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Chapter 10--Forecasting Financial Statements
Student: ___________________________________________________________________________
1. The objective of forecasting is to develop

A. stand-alone financial statements for future analysis.
B. a set of realistic expectations for future value-relevant payoffs.
C. a balance sheet and income statement that articulate.
D. financial statements for comparison to industry averages.
2. Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior
security returns. Nichols and Wahlen's findings indicate
A. that an investor could earn excess returns if the investor could predict accurately the sign of the change in
earnings one year ahead.
B. that an investor could earn excess returns if the investor could predict accurately the magnitude of the change
in earnings one year ahead.
C. that an investor could earn excess returns if the investor could predict accurately the sign of the change in
cash flows from operations one year ahead.
D. that an investor could earn excess returns if the investor could predict accurately the sign of the change in
working capital one year ahead.
3. Financial statement forecasts rely on additivity within financial statements and articulation across financial
statements. Given this information forecasts of future growth in inventory will most likely affect growth in
A. accounts receivables.
B. accounts payable.
C. depreciation.
D. salary payable.
statements. Given this information sales growth forecasts will most likely affect growth in
C. depreciation.
D. salary payable.
5. Projecting sales price changes depends on factors specific to the firm and its industry that might affect
demand and price elasticity. Which of the following types of companies would most likely be able to increase
prices?
A. A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B. A firm in a capital intensive industry in which excess capacity exists.
C. A firm operating in an industry that is expected to experience technological improvements in its production
process.
D. A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life
cycle.
demand and price elasticity. Which of the following companies would most likely not be able to increase prices
in the near future?
C. A firm operating in an industry that is expected to maintain its current production processes.
D. A firm operating in an industry that is transitioning from the introduction phase to the high growth phase of
its life cycle.
7. If a company has very low operating leverage (i.e. a low proportion of fixed costs in the cost structure) and
no changes are expected in operations
A. percentage change income statement percentages can serve as the basis for projecting operating expenses.
B. using common-size income statement percentages will overstate future projected operating expenses.
C. using common-size income statement percentages will understate future projected operating expenses.
D. using common-size income statement percentages can serve as a reasonable basis for projecting future
operating expenses.
8. When projecting operating expenses it is important to determine the mix of fixed and variable costs, one clue
suggesting the presence of fixed costs is
A. the percentage change in cost of goods sold in prior years is significantly greater than the percentage change
in sales.
B. the percentage change in cost of goods sold in prior years is significantly less than the percentage change in
sales.
C. low capital intensity in the production process.
D. the percentage change in sales in prior years is significantly greater than the percentage change in
receivables.
9. To ensure that the financial statements articulate, it is important that the change in the cash balance on the
balance sheet each year agrees with
A. the cash collections from sales in the projected income statement.
B. the cash provided by or used by operations on the projected statement of cash flows.
C. the net change in cash on the projected statement of cash flows.
D. the net change in working capital from period to period.
10. An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem
that
A. the method reduces the potential understatement inherent in average balances.
B. the method can introduce artificial volatility in ending balances.
C. the method results in understating inventory each year.
D. the method results in overstating inventory each year.
11. Sparky’s
Sparky’s sells auto parts. Provided below is selected financial information from the company’s 2012 annual
report:
Sparky’s Selected Financial Statement data

Fiscal year end 2012 2011
(amounts in thousands of dollars)
Net sales $125,410 $106,380
Cost of Goods Sold -104,090 -89,359
Gross Profit $21,320 $17,021
Inventory $31,353 $30,850
Using Sparky’s financial information what is the company’s inventory turnover ratio for 2012?
A. 0.69
B. 1.00
C. 3.35
D. 4.03
12. Sparky’s
report:

Net sales $125,410 $106,380
Gross Profit $21,320 $17,021
Inventory $31,353 $30,850
Sparky’s forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012. If
these assumptions prove correct and Sparky’s inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?
A. $31,353
B. $38,320
C. $40,000
D. $42,314
13. Card Sharks, Inc.
Card Sharks, Inc. sells baseball cards and other memorabilia. The company tries to maintain a cash balance
equivalent to approximately 30 days of sales. Sales in 2011 amounted to $352,412 and the company expects
growth in 2012 of 33% and in 2013 of 40%.
Given the information provided about Card Sharks, what is the company’s 2012 projected year-end cash
balance?
A. $966
B. $28,965
C. $15,623
D. $38,524
Given the information provided about Card Sharks, what is the company’s 2013 projected annual sales?
A. $656,191
B. $493,377
C. $187,483
D. $542,333
Given the information provided about Card Sharks, what is the company’s 2013 projected cash balance?
A. $53,934
B. $49,524
C. $21,873
D. $38,524
16. All of the following are the fundamental bases for future payoffs to equity shareholders and share value
except:
A. earnings
B. cash flows
C. dividends
D. depreciation
17. All of the following are true regarding the key principles of forecasting except:
A. Financial statement forecasts need not be comprehensive.
B. Forecasts should not manifest wishful thinking.
C. Financial statement forecasts must be internally consistent.
D. Financial statement forecasts must rely on assumptions that have external validity.
18. Which of the following statements does not apply to preventing “garbage in, garbage out” when
implementing a forecasting game plan?
A. The quality of the financial statement forecasts will depend on the quality of the
forecast assumptions.
B. The quantities forecasted within financial statement forecasts will depend on the quantity of the forecast
assumptions.
C. Analysts should justify and evaluate the most important assumptions that reflect the critical risk and success
factors of the firm’s strategy.
D. Analysts can impose reality checks on the assumptions by analyzing the forecasted financial statements
using ratios, common-size, and rate-of-change financial statements.
19. If a firm competes in a capital-intensive industry with excess capacity, all of the following are true except:
A. price increases will be less likely.
B. price increases will be more likely.
C. companies in competitive industries face high exit barriers.
D. companies in competitive industries may experience future price decreases.
20. Using common-size balance sheet percentages to project individual assets, liabilities, or shareholders’ equity
has all of the following shortcomings except:
A. Individual assets, liabilities, and shareholders’ equity are not independent
of each other.
B. If a company experiences changing proportions for investments in securities among its assets, other asset
categories may show decreasing percentages in some years even though their dollar amounts are increasing.
C. Individual assets, liabilities, and shareholders’ equity are independent
of each other.
D. The common-size percentages do not permit the analyst to easily change
the assumptions about the future behavior of an individual asset or liability.
21. All of the following statements are true regarding ratios and forecasts except:
A. Ratios cannot confirm whether forecast assumptions will turn out to be correct.
B. Ratios can tell whether future sales growth was accurately captured.
C. Ratios cannot tell whether assumptions about future cash flows are realistic.
D. Ratios can tell whether growth rates for sales are consistent with past sales growth performance.
22. Projected financial statements can be used to assess the sensitivity of all of the following except:
A. a firm’s liquidity
B. a firm’s leverage to changes in assumptions
C. conditions under which the firm’s debt covenants may become binding
D. unusual patterns for projected total assets.
23. Common-size financial statements recast each statement item as

A. a percentage of the "bottom line."
B. a percentage using industry averages for the "base number."
C. a percentage using a base year number for each line item.
D. a percentage of some "base number" on the financial statement in question.
24. Financial ratio, percentage, and trend comparisons can be distorted by all of the following except:
A. aggressive revenue recognition practices.
B. the timing of asset purchases.
C. accounting for similar economic fundamentals in similar fashion.
D. the presence of nonrecurring items among the firms being analyzed.
25. All of the following are true regarding projected financial statements except:
A. The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
B. Preparing projected financial statements must incorporate a company's past performance records.
C. Preparing projected financial statements must incorporate a company's current performance records.
D. The income statement demonstrates immediate capability to service debt for banks or real potential for
growth in returns for venture capital.
26. As a firm progresses through the introduction life-cycle stage, what type of flexible account will it be more
likely to use to balance the balance sheet?
A. dividends.
B. growth related assets.
C. issued equity.
D. stock buy-backs.
27. As a firm progresses through the decline life-cycle stage, what type of flexible account will it be more likely
to use to balance the balance sheet?
A. issued debt.
C. issued equity.
D. stock buy-backs.
28. As a firm progresses through the growth life-cycle stage, what type of flexible account will it be more likely
A. issued debt.
B. paying down of debt.
C. dividends
D. stock buy-backs.
29. Financial statement forecasts are important analysis tools because forecasts of
______________________________ play a central role in valuation and many other financial decision
contexts.
________________________________________
30. Realistic expectations are ____________________ and ____________________.

