the Operating Activities category of its 2012 statement of cash flows assuming that the direct method is used?

PROBLEM 7-3: Accounts Receivable Turnover for Coca-Cola and PepsiCo

The following information was summarized from the 2010 annual report of The Coca-Cola Company:
(in Millions)
Trade accounts receivable, less allowances of $48 and $55, respectively:
December 31, 2010 4430
December 31, 2009 3758
Net operating revenues for the year ended December 31:
2010 35119
2009 30990
The following information was summarized from the 2010 annual report of PepsiCo:
(in Millions)
Accounts and notes receivable, net
December 25, 2010 6323
December 26, 2009 4624
Net revenue for the year ended:
December 25, 2010 57838
December 26, 2009 43232

1. Calculate the accounts receivable turnover ratios for Coca-Cola and PepsiCo for 2010.
2. Calculate the average collection period, in days, for both companies for 2010. Comment on the reasonableness of the collection periods for these companies considering the nature of their business.
3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing?

PROBLEM 7-4: Credit Card Sales

Gas stations sometimes sell gasoline at a lower price to customers who pay cash than to customers who use a credit card. A local gas station owner pays two percent of the sales price to the credit card company when customers pay with a credit card. The owner pays $0.75 per gallon of gasoline and must earn at least $0.25 per gallon of gross margin to stay competitive.

1. Determine the price the owner must charge credit card customers to maintain the station’s gross margin.
2. How much discount could the owner offer to cash customers and still maintain the same gross margin?

Problem 8-2: Depreciation as a Tax Shield
The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 1, 2012. The cost of the asset with a five-year life and zero residual value is $100,000. The company will use the straight-line method of depreciation.

Supreme’s income for tax purposes before recording depreciation on the asset will be $50,000 per year for the next five years. The corporation is currently in the 35% tax bracket.

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