Grillin' Steaks SS7 Vignette

The financial statements for Grillin’ Steaks Financial, Inc. (GS) are presented below. GRILLIN’ STEAKS FINANCIAL, INC. Balance Sheet, December 31, 20X7 (000s) Cash and equivalents $105,000 Accounts receivable 81,000 Inventories 62,000 Total current assets 248,000 Plant & equipment (net) 390,000 Pension asset 27,000 Total assets 665,000 Liabilities Accounts payable 71,000 Current portion of debt 15,000 Other current liabilities 14,000 Total current liabilities 100,000 Long-term debt 235,000 Deferred tax liability 20,000 Total liabilities 355,000 Equity Common stock 90,000 Retained earnings 220,000 Total equity 310,000 Total liabilities and equity $665,000 Income Statement Year Ended December 31, 20X7 (000s) Sales 525,000 Cost of goods sold 315,000 Gross profit 210,000 Operating expenses 76,000 Depreciation 44,000 Operating income 90,000 Interest expense 10,000 Pretax operating income 80,000 Income taxes (40%) 32,000 Net income 48,000 Sam Adams, CFA is analyzing the company and wishes to adjust the financial statements to better reflect economic reality. He has gathered the following information from the footnotes, other reporting sources, and his own insight. Additional Information (all amounts in 000s) 1) Inventories are valued using LIFO. The LIFO reserve is $15,000 at December 31, 20X6 and $22,000 at December 31, 20X7. 2) GS has throughput commitments of $50,000 per year for the next four years. The current interest rate is 8%. The present value of the current throughput commitment is $46,296. The present value of the long-term throughput commitments is $119,310. 3) GS has numerous operating leases. The present value of these leases was $115,572 (6 year lease, $25,000 annual payment, 8% interest rate) on December 31, 20X6 and $99,818 (same terms, but 5 years remaining) on December 31, 20X7. The annual lease payments are recorded as a part of cost of goods sold on the income statement. 4) Fixed assets include capitalized interest of $15,000. 5) GS uses straight-line depreciation over an average useful life of 10 years. On December 31, 20X7 the company recorded an impairment loss of $6,000 on one of its fixed assets. The impairment loss is a component of operating expenses. 6) During 20X7, GS guaranteed the $20,000 debt of its main supplier. 7) Adams believes that GS’s deferred tax liability will continue to grow for several more years and will then stabilize. 8) Other than noted above, all assets and liabilities are considered to be at fair market value on December 31, 20X7. 1. The firm’s adjusted current ratio is closest to: a. 2.48x b. 1.94x c. 1.59x 2. The firm’s adjusted total assets are closest to: a. $791,818 b. $935,424 c. $957,424 3. The firm’s adjusted total liabilities are closest to: a. $355,000 b. $620,424 c. $640,424 4. The firm’s adjusted inventory turnover is closest to: a. 3.45x b. 3.75x c. 4.68x 5. The firm’s adjusted debt-to-equity ratio is closest to: a. 1.49x b. 1.59x c. 1.84x 6. The firm’s adjusted return on common equity is closest to: a. 10.8% b. 12.0% c. 14.6%

evil. you and your fancy passmaster are evil with 7 adjustments, not just one or 2. you want to walk through these one by one anyone? i’ll start- # 1) you’d want to add the LIFO reserve to inventories, so since we’re 2007, i was going to up inventories from 62k to 84k and then bump up retained earnings/total equity by 22k as well. # 2) have not seen it split out like this before- am i supposed to for the current commitment bump up CA and CL by the 46,296 and then bump up LT assets and LT/total liabilities by 119,310? how am i doing so far coach?

For #1. I did I = I + 22K and E = E + 22K and then CL = CL + 46.296 So new CA = 248 + 22 = 270 CL = 100 + 46.296 = 146.296 CR = 1.84557 crap!

yeah you’re missing some SG. work with me on all of them- we’ll get it. do you agree with my # 1 and # 2 so far (2 being my fuzzier one?) # 3) i want to take the 2007 $99,818 and add this to both LT assets and LT liabilities. question- they say the annual lease payments are recorded as part of COGS- am i now supposed to go take the 115,572 - 99,818 = 15,754 and add it to COGS? this part is confusing to me. SG- talk to me goose. we can do this.

I suck at these - Working on these right now as well 1) Choice “b” is correct. The completed adjusted balance sheet is included below. The firm’s adjusted current assets are $316,296 and the current liabilities are $163,311. Thus, the current ratio is $316,296/163,311 = 1.94x. Choice “a” is incorrect. This is the unadjusted current ratio. Choice “c” is incorrect. This is the adjusted quick ratio. Current Assets: $248,000 + $46,296 (PV of the throughput, current) + $22,000 (for LIFO to FIFO) Adjusted CA: $316,296 Current Liabilities: $100,000 + $17,015 (Current portion of lease) + $46,296 (PV of throughput, current) Adjusted CL: $163,311

Banni - Adjustment for #1 and #2 is fine. For #3 the same COGS part is confusing me to. I think we are better up bumping LTA and LTL by 99,818

mannn - where, how and why did they come up with this number 17,015? This thread will reconfirm that I am the most dummest with FSA in international marketplace.

agree- we’ll come back to COGS- maybe you up that but down interest by the 25k? # 4) what in the banana do you do with capitalized interest?

5) drop my LT assets by 6k, drop my equity by 6k says this is a component of operating expenses- should i jack my op expenses on the I/S by 6k? this is the fuzzy part- i feel like i’ve only really adjusted B/S’s… this is FUN on I/S side. weeeee!

and yes phil, where did they get that 17,015?