________________________________________
31. Financial statement forecasts should rely on ____________________ within financial statements.
________________________________________
32. Financial statement forecasts should rely on _________________________ across financial statements.
________________________________________
33. A firm in a mature industry with little expected change in its market share might anticipate volume increases
equal to the growth rate in the _________________________ within its geographic markets.
________________________________________
34. Firms which have differentiated ___________________________________ for its products may have a
greater potential to increase prices.
________________________________________
35. It may be difficult to forecast sales for firms with _________________________ patterns because their
historical growth rates reflect wide variations in both direction and amount from year to year.
________________________________________
36. A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys
___________________________________.
________________________________________
37. To develop forecasts of individual assets, the analyst must first link historical growth rates for individual
assets to historical growth rates in sales or other ___________________________________.
________________________________________
38. The analyst can capture projected levels of operating activity by using ______________________________
to develop forecasts for individual assets.
________________________________________
assets to historical growth rates in ____________________ and other activity-based drivers.
________________________________________
40. For some types of assets, such as plant, property and equipment, asset growth typically
____________________ future sales growth.
________________________________________
41. For some types of assets, such as accounts receivable, asset growth typically ____________________ future
sales growth.
________________________________________
42. When projecting ____________________, the analyst should consider economy-wide factors such as the
expected rate of general price inflation in the economy.
________________________________________
43. A firm in transition from the high growth to the mature phase of its life cycle, or a firm with significant
technological improvements in its production processes, might expect increases in
______________________________ but decreases in sales prices per unit.
________________________________________
44. If a firm competes in a ___________________________________ industry that the analyst expects will
operate near capacity for the next few years, then price increases will be more likely.
________________________________________
45. Analysts must develop realistic expectations for the outcomes of future business activities.
To develop these expectations, analysts build a set of _____________________________.
________________________________________
46. Many times an analyst will compute ending accounts receivable or inventory balances using turnover ratios.
Discuss the advantage and disadvantage of using this methodology.
47. The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.
Discuss the seven steps necessary to prepare the three principal financial statements.
48. One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in
projected ending balances. What might an analyst do to reduce the "sawtooth" pattern caused by using turnover
ratios?
49. The first step in the forecasting game plan is to project sales and other other operating activities. Sales
numbers are determined by both a volume component and price component. Projecting prices depends on
factors specific to the firm and its industry that might affect demand and price elasticity. For the following types
of firms discuss whether it would be likely that the firm would be able to raise future prices:
a. A firm in a capital-intensive industry that is expected to operate near capacity for the near future.
b. A firm in an industry that is expected to experience numerous technological improvements.
c. A firm with products which are transitioning from the growth to maturity phase of the product life cycle.
d. A firm that has established a well known brand name and image.
50. As an analyst it is important when projecting sales to make estimates about future changes in sales volume.
Compare how you might make estimates about future sales value for a company in a mature industry and one in
a rapidly growing industry.
51. In comparison of 2010 to 2009 performance, Watson Company's inventory turnover decreased substantially,
although sales and inventory amounts were essentially unchanged.
Required:
During a corporate meeting you heard the following managers postulate why the decreased inventory turnover
ratio happened. Which statement best explains the decreased inventory turnover ratio and why?
a. The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods
sold.
b. The operations manager said: The decreased inventory turnover ratio is due to increased gross profit
percentage.
c. The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts
receivable turnover.
d. The shipping manager said: The decreased inventory turnover ratio is due to decreased total asset turnover.
52.
Bargains, Inc. manufactures and markets toys. Selected income statement data from 2010 and 2009 appear
below:
Bargains, Inc.
Selected Income Statement data
Fiscal year end 12/31/2010 12/31/2009
Net sales $4,885,340 $4,637,924
Cost of Goods Sold -3,824,353 -3,638,990
Gross profit 1,060,987 998,934
Required:
a. An analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost by dividing the amount of the
change in the cost item between two years by the amount of the change in sales for those two years. The analyst can then multiply the
variable cost percentage times sales to determine the total variable cost. Subtracting the variable cost yields the fixed cost for that
particular item. Follow this procedure to determine the cost structure for costs of goods sold for Bargains, Inc.
b. Bargains, Inc. projects sales to grow at the following percentages in future years: 2011, 9 percent; 2012, 11 percent; 2013, 15 percent.
Using this information project sales, cost of goods sold and gross profit for Bargains, Inc. for 2011 to 2013.
53. Glad Rags, Inc. sells women's clothes. Provided below is selected financial statement information:
Glad Rags, Inc.

Selected Financial Statement data
Net sales $47,895 $42,589
Cost of Goods Sold (35,952) (32,588)
Gross profit $11,943 $10,001
Inventory $ 5,548 $ 4,948
Required:
a. Compute the inventory turnover ratio for 2010.
b. Clothes, Inc. projects that sales will grow at a compound rate of 7% per year for years 2011-2013 and that the cost of goods sold to sales
percentage will equal that realized in 2010. Compute the projected implied level of inventory at the end of 2011 to 2013.
54. Office Mart, Inc. sells numerous office supply products through a national distribution center. The company
has focused on maintaining a cash balance equivalent to approximately 14 days of sales. Sales in 2010
amounted to $125,980,673 and the company expects growth in 2011 of 11% and in 2012 of 15%. Given this
information determine Office Mart, Inc.'s projected year-end cash balance for 2011 and 2012.
55. The following information about Douglas Corp.’s Accounts Receivable and Sales are presented below:
Year
2012-Beginnin
g Balance of
A/R = $791M
Year 2012
-Ending
Balance of A/R
= $807M
Year 2012 -
Sales =
$3,002M
Assumptions:
Sales growth
will be equal to
6% per year
A/R turnover
will stay
constant
throughout the
forecast period
Required:
a. Using this information, forecast Douglas Corp.’s the growth in Accounts Receivable for years 2013-2017.
b. What problem does a constant A/R turnover assumption cause?
c. Provide a solution to the problem caused by a constant A/R turnover assumption.
56. The following balance sheet and income statement pertain to Goode Corp., using the following assumptions
complete a forecasted 2013 income statement:
Assumpt
ions for
2013:
Revenue growth rate 32%
COGS 64% of sales
Operating expenses 23% of sales
Interest expense 10% of
beginning
long-term
debt
Tax rate 35%
Goode Corp. Consolidated Statement of Income

(Thousands except per share amounts) 2012
Net Revenues $345,871

Cost of Revenue (226,546)
SG&A (83,009)
Operating Income 36,316
Interest Expense (484)
Income Before Income Taxes 35,832
Income taxes (12,541)
Net Income $23,291
Goode Corp Consolidated Balance Sheet

(Thousands) 2012
Current Assets
Cash and Equivalents 7,905
Merchandise inventory 6,308
Accounts receivable 6,614
PPE (including intangibles), net 39,458
Total Assets 60,285
Liabilities and Stockholders' Equity

Accounts payable 9,643
Long-term debt 13,500
Shareholders' Equity
Common stock and APIC 28,613
Retained earnings 8,529
Total Liabilities and Shareholders' Eq. 60,285
57. Simmons Company
These data represent a summary of your first-iteration forecast amounts for Year 1. Simmons uses dividends as
a flexible financial account.
Year + 1
Operating Income $ 58
Interest Expense 8
Income before Tax $ 50
Tax Provision (20.0 percent effective tax rate) 10
Net Income $ 40
Total Assets $200
Accrued Liabilities $ 43
Long-Term Debt $ 80
Common Stock, at par $ 20
Retained Earnings (at the beginning of Year 1) $ 34
A. See the information for Simmons Company.

Compute the amount of dividends you can assume that Simmons will pay in order to balance your projected balance sheet. Present the projected
balance sheet.
B. See the information for Simmons Company.

Now assume that Simmons pays common shareholders a dividend of $25 in Year +1. Also assume that Simmons uses long-term debt as a flexible
financial account, increasing borrowing when it needs capital and paying down debt when it generates excess capital. For simplicity, assume that
Simmons pays 10.0 percent interest expense on the ending balance in long-term debt for the year and that interest expense is tax deductible at
Simmons' average tax rate of 20.0 percent.
Present the projected income statement and balance sheet for Year +1. (Hint: Because of the circularity between interest expense, net income,
and debt, several iterations may be needed to balance the projected balance sheet and to have the projected balance sheet articulate with net income.
You may find it helpful to program a spreadsheet to work the iterative computations.)
58. Repair Specialists is a leading retailer of home improvement products. It operates large warehouse-style
stores. Despite declining sales and difficult economic conditions in 2009 and 2010, Repair Specialists continued
to invest in new stores. The following table provides summary data for Repair Specialists.
Repair Specialists 2009 2010

