Answer the following questions:
• What is the purpose of accounting adjustments?
• Name and define the four types of account adjustments and give an example of each.
1.Formulating Financial Statements from Raw Data
Following is selected financial information from Abercrombie & Fitch, for its fiscal year ended February 2, 2008 ($ millions):
|
Revenue
|
$ 3,749.8
|
|
Cash from operating activities
|
817.8
|
|
Cash, beginning year
|
82.0
|
|
Stockholders' equity
|
1,618.3
|
|
Noncash assets
|
2,449.6
|
|
Cash from financing activities*
|
(281.6)
|
|
Cost of goods sold
|
1,238.5
|
|
Total expenses (other than cost of goods sold)
|
2,035.6
|
|
Cash, ending year
|
118.0
|
|
Total liabilities
|
949.3
|
|
Cash from investing activities
|
(500.2)
|
*Cash from financing activities includes the effects of foreign exchange rate fluctuations.
(a) Prepare the income statement, the balance sheet, and the statement of cash flows for Abercrombie & Fitch for the fiscal year ended February 2008.
(b) Using the statements prepared for part a. compute the following ratios (for this part only, use the year-end balance instead of the average for assets and stockholders' equity):
(i) Profit margin (Round your answer to two decimal places.)
Answer %
(ii) Asset turnover (Round your answer to two decimal places.)
Answer
(iii) Return on assets (Round your answer to two decimal places.)
Answer %
(iv) Return on equity (Round your answer to one decimal place.)
2.Comparing Abercrombie & Fitch and TJX Companies
Following are selected financial statement data from Abercrombie & Fitch (ANF-upscale clothing retailer) and TJX Companies (TJX-value-priced clothing retailer including TJ Maxx) -- both dated the end of January 2009 or 2008.
|
($ millions)
|
Company
|
Total Assets
|
Net Income
|
Sales
|
|
2008
|
TJX Companies Inc.
|
$6,600
|
|
|
|
2009
|
TJX Companies Inc.
|
6,178
|
$ 881
|
$19,000
|
|
2008
|
Abercrombie & Fitch
|
2,568
|
|
|
|
2009
|
Abercrombie & Fitch
|
2,848
|
272
|
3,540
|
(a) Compute the return on assets for both companies for the year ended January 2009. (Round your answers to one decimal place.)
TJX 2009 ROA = Answer __%
ANF 2009 ROA =Answer __%
(b) Disaggregate the ROAs for both companies into the profit margin and asset turnover.
TJX 2009 Profit Margin =Answer % (Round your answer to one decimal place.)
ANF 2009 Profit Margin =Answer % (Round your answer to one decimal place.)
TJX 2009 Asset Turnover =Answer (Round your answer to two decimal places.)
ANF 2009 Asset Turnover =Answer (Round your answer to two decimal places.)
(c) Which of the following is a likely interpretation of the results of your computations for parts a and b?
ANF turns its assets much faster than TJX and this is the primary reason for its higher return on assets.
ANF is realizing a higher return on assets as a result of its lower investment in assets.
ANF's higher profit margin results from premium prices on its clothing. TJX's value-pricing business model relies on higher turnover of clothing with lower margins. TJX's turnover rate is more than twice as much as ANF's, resulting in a ROA for TJX that is higher than ANF's.
ANF's higher return on assets is the result of its greater level of sales.