For Capitalized Interest - do we have to rollback the interest which was capitalized and incur it immediately as Interest Expense? damm… who created FSA and these nasty adjustements? For #5: Do we addback the impairement loss of $6K back as it is non-recurring? For #6: Do we take PV(Debt Gurantees) and add it to CL? For #7: This one i am sure off - We remove the DTL and increase the Equity. As DTL is not going to be reversed, so treat it as equity?

  1. Choice “c” is correct. The firm’s adjusted total assets are $957,424. Choice “a” is incorrect. This amount excludes the adjustment for the throughput commitments. Choice “b” is incorrect. This amount incorrectly excludes the adjustment from LIFO to FIFO inventory. Total Assets: $665,000 + 22,000 (For LIFO to FIFO) + 46,296 (throughput, current) + 119,310 (througput, long term) + 99,818 (PV of operating leases) - 15,000 (Carrying value of fixed assets reduced by capitalized interest) +20,000 (Guaranteed debt/investment in affiliate) Total Adjusted Assets: $957,424.

bannisja Wrote: ------------------------------------------------------- > and yes phil, where did they get that 17,015? (3) The operating leases are treated as if they were capitalized. The total present value of the leases on December 31, 20X7 is $99,818. This amount is recorded as a liability after determining the current versus long-term portion. The present value at March 31, 20X8 is calculated to be $82,803 (payments of $25,000, 8% rate, four years remaining). Thus, the current portion of the lease is $17,015 ($99,818 - $82,803). The offset to the liability is an addition to plant & equipment of $99,818.

6) you’d add the PV of guarantees to both A and L. doesn’t say the PV is 20k, but said it was during this year so do i just take the 20k straight or do i need to do some fancy PV action? crap philip, you ain’t messin around. # 7) i wanted to do same thing, drop out the DTL of 20k and add it to equity since there are no signs of reversal.

i got C, B, B for 2, 3, 4 by the way…the ratios are where i’m f’ing something. not getting answers that match.

Lease: Year 1 Lease: 115572 Year 2 Lease: 99818 Year 1 Interest: 115572*.08=9.245 Year 1 Prin = 15.754 (25-9.245) Year 2: 99.818 is total lease PV. Interest: 7.985 Prin = Current Portion of Lease = 25 - 7.985 = 17.015 Long term portion of lease = 99.818 - 17.015 = 82.803 COGS: COGS FIFO = COGSLIFO - Delta LIFO Reserve = 315 - 7 = 308 Current Assets: 105 + 81 + 62 + 22 (LIFO Reserve) + 46.296 (Current portion of commitments) = 316.296 Current Liabs: 71 + 15 + 14 + 46.296 + Lease 17.015 = 163.311 Current Ratio = 316.296/163.311 = 1.94x Total Assets: 316.296 (Current Assets) + Long Term Commitments 119.310 + PPE 390 - 15 (Cap Interest Cost) + Pension Assets 27 + PV Lease 99.818 + Debt Guarantee 20 = 957.424 Total Liabs: 163.311 (Current) + LTD 235 + 20 (Debt Guar) + DTL 0 (Becomes equity) + LT Commitments 119.310 + LT Lease 82.803 = 620.424 Inventory Turnover = 308/84 = 3.67 closest to 3.75x Equity: 90 + 220 + 22 (Inv) + 20 (DTL) -15 (Fixed Asset reduction due to capitalized interest) = 337 Total Liab + Equity = 620.424 + 337 = 957.424 Debt / Equity = 620.424 / 337 = 1.84x

now for income statement Revenues 525 - COGS 308 = 217 Op Exp = 76 - 6 (due to impaired asset expense) = 70 Depreciation 44 - 0.6 (remove asset back) = 43.4 Op Inc. 103.6 Interest exp: 10 + 9.245 (Lease current year) + 13.248 ((119.310 + 46.296) * .08) Commitments + 15 (Cap Interest) = 47.493 EBT = 56.107 Net Income = 33.6642 ROCE = 33.664 / 337 = 9.99% – so would choose A 10.8% and move on.

  1. Choice “b” is correct. The firm’s adjusted total liabilities are $620,424. Choice “a” is incorrect. This amount is the unadjusted total liabilities. Choice “c” is incorrect. This amount does not eliminate the deferred tax liability. As Johnson believes this will never be paid, it should be eliminated. Total Liabilities: $355,000 + 99,818 (PV of leases) + 46,296 (throughput, current) + 119,310 (througput, long term) + 20,000 (Guaranteed debt/investment in affiliate) - 20,000 (DTL eliminated) Total Adjusted Liabilities: $640,424

if you’re right on all of this stuff CP, you seriously need to stop studying now, do not pass go, do not collect $200, and just party like a rockstar until june 6th because you are out of control good. phil, post up the answers whenever and i’ll print this out and sip coffee tomorrow am at work reviewing. seriously, though, stalla is making schweser look like childsplay so far. i want to curl up in a little ball and suck my thumb or something.

bannisja Wrote: ------------------------------------------------------- > if you’re right on all of this stuff CP, you > seriously need to stop studying now, do not pass > go, do not collect $200, and just party like a > rockstar until june 6th because you are out of > control good. phil, post up the answers whenever > and i’ll print this out and sip coffee tomorrow am > at work reviewing. seriously, though, stalla is > making schweser look like childsplay so far. i > want to curl up in a little ball and suck my thumb > or something. haha banni you crack me up