(amounts in millions except number of stores)
Number of stores 2,234 2,274
Sales revenues $77,349 $71,288
Inventory $11,731 $10,673
Capital expenditures, net $ 3,558 $ 1,847
Required
a. Use the preceding data for Repair Specialists to compute average revenues per store,
capital spending per new store, and ending inventory per store in 2010.
b. Assume that Repair Specialists will add 100 new stores by the end of Year 1. Use
the data from 2010 to project Year 1 sales revenues, capital spending, and ending
inventory. Assume that each new store will be open for business for an average of
one-half year in Year 1. For simplicity, assume that in Year 1, Repair Specialists’ sales
revenues will grow, but only because it will open new stores.
59. Techtronics is a leader in manufacturing computer chips, which is very capital-intensive. Because the
production processes in computer chip manufacturing require sophisticated and rapidly changing technology,
production and manufacturing assets in the chip industry tend to have relatively short useful lives.
The following summary information relates to Techtronics’ property, plant, and

equipment for 2009 and 2010:
Techtronics (amounts in millions) 2009 2010

Property, Plant, and Equipment, at cost $ 46,052 $ 48,088
Accumulated Depreciation $(29,134) $(30,544)
Property, Plant, and Equipment, net $ 16,918 $ 17,544
Depreciation Expense $ 4,360
Capital Expenditures, net $ 5,200
Required
Assume that Techtronics depreciates all property, plant, and equipment using the straight-line
depreciation method and zero salvage value. Assume that Intel spends $6,000 on new
depreciable assets in Year 1 and does not sell or retire any property, plant, and equipment
during Year 1.
a. Compute the average useful life that Techtronics used for depreciation in 2010.
b. Project total depreciation expense for Year 1 using the following steps: (i) project
depreciation expense for Year 1 on existing property, plant, and equipment at the
end of 2010; (ii) project depreciation expense on capital expenditures in Year 1
assuming that Intel takes a full year of depreciation in the first year of service; and
(iii) sum the results of (i) and (ii) to obtain total depreciation expense for Year 1.
c. Project the Year 1 ending balance in property, plant, and equipment, both at cost
and net of accumulated depreciation.
60. Arco is an integrated manufacturer in capital-intensive industry. Nuwak manufactures more

commodity-level products in the same industry at the lower end of the market and uses less capital-intensive
processes. The following data describe sales and cost of products sold for both firms for Years 3 and 4.
($ amounts in millions) Year 3 Year 4

Arco
Sales $4,042 $ 5,217
Cost of Products Sold 3,887 4,554
Gross Profit $ 155 $ 663
Gross Margin 3.8% 12.7%
Nuwak
Sales $6,266 $11,377
Gross Profit $ 269 $ 2,248
Industry analysts anticipate the following annual changes in sales for the next five years:
Year +1, 5 percent increase; Year +2, 10 percent increase; Year +3, 20 percent increase; Year +4, 10 percent decrease; Year +5, 20 percent decrease.
Required
a. The analyst can sometimes estimate the variable cost as a percentage of sales for a
particular cost (for example, cost of products sold) by dividing the amount of the
change in the cost item between two years by the amount of the change in sales for
those two years. The analyst can then multiply the variable-cost percentage times
sales to estimate the total variable cost. Subtracting the variable cost from the total
cost yields an estimate of the fixed cost for that particular cost item. Follow this procedure
to estimate the manufacturing cost structure (variable cost as a percentage of
sales, total variable costs, and total fixed costs) for cost of products sold for both Arco and Nuwak in Year 4.
b. Discuss the structure of manufacturing cost (that is, fixed versus variable) for each
firm in light of the manufacturing process and type of product produced.
c. Using the analysts’ forecasts of sales changes, compute the projected sales, cost of
products sold, gross profit, and gross margin (gross profit as a percentage of sales)
of each firm for Year +1 through Year +5.
d. Why do the levels and variability of the gross margin percentages differ for these two
firms for Year +1 through Year +5?
61. Saunders Corporation manufactures consumer electronics products. Selected income statement data for
2009 and 2010 follow (amounts in millions of dollars):
Saunders Corporation (amounts in millions of dollars) 2009 2010

Sales 8,296 8,871
Selling and Administrative Expenses (1,788) (1,714)
Operating Income before Income Taxes 618 867
Required
a. The analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost (for example, cost of goods sold) by dividing the
amount of the change in the cost item between two years by the amount of the change in sales for those two years. The analyst can then multiply total
sales by the variable-cost percentage to determine the total variable cost. Subtracting the variable cost from the total cost yields the fixed cost
component for that particular cost item. Follow this procedure to determine the cost structure (fixed cost plus variable cost as a percentage of sales)
for cost of goods sold for Saunders.
b. Repeat requirement a. for selling and administrative expenses.
c. Saunders Corporation discloses that it expects sales to grow at the following percentages
in future years: Year 1, 12 percent; Year 2, 10 percent; Year 3, 8 percent; Year 4, 6 percent. Project sales, cost of goods sold, selling and
administrative expenses, and operating income before income taxes for Saunders for Year 1 to Year 4 using the cost structure amounts derived in
requirements a. and b.
d. Compute the ratio of operating income before income taxes to sales for Year 1 through Year 4.
e. Interpret the changes in the ratio computed in requirement d. in light of the expected changes in sales.
62. Hart designs, manufactures, and markets toys in domestic and international markets. Sales during 2010
totaled $4,022 million. Accounts receivable totaled $655 million at the beginning of 2010 and $612 million at
the end of 2010.
Required
a. Use the average balance to compute the accounts receivable turnover ratio for Hart for 2010.
b. Hart generated a compound annual sales growth rate of 13.0 percent over the past two years. Assume that
Hart's sales will continue to grow at that rate each year for Year +1 through Year +5 and that the accounts
receivable turnover ratio each year will equal the ratio computed in requirement a. for 2010. Project the amount
of accounts receivable at year-end through Year +5 based on the accounts receivable turnover computed in
requirement a. Also compute the percentage change in accounts receivable between each of the year-ends
through Year +5.
c. Does the pattern of growth in your projections of Hart's accounts receivable seem
reasonable considering the assumptions of smooth growth in sales and steady turnover? Explain.
d. The changes in accounts receivable computed in requirement b. display the sawtooth pattern depicted in
Exhibit 10.5 in the text. Smooth the changes in accounts receivable by computing the year-end accounts
receivable balances for Year 1 through Year 5 using the compound annual growth rate in accounts receivable
between the end of 2010 and the end of Year +1 from requirement b.
e. Smooth the changes in accounts receivable using the compound annual growth rate in accounts receivable
between the end of 2010 and the end of Year +4 from requirement b. Apply this growth rate to compute
accounts receivable at the end of Year +1 through Year +5. Why do the amounts for ending accounts receivable
using the growth rate from requirement d. differ from those using the growth rate from this requirement?
f. Compute the accounts receivable turnover for 2010 by dividing sales by the balance in accounts receivable at
the end of 2010 (instead of using average accounts receivable as in requirement a). Use this accounts receivable
turnover ratio to compute the projected balance in accounts receivable at the end of Year +1 through Year +5.
Also compute the percentage change in accounts receivable between the year-ends for Year +1 through Year
+5.
63. Benson sells books through retail stores and on the Web. For a retailer like Benson, inventory is a critical
element of the business and it is necessary to carry a wide array of titles. In 2010, sales totaled $5,122 million
and cost of sales and occupancy totaled $3,541 million. Inventories constitute the largest asset on Benson’s
balance sheet, totaling $1,203 million at the end of 2010 and $1,358 million at the end of 2009.
Required
a. Compute the inventory turnover ratio for Benson for 2010.
b. Over the last two years, the number of Benson retail stores has remained fairly steady and sales have grown
at a compounded annual rate of 11.6 percent. Assume that the number of stores will remain constant and that
sales will continue to grow at an annual rate of 11.6 percent each year between Year +1 and Year +5. Also
assume that the future cost of goods sold to sales percentage will equal that realized in 2010 (which is very
similar to the cost of goods sold percentage over the past three years). Project the amount of inventory at the
end of Year +1 through Year +5 using the inventory turnover ratio computed in Part a. Also compute the
percentage change in inventories between each of the year-ends between 2010 and Year +5. Does the pattern of
growth in your projections of Benson inventory seem reasonable to you considering the assumptions of smooth
growth in sales and steady cost of goods sold percentages? Explain.
c. The changes in inventories in Part b display the sawtooth pattern depicted in Exhibit 10.5 of the text. Smooth
the changes in the inventory forecasts between 2010 and Year +5 using the compound annual growth rate in
inventories between the end of 2010 and the end of Year +5 implied by the projections in Part b. Does this
pattern of growth seem more reasonable? Explain.
d. Now suppose that instead of following the smoothing approach in Part c, you used the rate of growth in
inventory during 2010 to project future inventory balances at the end of Year +1 through Year +5. Use these
projections to compute the implied inventory turnover rates. Does this pattern of growth and efficiency in
inventory for Benson seem reasonable? Explain.
Chapter 10--Forecasting Financial Statements Key
1. The objective of forecasting is to develop

