Reading 27: Accounting Shenanigans on the Cash Flow Stateme balance, company, black

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13.Below is the balance sheet for a company:

	2001	2002
Cash	300	330
Accounts receivables	630	650
Inventories	600	660
Other current assets	300	320
Gross PP&E	5,860	6,890
Less accumulated depreciation	1,740	2,100
Net PP&E	4,120	4,790
Deferred tax assets	60	55
Goodwill	920	900
Other fixed assets	120	120
Total assets	7,050	7,825
Accounts payable	420	480
Current portion of LTD	600	600
Notes payable	130	95
Other current liabilities	180	180
Deferred tax liabilities	60	70
Long-term debt	1,800	1,200
Common stock	1,940	1,960
Paid in capital	420	870
Retained earnings	1,500	2,370
Total	7,050	7,825

The footnotes indicate that the company sold 600 of receivables with recourse to a subsidiary.

After adjusting the balance sheet for current value, the current ratio is:

A)   1.44.

B)   1.89.

C)   1.31.

D)   1.23.

14.After adjusting the financial statements to current value, the long-term debt to asset ratio is (note: do not include deferred tax liabilities as part of long-term debt):

A)   15.3%.

B)   15.9%.

C)   18.3%.

D)   24.3%.

15.Star Chemical Inc. (SCI) reported the following year-end data:

Depreciation expense	$25 million
Net income	$35 million
Dividends	$10 million
Total assets	$250 million
Shareholder’s equity	$195 million
Effective tax rate	35 percent

SCI also reported that it changed from an accelerated depreciation method to straight line depreciation. The change resulted in a decrease in depreciation expense of $5 million. Management felt that the change “would not have a material effect on financial performance measures.” What are the return on assets (ROA) and return on equity (ROE) measures under the old depreciation methods?

A)   ROA is 13.30% and ROE is 17.21%.

B)   ROA is 13.50% and ROE is 17.66%.

C)   ROA is 12.96% and ROE is 16.71%.

D)   ROA is 13.67% and ROE is 17.21%.