Suggested Solutions Chapter 13

Exercise 13.9
2009 2008
Asset turnover
$5,136,628 ÷ $6,327,881 .811
$4,845,875 ÷ $6,005,609 .807

Accounts receivable turnover

$5,136,628 ÷ $523,489 9.81
$4,845,875 ÷ $410,378 11.81

Days’ sales in receivables

365 ÷ 9.81 37.21
365 ÷ 11.81 30.91

Inventory turnover
$2,619,680 ÷ $4,675,540 .56
$2,422,938 ÷ $4,457,540 .54

Days’ sales in inventory

365 ÷ .56 651.78
365 ÷ .54 675.92

As indicated, there appears to be a very significant problem related to

excess inventory. The company has approximately 1.8 years of
inventory on hand! Quite possibly, return on assets could be improved
by decreasing inventory.
Exercise 13.12
2009 2008
Inventory turnover
$25,227.6 ÷ $2,740.7 9.20
$25,003.0 ÷ $2,642.2 9.46

Days’ sales in inventory

365 ÷ 9.20 39.67
365 ÷ 9.46 38.58

With respect to inventory, Safeway has approximately 40 days of

inventory on hand, which seems reasonable considering the nature of
the company.
Problem 13.5
a. The three strategies do, indeed, appear to constitute manipulation of
earnings. The first strategy (often referred to as a bill and hold
strategy) is being undertaken purely to shift income from a future
period to the current period. Note that the customers are not being
offered a discount to encourage a sale—the discount is being offered
just so the company can book the sale early. The second strategy
involves setting up a so-called cookie jar reserve. This involves
overestimation of a restructuring charge so that income can be taken
out of the reserve (i.e., the cookie jar) when needed to meet an
earnings target. The third strategy simply violates the principle of
conservatism.

b. Each of the strategies would affect income but not cash flow. Thus,
a comparison of net income and cash flow from operations might
detect the earnings manipulation.

c. The strategies are not consistent with ethical behavior. The boost in
current period earnings enriches senior management but at the cost
of misleading investors.
Problem 13.16
a.
It is becoming easier for Mendella to pay its bills as they come due
because its current ratio has increased in each of the past two years.

b.
No, customers are not paying their accounts as well as they did in Year
1. In Year 1, Mendella’s accounts receivable turnover was 10.5, but in
Year 3 it was 8.2.

c.
Mendella’s inventory level is increasing since its inventory turnover has
increased both in Year 2 and Year 3.

d.
Mendella’s market price is going down because its price-earnings ratio
decreased in Year 2 and Year 3.

e.
Mendella is employing financial leverage to the advantage of the
common stockholders because its return on common stockholders’
equity increased in Year 2 and Year 3.