A. stand-alone financial statements for future analysis.
B. a set of realistic expectations for future value-relevant payoffs.
C. a balance sheet and income statement that articulate.
D. financial statements for comparison to industry averages.
2. Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior
security returns. Nichols and Wahlen's findings indicate
A. that an investor could earn excess returns if the investor could predict accurately the sign of the change in
earnings one year ahead.
B. that an investor could earn excess returns if the investor could predict accurately the magnitude of the change
in earnings one year ahead.
C. that an investor could earn excess returns if the investor could predict accurately the sign of the change in
cash flows from operations one year ahead.
D. that an investor could earn excess returns if the investor could predict accurately the sign of the change in
working capital one year ahead.
statements. Given this information forecasts of future growth in inventory will most likely affect growth in
C. depreciation.
D. salary payable.
statements. Given this information sales growth forecasts will most likely affect growth in
C. depreciation.
D. salary payable.
demand and price elasticity. Which of the following types of companies would most likely be able to increase
prices?
C. A firm operating in an industry that is expected to experience technological improvements in its production
process.
D. A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life
cycle.
demand and price elasticity. Which of the following companies would most likely not be able to increase prices
in the near future?
C. A firm operating in an industry that is expected to maintain its current production processes.
D. A firm operating in an industry that is transitioning from the introduction phase to the high growth phase of
its life cycle.
7. If a company has very low operating leverage (i.e. a low proportion of fixed costs in the cost structure) and
no changes are expected in operations
A. percentage change income statement percentages can serve as the basis for projecting operating expenses.
B. using common-size income statement percentages will overstate future projected operating expenses.
C. using common-size income statement percentages will understate future projected operating expenses.
D. using common-size income statement percentages can serve as a reasonable basis for projecting future
operating expenses.
8. When projecting operating expenses it is important to determine the mix of fixed and variable costs, one clue
suggesting the presence of fixed costs is
A. the percentage change in cost of goods sold in prior years is significantly greater than the percentage change
in sales.
B. the percentage change in cost of goods sold in prior years is significantly less than the percentage change in
sales.
C. low capital intensity in the production process.
D. the percentage change in sales in prior years is significantly greater than the percentage change in
receivables.
9. To ensure that the financial statements articulate, it is important that the change in the cash balance on the
balance sheet each year agrees with
A. the cash collections from sales in the projected income statement.
B. the cash provided by or used by operations on the projected statement of cash flows.
C. the net change in cash on the projected statement of cash flows.
D. the net change in working capital from period to period.
10. An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem
that
A. the method reduces the potential understatement inherent in average balances.
B. the method can introduce artificial volatility in ending balances.
C. the method results in understating inventory each year.
D. the method results in overstating inventory each year.
11. Sparky’s
report:

Net sales $125,410 $106,380
Gross Profit $21,320 $17,021
Inventory $31,353 $30,850
Using Sparky’s financial information what is the company’s inventory turnover ratio for 2012?
A. 0.69
B. 1.00
C. 3.35
D. 4.03
12. Sparky’s
report:

Net sales $125,410 $106,380
Gross Profit $21,320 $17,021
Inventory $31,353 $30,850
Sparky’s forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012. If
these assumptions prove correct and Sparky’s inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?
A. $31,353
B. $38,320
C. $40,000
D. $42,314
Given the information provided about Card Sharks, what is the company’s 2012 projected year-end cash
balance?
A. $966
B. $28,965
C. $15,623
D. $38,524
Given the information provided about Card Sharks, what is the company’s 2013 projected annual sales?
A. $656,191
B. $493,377
C. $187,483
D. $542,333
Given the information provided about Card Sharks, what is the company’s 2013 projected cash balance?
A. $53,934
B. $49,524
C. $21,873
D. $38,524
16. All of the following are the fundamental bases for future payoffs to equity shareholders and share value
except:
A. earnings
B. cash flows
C. dividends
D. depreciation
17. All of the following are true regarding the key principles of forecasting except:
A. Financial statement forecasts need not be comprehensive.
B. Forecasts should not manifest wishful thinking.
C. Financial statement forecasts must be internally consistent.
D. Financial statement forecasts must rely on assumptions that have external validity.
18. Which of the following statements does not apply to preventing “garbage in, garbage out” when
implementing a forecasting game plan?
A. The quality of the financial statement forecasts will depend on the quality of the
forecast assumptions.
B. The quantities forecasted within financial statement forecasts will depend on the quantity of the forecast
assumptions.
C. Analysts should justify and evaluate the most important assumptions that reflect the critical risk and success
factors of the firm’s strategy.
D. Analysts can impose reality checks on the assumptions by analyzing the forecasted financial statements
using ratios, common-size, and rate-of-change financial statements.
19. If a firm competes in a capital-intensive industry with excess capacity, all of the following are true except:
A. price increases will be less likely.
B. price increases will be more likely.
C. companies in competitive industries face high exit barriers.
D. companies in competitive industries may experience future price decreases.
20. Using common-size balance sheet percentages to project individual assets, liabilities, or shareholders’ equity
has all of the following shortcomings except:
A. Individual assets, liabilities, and shareholders’ equity are not independent
of each other.
B. If a company experiences changing proportions for investments in securities among its assets, other asset
categories may show decreasing percentages in some years even though their dollar amounts are increasing.
C. Individual assets, liabilities, and shareholders’ equity are independent
of each other.
D. The common-size percentages do not permit the analyst to easily change
the assumptions about the future behavior of an individual asset or liability.
21. All of the following statements are true regarding ratios and forecasts except:
A. Ratios cannot confirm whether forecast assumptions will turn out to be correct.
B. Ratios can tell whether future sales growth was accurately captured.
C. Ratios cannot tell whether assumptions about future cash flows are realistic.
D. Ratios can tell whether growth rates for sales are consistent with past sales growth performance.
22. Projected financial statements can be used to assess the sensitivity of all of the following except:
A. a firm’s liquidity
B. a firm’s leverage to changes in assumptions
C. conditions under which the firm’s debt covenants may become binding
D. unusual patterns for projected total assets.
23. Common-size financial statements recast each statement item as

A. a percentage of the "bottom line."
B. a percentage using industry averages for the "base number."
C. a percentage using a base year number for each line item.
D. a percentage of some "base number" on the financial statement in question.
24. Financial ratio, percentage, and trend comparisons can be distorted by all of the following except:
A. aggressive revenue recognition practices.
B. the timing of asset purchases.
C. accounting for similar economic fundamentals in similar fashion.
D. the presence of nonrecurring items among the firms being analyzed.
25. All of the following are true regarding projected financial statements except:
A. The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
B. Preparing projected financial statements must incorporate a company's past performance records.
C. Preparing projected financial statements must incorporate a company's current performance records.
D. The income statement demonstrates immediate capability to service debt for banks or real potential for
growth in returns for venture capital.
26. As a firm progresses through the introduction life-cycle stage, what type of flexible account will it be more
likely to use to balance the balance sheet?
A. dividends.
C. issued equity.
D. stock buy-backs.
27. As a firm progresses through the decline life-cycle stage, what type of flexible account will it be more likely
A. issued debt.
C. issued equity.
D. stock buy-backs.
28. As a firm progresses through the growth life-cycle stage, what type of flexible account will it be more likely
A. issued debt.
B. paying down of debt.
C. dividends
D. stock buy-backs.
29. Financial statement forecasts are important analysis tools because forecasts of
______________________________ play a central role in valuation and many other financial decision
contexts.
future payoffs
30. Realistic expectations are ____________________ and ____________________.

unbiased, objective or
objective, unbiased
31. Financial statement forecasts should rely on ____________________ within financial statements.
additivity
32. Financial statement forecasts should rely on _________________________ across financial statements.
articulation
33. A firm in a mature industry with little expected change in its market share might anticipate volume increases
equal to the growth rate in the _________________________ within its geographic markets.
population
34. Firms which have differentiated ___________________________________ for its products may have a
greater potential to increase prices.
unique characteristics
35. It may be difficult to forecast sales for firms with _________________________ patterns because their
historical growth rates reflect wide variations in both direction and amount from year to year.
cyclical sales
36. A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys
___________________________________.
economies of scale
assets to historical growth rates in sales or other ___________________________________.
activity-based drivers
38. The analyst can capture projected levels of operating activity by using ______________________________
to develop forecasts for individual assets.
turnover rates
assets to historical growth rates in ____________________ and other activity-based drivers.
sales
40. For some types of assets, such as plant, property and equipment, asset growth typically
____________________ future sales growth.
leads
41. For some types of assets, such as accounts receivable, asset growth typically ____________________ future
sales growth.
lag
42. When projecting ____________________, the analyst should consider economy-wide factors such as the
expected rate of general price inflation in the economy.
prices
43. A firm in transition from the high growth to the mature phase of its life cycle, or a firm with significant
technological improvements in its production processes, might expect increases in
______________________________ but decreases in sales prices per unit.
sales volume
44. If a firm competes in a ___________________________________ industry that the analyst expects will
operate near capacity for the next few years, then price increases will be more likely.
capital-intensive
45. Analysts must develop realistic expectations for the outcomes of future business activities.
To develop these expectations, analysts build a set of _____________________________.
financial statement forecasts
46. Many times an analyst will compute ending accounts receivable or inventory balances using turnover ratios.
Discuss the advantage and disadvantage of using this methodology.
One advantage of using this method is that it reduces the potential understatement inherent in average balances.
One disadvantage is that it may introduce artificial volatility in ending balances.

