Module 1 Class Homework Solutions Essay

Module 1: Framework for Analysis and
Valuation
M1-20.
a.
b.
c.
d.
e.

BS and SCF
IS
BS
BS and SE
SCF

f.
g.
h.
i.

BS and SE
SCF and SE
SCF and SE
IS, SE, and SCF

M1-21.
There are many stakeholders impacted by this business decision, including the following (along with a description of how):





You as a Manager—your reputation, self-esteem, and potentially your livelihood could be negatively impacted.
Creditors and Bondholders—credit decisions based on inaccurate information could occur. Shareholders—buying or selling shares based on inaccurate information could occur.
Management and other Employees of your company—repercussions of your decision extend to all other employees. Also, a decision to record these revenues suggests an environment condoning dishonesty.

Indeed, your decisions can affect many more parties than you might initially realize. The shortterm benefit of meeting Wall Street’s expectations could have serious long-term ramifications.

Solutions Manual, Module 1

© Cambridge Business Publishers, 2015
1-1

Module 1: Framework for Analysis and
Valuation
E1-24.
External constituents use accounting information from financial statements to answer questions such as the following:
1. Shareholders (investors), ask questions such as:
a. Are the company’s resources adequate to carry out strategic plans?
b. Are the company’s debts appropriate in amount given the company’s existing assets and plans for growth?
c. What is the current level of income (and what are its components)?
d. Is the current stock price indicative of the company’s profitability and level of debt?
2. Creditors, ask questions such as:
a. Does the business have the ability to repay its debts as they come due?
b. Can the business take on additional debt?
c. Are current assets sufficient to cover current liabilities?
3. Employees, ask questions such as:
a. Is the business financially stable?
b. Can the business afford to pay higher salaries?
c. What are growth prospects for the organization?
d. Will the company be able to pay my pension when I retire?

Solutions Manual, Module 1

© Cambridge Business Publishers, 2015
1-2

Module 1: Framework for Analysis and
Valuation
P1-30.
a. 2013 ROE = $16,999/ [($81,738 + $75,761)/2] = 21.6%
2012 ROE = $15,699/ [($75,761 + $71,247)/2] = 21.4%
Wal-Mart’s ROE increased slightly from 2012 to 2013, and is slightly above the median ROE of 21.5 for other companies in the Dow Jones average.
b. 2013 ROA = $16,999/ [($203,105 + $193,406)/2] = 8.6%
2012 ROA = $15,699/ [($193,406 + $180,782)/2] = 8.4%
Wal-Mart’s ROA increased slightly from 2012 to 2013 and is above the median 6.7% for other Dow Jones companies.
c. Wal-Mart does not sell products with a high level of technology and specialization, and it, therefore, is not protected by patents or other legal barriers to entry. It does, however, have considerable market power over suppliers as a result of its considerable size, which may result in product cost savings. Wal-Mart is also able to use its considerable advertising budget to its advantage.

Solutions Manual, Module 1

© Cambridge Business Publishers, 2015
1-3

Module 1: Framework for Analysis and
Valuation
P1-31.
a.
GENERAL MILLS, INC.
Income Statement ($ millions)
For Year Ended May 26, 2013
Revenue
Cost of goods sold
Gross profit
Total expenses
Net income

Cash
Noncash assets
Total assets

$17,774.1
11,350.2
6,423.9
4,568.7
$ 1,855.2

GENERAL MILLS, INC.
Balance Sheet ($ millions)
May 26, 2013
$741.4 Total liabilities
21,916.6 Stockholders’ equity
$22,658.0 Total liabilities and equity

GENERAL MILLS, INC.
Statement of Cash Flows ($ millions)
For Year Ended May 26, 2013
Cash from operating activities
Cash from investing activities
Cash from financing activities
Net change in cash
Cash, beginning of year
Cash, ending year

$14,562.0
8,096.0
$22,658.0

$2,926.0
(1,515.4)
(1,140.4)
270.2
471.2
$ 741.4

b. A negative amount for cash from investing activities reflects additional investment by the company in its

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