Page 716 - Accounting Principles (A Business Perspective)

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• Returned merchandise that had not been paid for.
• Wrote off an account receivable as uncollectible. Uncollectible amount is less than the balance in the
Allowance for Uncollectible Accounts.

• Accepted a 90-day note from a customer in settlement of customer's account receivable.
• Declared a stock dividend on common stock.
Consider each transaction independently of all the others.
a. Indicate whether the amount of working capital will increase, decrease, or be unaffected by each of the
transactions.
b. Indicate whether the current ratio will increase, decrease, or be unaffected by each of the transactions.

Problem E Digital Company has net operating income of USD 500,000 and operating assets of USD
2,000,000.
Its net sales are USD 4,000,000.
The accountant for the company computes the rate of return on operating assets after computing the operating
margin and the turnover of operating assets.
a. Show the computations the accountant made.
b. Indicate whether the operating margin and turnover increase or decrease after each of the following changes.
Then determine what the actual rate of return on operating assets would be. The events are not interrelated;
consider each separately, starting from the original earning power position. No other changes occurred.

(a) Sales increased by USD 160,000. There was no change in the amount of operating income and no
change in operating assets.
(b)Management found some cost savings in the manufacturing process. The amount of reduction in
operating expenses was USD 40,000. The savings resulted from the use of less materials to manufacture
the same quantity of goods. As a result, average inventory was USD 16,000 lower than it otherwise
would have been. Operating income was not affected by the reduction in inventory.
(c) The company invested USD 80,000 of cash (received on accounts receivable) in a plot of land it

plans to use in the future (a nonoperating asset); income was not affected.
(d)The federal income tax rate increased and caused income tax expense to increase by USD 20,000.
The taxes have not yet been paid.
(e) The company issued bonds and used the proceeds to buy USD 400,000 of machinery to be used in
the business. Interest payments are USD 20,000 per year. Net operating income increased by USD
100,000 (net sales did not change).
Problem F Polaroid Corporation designs, manufactures, and markets worldwide instant photographic cameras
and films, electronic imaging recording devices, conventional films, and light polarizing filters and lenses. The
following information is for Polaroid:

(in millions) 2000 1999
Net sales $13,994 $14,089
Income before interest and taxes 2,310 2,251
Net income 1,407 1,392
Interest expense 178 142
Stockholders' equity (on 1998 December 31, 3,428 3,912
$3,988)
Common stock, par value $1, December 31 978 978
Compute the following for both 2000 and 1999. Then compare and comment.

Accounting Principles: A Business Perspective 717 A Global Text