47. The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.
Discuss the seven steps necessary to prepare the three principal financial statements.
The seven steps are:
1. Project revenues from sales and other operating activities.

2. Project operating expenses and derive projected operating income.
3. Project the operating assets that will be necessary to support the level of operations projected in Steps 1 and 2. Also project the
operating liabilities that will be triggered by normal business operations.
4. Project the financial leverage, financial assets, and common equity capital that will be necessary to finance the net operating assets
projected in Step 3. In addition, determine the financing costs triggered by the financial liabilities and any investment income from
financial assets in the firm’s capital structure. From projected operating income from Step 2, subtract interest expense and add interest
income.
5. Project nonrecurring gains or losses (if any) and derive projected income before tax. Subtract the projected provision for income taxes
to derive the projected net income. Subtract expected dividends from net income to obtain the projected change in retained earnings.
Also project any other comprehensive income items.
6. Check whether the projected balance sheet is in balance. Repeat Steps 4 and 5 until it is in balance.
7. Derive the projected statement of cash flows from the projected income statements and the changes in the projected balance sheet
amounts.
48. One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in
projected ending balances. What might an analyst do to reduce the "sawtooth" pattern caused by using turnover
ratios?
One thing an analyst might do is estimating the average rate of growth in the asset balance expected over a long
forecast period and then smooth each year-end balance using the average growth rate.
49. The first step in the forecasting game plan is to project sales and other other operating activities. Sales
numbers are determined by both a volume component and price component. Projecting prices depends on
factors specific to the firm and its industry that might affect demand and price elasticity. For the following types
of firms discuss whether it would be likely that the firm would be able to raise future prices:
a. A firm in a capital-intensive industry that is expected to operate near capacity for the near future.
b. A firm in an industry that is expected to experience numerous technological improvements.
c. A firm with products which are transitioning from the growth to maturity phase of the product life cycle.
d. A firm that has established a well known brand name and image.
Suggested answers:
a. In this case, due to capacity constraints the firm should be able to raise prices. Because the industry is capital intensive it is not likely
that a competitor could easily and quickly enter the market and steal market share by cutting prices.
b. This firm would probably not be able to raise prices due to efficiencies brought on by the technological change, although sales
volumes may increase.
c. This firm may find it more difficult to raise prices, as the product's sales reach a level in which demand is more stable. Thus, price
increases may result in consumers switching products, etc.
d. Firms with well known images and brand names may be better positioned to raise prices because consumers feel such brand loyalty.
50. As an analyst it is important when projecting sales to make estimates about future changes in sales volume.
Compare how you might make estimates about future sales value for a company in a mature industry and one in
a rapidly growing industry.
Suggested Solution from the text::

For a stable firm in a mature industry (for example, consumer foods), an analyst may conclude that the firm will
not significantly increase its market share, in which he or she might anticipate that sales volume with grow with
population growth in the firm’s geographic markets. For a firm that has increased its production in an industry
with high anticipated growth (for example, biotechnology or cell phones), the analyst can use the industry
growth rate coupled with the expansion in the firm’s capacity to project sales volume increases.
51. In comparison of 2010 to 2009 performance, Watson Company's inventory turnover decreased substantially,
although sales and inventory amounts were essentially unchanged.
Required:
During a corporate meeting you heard the following managers postulate why the decreased inventory turnover
ratio happened. Which statement best explains the decreased inventory turnover ratio and why?
a. The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods
sold.
b. The operations manager said: The decreased inventory turnover ratio is due to increased gross profit
percentage.
c. The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts
receivable turnover.
d. The shipping manager said: The decreased inventory turnover ratio is due to decreased total asset turnover.
The operations manager’s statement (b) best explains the decreased inventory turnover ratio. The gross profit
margin increased. Sales were unchanged, so the gross profit margin increase would be due to decreased cost of
goods sold. If inventory were also unchanged, the lower cost of goods sold would result in lower inventory
turnover.
52.
Bargains, Inc. manufactures and markets toys. Selected income statement data from 2010 and 2009 appear
below:
Bargains, Inc.
Selected Income Statement data
Fiscal year end 12/31/2010 12/31/2009
Net sales $4,885,340 $4,637,924
Cost of Goods Sold -3,824,353 -3,638,990
Gross profit 1,060,987 998,934
Required:
a. An analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost by dividing the amount of the
change in the cost item between two years by the amount of the change in sales for those two years. The analyst can then multiply the
variable cost percentage times sales to determine the total variable cost. Subtracting the variable cost yields the fixed cost for that
particular item. Follow this procedure to determine the cost structure for costs of goods sold for Bargains, Inc.
b. Bargains, Inc. projects sales to grow at the following percentages in future years: 2011, 9 percent; 2012, 11 percent; 2013, 15 percent.
Using this information project sales, cost of goods sold and gross profit for Bargains, Inc. for 2011 to 2013.
a.
Change in COGS $185,363
Change in sales $247,416
Variable cost percentage 75%
Fixed Costs:
2010 $160,348
b.
2011 2012 2013
Projected Growth Rate 9% 11% 15%
Net Sales 5,325,021 5,910,773 6,797,389
Cost of Goods Sold:

Fixed portion ($ 160,348) ($ 160,348) ($ 160,348)
Variable portion (75% of Sales) (3,993,766) (4,433,080) (5,098,042)
Gross Profit 1,170,907 1,317,345 1,538,999
53. Glad Rags, Inc. sells women's clothes. Provided below is selected financial statement information:
Glad Rags, Inc.

Selected Financial Statement data
Net sales $47,895 $42,589
Gross profit $11,943 $10,001
Inventory $ 5,548 $ 4,948
Required:
a. Compute the inventory turnover ratio for 2010.
b. Clothes, Inc. projects that sales will grow at a compound rate of 7% per year for years 2011-2013 and that the cost of goods sold to sales
percentage will equal that realized in 2010. Compute the projected implied level of inventory at the end of 2011 to 2013.
a. Inventory Turnover 6.85

I.T. = $35,952/.5(5,548 + 4,948) = 6.85
b.
Inventory Average Inventory Inventory Percentage
Sales COGS Turnover Inventories beg. Year end year change
2010 47,895.00 $35,952 6.85 5,248 4,948 5,548 12%
2011 51,247.65 $38,469 6.85 5,616 5,548 5,684 2%
2012 54,834.99 $41,161 6.85 6,009 5,684 6,334 11%
2013 58,673.43 $44,043 6.85 6,430 6,334 6,525 3%
54. Office Mart, Inc. sells numerous office supply products through a national distribution center. The company
has focused on maintaining a cash balance equivalent to approximately 14 days of sales. Sales in 2010
amounted to $125,980,673 and the company expects growth in 2011 of 11% and in 2012 of 15%. Given this
information determine Office Mart, Inc.'s projected year-end cash balance for 2011 and 2012.
Annual Average Days Sales Year-end

Sales Sales/Day in Cash Cash Bal.
2010 $125,980,673 Sales/365 Given Sales/Day *14
2011 $139,838,547 383,119 14 $5,363,670
2012 $160,814,329 440,587 14 $6,168,221
55. The following information about Douglas Corp.’s Accounts Receivable and Sales are presented below:
Year
2012-Beginnin
g Balance of
A/R = $791M
Year 2012
-Ending
Balance of A/R
= $807M
Year 2012 -
Sales =
$3,002M
Assumptions:
Sales growth
will be equal to
6% per year
A/R turnover
will stay
constant
throughout the
forecast period
Required:
a. Using this information, forecast Douglas Corp.’s the growth in Accounts Receivable for years 2013-2017.
b. What problem does a constant A/R turnover assumption cause?
c. Provide a solution to the problem caused by a constant A/R turnover assumption.
a.
2012 2013* 2014* 2015* 2016* 2017*

Sales $3,002 $3,182 $3,373 $3,575 $3,790 $4,017
Beg. A/R balance $791 807 887 909 995 1,023
Ending A/R balance $807 887 909 995 1,023 1,116
Sales Growth Rate 6%

A/R turnover 3.76
Growth in A/R 9.90% 2.48% 9.46% 2.81% 9.09%
b. The constant A/R turnover assumption results in the sawtooth forecasting problem.
c.
2012 2013* 2014* 201 2016* 201
5* 7*
Sales $3,002 $3,182 $3,373 $3,575 $3,790 $4,017
Beg. A/R balance $791 807 887 909 995 1,023
Ending A/R balance $807 887 909 995 1,023 1,116
Sales Growth Rate 6%

A/R turnover 3.76
Yearly Growth in A/R 9.90% 2.48% 9.46% 2.81% 9.09%
Compound Average growth in 6.69%

A/R=
A/R based on CAGR year 1 Y2* Y3* Y4* Y5* Y6*
Beginning Balance $791 807 861 919 980 1,046

Ending Balance $807 861 919 980 1,046 1,116
Growth in A/R 6.69% 6.69% 6.69% 6.69% 6.69%
One potential solution is to: not use the average balance sheet account balance when initially calculating turnover ratios-but rather base it on the
ending balance. Then forecast using average turnover ratios and then smooth changes using the compound average growth rate.
56. The following balance sheet and income statement pertain to Goode Corp., using the following assumptions
complete a forecasted 2013 income statement:
Assumpt
ions for
2013:
Revenue growth rate 32%
COGS 64% of sales
Operating expenses 23% of sales
Interest expense 10% of
beginning
long-term
debt
Tax rate 35%
Goode Corp. Consolidated Statement of Income
(Thousands except per share amounts) 2012
Net Revenues $345,871

Cost of Revenue (226,546)
SG&A (83,009)
Operating Income 36,316
Interest Expense (484)
Income Before Income Taxes 35,832
Income taxes (12,541)
Net Income $23,291
Goode Corp Consolidated Balance Sheet

(Thousands) 2012
Current Assets
Cash and Equivalents 7,905
Merchandise inventory 6,308
Accounts receivable 6,614
PPE (including intangibles), net 39,458
Total Assets 60,285
Liabilities and Stockholders' Equity

Accounts payable 9,643
Long-term debt 13,500
Shareholders' Equity
Common stock and APIC 28,613
Retained earnings 8,529
Total Liabilities and Shareholders' Eq. 60,285
Goode Corp. Consolidated Statements of Income

(Thousands except per share amounts) 2013 2012
Net Revenues $456,550 $345,871

SG&A (105,006) (83,009)
Operating Income 59,352 36,316
Interest Expense (1,350) (484)
Income Before Income Taxes 58,002 35,832
Income taxes (20,301) (12,541)
Net Income $37,701 $23,291
57. Simmons Company
These data represent a summary of your first-iteration forecast amounts for Year 1. Simmons uses dividends as
a flexible financial account.
Year + 1
Operating Income $ 58
Interest Expense 8
Income before Tax $ 50
Tax Provision (20.0 percent effective tax rate) 10
Net Income $ 40
Total Assets $200
Long-Term Debt $ 80
Common Stock, at par $ 20
Retained Earnings (at the beginning of Year 1) $ 34
A. See the information for Simmons Company.
Compute the amount of dividends you can assume that Simmons will pay in order to balance your projected balance sheet. Present the projected
balance sheet.
B. See the information for Simmons Company.

Now assume that Simmons pays common shareholders a dividend of $25 in Year +1. Also assume that Simmons uses long-term debt as a flexible
financial account, increasing borrowing when it needs capital and paying down debt when it generates excess capital. For simplicity, assume that
Simmons pays 10.0 percent interest expense on the ending balance in long-term debt for the year and that interest expense is tax deductible at
Simmons' average tax rate of 20.0 percent.
Present the projected income statement and balance sheet for Year +1. (Hint: Because of the circularity between interest expense, net income,
and debt, several iterations may be needed to balance the projected balance sheet and to have the projected balance sheet articulate with net income.
You may find it helpful to program a spreadsheet to work the iterative computations.)
A. This problem basically asks students to compute the plug to dividends to balance the balance sheet for
Simmons Company for Year +1. Students can compute the plug to dividends as follows:
Year +1 Balance Sheet Amounts before Plugging Dividends:

Total Assets $ 200
Long-Term Debt $ 80
Common Stock (at par) $ 20
Beginning Retained Earnings $ 34
Year +1 Net Income $ 40
Total Liabilities and Equity
before Plugging Dividends $ 217
Necessary plug to increase dividends to balance the balance sheet: $17.
Year +1 Balance Sheet Amounts after Plugging Dividends:

Total Assets $ 200
Long-Term Debt $ 80
Ending Retained Earnings $ 57 = ($34 + $40 – $17)
Total Liabilities and Equity $ 200
B. This problem asks students to compute the plug to long-term debt to balance the balance sheet for Simmons
Company for Year +1. This problem introduces circularity to balancing the balance sheet because the amount
of debt needed depends on net income, which is affected by the interest expense on the amount of debt
needed. Students should input these amounts into a spreadsheet and have the spreadsheet compute the amounts
iteratively. Students should obtain the following amounts:
Year +1
Projected Income Statement Amounts
Operating Income $ 58.00
Interest Expense –8.87
Income before Tax $ 49.13
Tax Provision (20.0 percent rate) –9.83
Net Income $ 39.30
Year +1
Projected Balance Sheet Amounts
Total Assets $ 200
Long-Term Debt $ 88.70
Retained Earnings (end of Year +1) $ 48.30 = ($34+$39.30–$25)
Total Liabilities and Shareholders’ Equity $ 200
58. Repair Specialists is a leading retailer of home improvement products. It operates large warehouse-style
stores. Despite declining sales and difficult economic conditions in 2009 and 2010, Repair Specialists continued
to invest in new stores. The following table provides summary data for Repair Specialists.
Repair Specialists 2009 2010

(amounts in millions except number of stores)
Number of stores 2,234 2,274
Sales revenues $77,349 $71,288
Inventory $11,731 $10,673
Capital expenditures, net $ 3,558 $ 1,847
Required
a. Use the preceding data for Repair Specialists to compute average revenues per store,
capital spending per new store, and ending inventory per store in 2010.
b. Assume that Repair Specialists will add 100 new stores by the end of Year 1. Use
the data from 2010 to project Year 1 sales revenues, capital spending, and ending
inventory. Assume that each new store will be open for business for an average of
one-half year in Year 1. For simplicity, assume that in Year 1, Repair Specialists’ sales
revenues will grow, but only because it will open new stores.
In this problem, students work through the computations to project revenue, capital expenditures, and ending
inventory for Repair Specialists, using 100 new stores as the driver of growth forecasts in Year +1. The
problem requires students to use the average number of stores to compute sales, the number of new stores to
compute capital expenditures, and the ending number of total stores to compute ending inventory. The data and
computations follow:
Repair Specialists (Data in Mil- REQ. B

lions Except Number of Stores) 2009 2010 Year +1 Computations
Number of Stores 2,234 2,274 2,374
New Stores 40 100
Average Stores 2,254 2,324
Sales Revenues $ 77,349 $ 71,288 $ 73,502 =2,324x$31.63

REQ. A Sales per Average Store $ 31.63 =$71,288/2,254
Inventory $ 11,731 $ 10,673 $ 11,134 =2,374 x $4.69

REQ. A Ending Inventory per Store $ 4.69 =$10,673/2,274
Capital Expenditures (Net) $ 3,558 $ 1,847 $ 4,618 = 100 x $46.18

REQ. A Capital Expenditures per
New Store $ 46.18 = $1,847/40
59. Techtronics is a leader in manufacturing computer chips, which is very capital-intensive. Because the
production processes in computer chip manufacturing require sophisticated and rapidly changing technology,
production and manufacturing assets in the chip industry tend to have relatively short useful lives.
The following summary information relates to Techtronics’ property, plant, and

equipment for 2009 and 2010:
Techtronics (amounts in millions) 2009 2010

Property, Plant, and Equipment, at cost $ 46,052 $ 48,088
Accumulated Depreciation $(29,134) $(30,544)
Property, Plant, and Equipment, net $ 16,918 $ 17,544
Depreciation Expense $ 4,360
Capital Expenditures, net $ 5,200
Required
Assume that Techtronics depreciates all property, plant, and equipment using the straight-line
depreciation method and zero salvage value. Assume that Intel spends $6,000 on new
depreciable assets in Year 1 and does not sell or retire any property, plant, and equipment
during Year 1.
a. Compute the average useful life that Techtronics used for depreciation in 2010.
b. Project total depreciation expense for Year 1 using the following steps: (i) project
depreciation expense for Year 1 on existing property, plant, and equipment at the
end of 2010; (ii) project depreciation expense on capital expenditures in Year 1
assuming that Intel takes a full year of depreciation in the first year of service; and
(iii) sum the results of (i) and (ii) to obtain total depreciation expense for Year 1.
c. Project the Year 1 ending balance in property, plant, and equipment, both at cost
and net of accumulated depreciation.
This problem gets students working through the computations to project property, plant, and equipment and
depreciation expense for Year +1 for Techtronics, a leading manufacturer of computer chips.
a. The average useful life that Techtronics used in 2010 for depreciation was 10.80 years, computed as
follows:
Useful Life 10.80 Years (= [($46,052 + $48,088)/2]/$4,360)
b. Depreciation expense for Year +1 on (i) existing property, plant, and equipment at the end of 2010; (ii)
capital expenditures in Year +1 assuming that there is $6,000 in expenditures on depreciable assets in Year +1
and assuming that Intel takes a full year of depreciation in the first year of service; and (iii) the sum of (i) and
(ii) to obtain total depreciation expense for Year +1:
Depreciation Expense on Existing PPE $ 4,453 (=$48,088/10.80 Years)

Depreciation Expense on Year +1 Capital
Expenditures $ 556 (= $6,000/10.80 Years)
Total Depreciation Expense $5,009 (= $4,453 + $556)
c. The Year +1 ending balance in property, plant, and equipment, both at cost and net of accumulated
depreciation:
Techtronics (Data in Millions) 2009 2010 Year +1 Computations

Property, Plant, and Equip., at Cost $ 46,052 $ 48,088 $ 54,088 (= $48,088 + $6,000)
Accumulated Depreciation -29,134 -30,544 -35,553 (= $-30,544 - $5,009)
Property, Plant and Equip. (Net) 16,918 17,544 18,535 (= $54,088 - $35,553)
Depreciation Expense 4,360 5,009 Computed above
Capital Expenditures (Net) 5,200 6,000 Assumed
60. Arco is an integrated manufacturer in capital-intensive industry. Nuwak manufactures more
commodity-level products in the same industry at the lower end of the market and uses less capital-intensive
processes. The following data describe sales and cost of products sold for both firms for Years 3 and 4.
($ amounts in millions) Year 3 Year 4

Arco
Sales $4,042 $ 5,217
Gross Profit $ 155 $ 663
Nuwak
Sales $6,266 $11,377
Gross Profit $ 269 $ 2,248
Industry analysts anticipate the following annual changes in sales for the next five years:
Year +1, 5 percent increase; Year +2, 10 percent increase; Year +3, 20 percent increase; Year +4, 10 percent decrease; Year +5, 20 percent decrease.
Required
a. The analyst can sometimes estimate the variable cost as a percentage of sales for a
particular cost (for example, cost of products sold) by dividing the amount of the
change in the cost item between two years by the amount of the change in sales for
those two years. The analyst can then multiply the variable-cost percentage times
sales to estimate the total variable cost. Subtracting the variable cost from the total
cost yields an estimate of the fixed cost for that particular cost item. Follow this procedure
to estimate the manufacturing cost structure (variable cost as a percentage of
sales, total variable costs, and total fixed costs) for cost of products sold for both Arco and Nuwak in Year 4.
b. Discuss the structure of manufacturing cost (that is, fixed versus variable) for each
firm in light of the manufacturing process and type of product produced.
c. Using the analysts’ forecasts of sales changes, compute the projected sales, cost of
products sold, gross profit, and gross margin (gross profit as a percentage of sales)
of each firm for Year +1 through Year +5.
d. Why do the levels and variability of the gross margin percentages differ for these two
firms for Year +1 through Year +5?
a. Compute the cost structure for each firm as follows:

Variable Cost per Dollar of Sales = Change in Cost of Products Sold/Change in
Sales
Total Variable Cost = Variable Cost per Dollar of Sales x Sales
Total Fixed Cost = Total Cost of Product Sold – Total Variable Cost
Arco:
Variable Cost per Dollar of Sales = ($4,554 – $3,887)/($5,217 – $4,042) =
$0.568
Total Variable Cost = $0.568 x $5,217 = $2,963 (65% of cost of products sold)
Total Fixed Cost = $4,554 – $2,963 = $1,591 (35% of cost of products sold)
Nuwak:
Variable Cost per Dollar of Sales = ($9,129 – $5,997)/($11,377 – $6,266)
= $0.613
Total Variable Cost = $0.613 x $11,377 = $6,974 (76% of cost of products sold)
Total Fixed Cost = $9,129 – $6,974 = $2,155 (24% of cost of products sold)
b. Arco is more capital-intensive than Nuwak and therefore has a higher proportion of fixed costs and a
lower proportion of variable costs in its cost structure. Arco also offers products at the higher end of the market
than Nuwak does and should, therefore, have higher selling prices and a higher gross margin. Both of these
factors explain the lower variable cost as a percentage of sales for Arco.
c. (Amounts in Millions)
Arco
Year +1 Year +2 Year +3 Year +4 Year +5
Sales $5,478 $6,026 $7,231 $6,508 $5,206
Less Cost of Products Sold:
Variable Costs (.568 of sales) 3,112 3,423 4,107 3,697 2,957
Fixed Costs 1,591 1,591 1,591 1,591 1,591
Total Costs of Products Sold 4,703 5,014 5,698 5,288 4,548
Gross Profit $ 775 $1,012 $1,533 $1,220 $ 658
Gross Margin % 14.1% 16.8% 21.2% 18.7% 12.6%
Nuwak
Year +1 Year +2 Year +3 Year +4 Year +5
Sales $11,946 $13,140 $15,768 $14,191 $11,353
Less Cost of Products Sold:
Variable Costs (.613 of sales) 7,323 8,055 9,666 8,699 6,959
Fixed Costs 2,155 2,155 2,155 2,155 2,155
Total Costs of Products Sold 9,478 10,210 11,821 10,854 9,114
Gross Profit $2,467 $2,931 $3,947 $3,337 $2,239
Gross Margin % 20.7% 22.3% 25.0% 23.5% 19.7%
d. The average gross margin of Arco is 16.7 percent, with a standard deviation of 3.5 percent. The average gross margin of Nuwak is 22.2
percent, with a standard deviation of 2.1 percent. Despite a higher variable cost per dollar of sales and larger total fixed costs, Nuwak generates a
higher gross margin than Arco because Nuwak’s much larger size creates economies of scale. For example, Nuwak’s fixed costs are 24 percent of
cost of products sold compared to Arco’s fixed costs, which amount to 35 percent of the cost of products sold. The larger variability of the gross
margin for Arco also occurs because of the higher proportion of fixed costs in its cost structure. Compared with Nuwak, Arco realizes greater
incremental economies of scale as sales increase but greater diseconomies of scale as sales decrease. For example, given the same rates of sales
growth over Years +1 to +3, Arco’s gross margin grows from 14.1 percent to 21.2 percent, whereas Nuwak’s gross margin percentage grows from
only 20.7 percent to 25.0 percent.
61. Saunders Corporation manufactures consumer electronics products. Selected income statement data for
2009 and 2010 follow (amounts in millions of dollars):
Saunders Corporation (amounts in millions of dollars) 2009 2010

Sales 8,296 8,871
Selling and Administrative Expenses (1,788) (1,714)
Operating Income before Income Taxes 618 867
Required
a. The analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost (for example, cost of goods sold) by dividing the
amount of the change in the cost item between two years by the amount of the change in sales for those two years. The analyst can then multiply total
sales by the variable-cost percentage to determine the total variable cost. Subtracting the variable cost from the total cost yields the fixed cost
component for that particular cost item. Follow this procedure to determine the cost structure (fixed cost plus variable cost as a percentage of sales)
for cost of goods sold for Saunders.
b. Repeat requirement a. for selling and administrative expenses.
c. Saunders Corporation discloses that it expects sales to grow at the following percentages
in future years: Year 1, 12 percent; Year 2, 10 percent; Year 3, 8 percent; Year 4, 6 percent. Project sales, cost of goods sold, selling and
administrative expenses, and operating income before income taxes for Saunders for Year 1 to Year 4 using the cost structure amounts derived in
requirements a. and b.
d. Compute the ratio of operating income before income taxes to sales for Year 1 through Year 4.
e. Interpret the changes in the ratio computed in requirement d. in light of the expected changes in sales.
Identifying the Cost Structure (Amounts in Millions of Dollars ).

a. Change in Cost of Goods Sold: ($6,290 – $5,890) $ 400
Change in Sales: ($8,871 – $8,296) $ 575
Variable Cost Percentage: $400/$575 .696
Fixed Cost: 2009, [$5,890 – (.696 x $8,296] $ 116
2010, [$6,290 – (.696 x $8,871] $ 116
b. Change in Selling and Administrative Expense: ($1,714 – $1,670) $ 44

Change in Sales: from Part a $ 575
Variable Cost Percentage: $44/$575 .077
Fixed Cost: 2009, [$1,670 – (.077 x $8,296)] 1,031
Fixed Cost: 2010, [$1,714 – (.077 x $8,871)] 1,031
c. and d. Year +1 Year +2 Year +3 Year+4

Sales $ 9,936 $10,929 $ 11,804 $12,512
Cost of Goods Sold:
Fixed (116) (116) (116) (116)
Variable (.696 of Sales) (6,915) (7,607) (8,216) (8,708)
Selling and Administrative Expense:
Fixed (1,031) (1,031) (1,031) (1,031)
(.077 of Sales) (765) (842) (909) (963)
Operating Income before Income
Taxes $ 1,109 $ 1,333 $ 1,532 $1,694
Operating Income before Income
Taxes/Sales 11.2% 12.2% 13.0% 13.5%
e. The percentage of operating income before income taxes to sales increases over time because Saunders
Corporation spreads its fixed operating costs over a larger sales volume. These increasing percentages do not
portray a full picture of the changes in the firm’s profitability. Although sales are projected to increase, they
increase at a continually decreasing rate. It is likely that Saunders Corporation would adjust its selling prices,
manufacturing costs, or selling and administrative costs in response to the projected declining rate of growth in
sales. Such adjustments would change the cost structure computed in requirements a. and b. above.
62. Hart designs, manufactures, and markets toys in domestic and international markets. Sales during 2010
totaled $4,022 million. Accounts receivable totaled $655 million at the beginning of 2010 and $612 million at
the end of 2010.
Required
a. Use the average balance to compute the accounts receivable turnover ratio for Hart for 2010.
b. Hart generated a compound annual sales growth rate of 13.0 percent over the past two years. Assume that
Hart's sales will continue to grow at that rate each year for Year +1 through Year +5 and that the accounts
receivable turnover ratio each year will equal the ratio computed in requirement a. for 2010. Project the amount
of accounts receivable at year-end through Year +5 based on the accounts receivable turnover computed in
requirement a. Also compute the percentage change in accounts receivable between each of the year-ends
through Year +5.
c. Does the pattern of growth in your projections of Hart's accounts receivable seem
reasonable considering the assumptions of smooth growth in sales and steady turnover? Explain.
d. The changes in accounts receivable computed in requirement b. display the sawtooth pattern depicted in
Exhibit 10.5 in the text. Smooth the changes in accounts receivable by computing the year-end accounts
receivable balances for Year 1 through Year 5 using the compound annual growth rate in accounts receivable
between the end of 2010 and the end of Year +1 from requirement b.
e. Smooth the changes in accounts receivable using the compound annual growth rate in accounts receivable
between the end of 2010 and the end of Year +4 from requirement b. Apply this growth rate to compute
accounts receivable at the end of Year +1 through Year +5. Why do the amounts for ending accounts receivable
using the growth rate from requirement d. differ from those using the growth rate from this requirement?
f. Compute the accounts receivable turnover for 2010 by dividing sales by the balance in accounts receivable at
the end of 2010 (instead of using average accounts receivable as in requirement a). Use this accounts receivable
turnover ratio to compute the projected balance in accounts receivable at the end of Year +1 through Year +5.
Also compute the percentage change in accounts receivable between the year-ends for Year +1 through Year
+5.
(In Millions).
a. Hart accounts receivable turnover: $4,022/[.5($655 + $612)] = 6.35.
b. Percentage
Accounts Average Ending Accounts Receivable Change in
Receivable Accounts Beginning End of Accounts
Sales Turnover Receivable of Year Year Receivable
Year +1 $4,543 6.35 $ 716 $ 612 $ 819 +33.8%
Year +2 $5,132 6.35 808 819 798 –2.6%
Year +3 $5,797 6.35 913 798 1,029 +29.0%
Year +4 $6,548 6.35 1,031 1,029 1,034 +0.5%
Year +5 $7,397 6.35 1,165 1,034 1,298 +25.5%
c. The changes in receivables exhibit the sawtooth pattern described in the chapter and in Exhibit
10.5. Such a pattern does not seem reasonable in light of the assumptions of smooth growth in sales and steady
accounts receivable turnover. The cause of the sawtooth pattern is the slight drop in receivables during 2010,
which causes the change in receivables in Year +1 to be unusually large to compensate; the same holds true for
Year +2, Year +3, and Year +4, and so on.
d. The increase in accounts receivable from $612 million at the of 2010 to $1,296 million at the end of Year
+5 represents a compound annual rate of growth of 16.2 percent over those five years. Using this rate of
growth to project a smooth pattern of receivables growth leads to the following projections:
Ending Accounts Receivable

Year +1 $ 612 x 1.162 = $ 711
Year +2 $ 711 x 1.162 = $ 826
Year +3 $ 826 x 1.162 = $ 960
Year +4 $ 960 x 1.162 = $ 1,116
Year +5 $ 1,116 x 1.162 = $ 1,297
e. An increase in accounts receivable from $612 million to $1,034 million over four years represents a
compound annual rate of growth of 14.0 percent.
Ending Accounts Receivable

Year +1 $ 612 x 1.14 = $ 698
Year +2 $ 698 x 1.14 = $ 795
Year +3 $ 795 x 1.14 = $ 907
Year +4 $ 907 x 1.14 = $ 1,034
Year +5 $ 1,034 x 1.14 = $ 1,178
The difference in growth rate in Parts d. and e. results from using an ending accounts receivable date that is
an upward “sawtooth” (Part c.) and a downward “sawtooth” (Part d.). Observe from Part b. that accounts
receivable increased 0.5 percent during Year +4 (a down “sawtooth”) but increased 25.3 percent during Year +5
(an up “sawtooth”).
f. Turnover based on year-end accounts receivable balance: $4,022/$612 = 6.57

Accounts Accounts Receivable Change in
Receivable Beginning End of Accounts
Sales Turnover of Year Year Receivable
Year +1 $4,543 6.57 $ 612 $ 691 13.0%
Year +2 $5,132 6.57 691 781 13.0%
Year +3 $5,797 6.57 781 882 13.0%
Year +4 $6,548 6.57 882 997 13.0%
Year +5 $7,397 6.57 997 1,126 13.0%
63. Benson sells books through retail stores and on the Web. For a retailer like Benson, inventory is a critical
element of the business and it is necessary to carry a wide array of titles. In 2010, sales totaled $5,122 million
and cost of sales and occupancy totaled $3,541 million. Inventories constitute the largest asset on Benson’s
balance sheet, totaling $1,203 million at the end of 2010 and $1,358 million at the end of 2009.
Required
a. Compute the inventory turnover ratio for Benson for 2010.
b. Over the last two years, the number of Benson retail stores has remained fairly steady and sales have grown
at a compounded annual rate of 11.6 percent. Assume that the number of stores will remain constant and that
sales will continue to grow at an annual rate of 11.6 percent each year between Year +1 and Year +5. Also
assume that the future cost of goods sold to sales percentage will equal that realized in 2010 (which is very
similar to the cost of goods sold percentage over the past three years). Project the amount of inventory at the
end of Year +1 through Year +5 using the inventory turnover ratio computed in Part a. Also compute the
percentage change in inventories between each of the year-ends between 2010 and Year +5. Does the pattern of
growth in your projections of Benson inventory seem reasonable to you considering the assumptions of smooth
growth in sales and steady cost of goods sold percentages? Explain.
c. The changes in inventories in Part b display the sawtooth pattern depicted in Exhibit 10.5 of the text. Smooth
the changes in the inventory forecasts between 2010 and Year +5 using the compound annual growth rate in
inventories between the end of 2010 and the end of Year +5 implied by the projections in Part b. Does this
pattern of growth seem more reasonable? Explain.
d. Now suppose that instead of following the smoothing approach in Part c, you used the rate of growth in
inventory during 2010 to project future inventory balances at the end of Year +1 through Year +5. Use these
projections to compute the implied inventory turnover rates. Does this pattern of growth and efficiency in
inventory for Benson seem reasonable? Explain.
(Assume Amounts in Thousands).
a. Benson inventory turnover: $3,541/[.5($1,358 + $1,203)] = 2.77
b. Cost of Inventories Percentage

Goods Inventory Average Beginning End of Change in
Sold Turnover Inventories of Year Year Inventories
Year +1 $3,952 2.77 $ 1,427 $ 1,203 $ 1,655 +37.6%
Year +2 $4,410 2.77 $ 1,595 $ 1,655 $ 1,535 –7.3%
Year +3 $4,922 2.77 $ 1,780 $ 1,535 $ 2,025 +32.0%
Year +4 $5,493 2.77 $ 1,986 $ 2,025 $ 1,947 –3.8%
Year +5 $6,130 2.77 $ 2,217 $ 1,947 $ 2,486 +27.6%
These projections exhibit substantial volatility in ending inventory, which is unrealistic considering the
assumptions of smooth growth in sales and costs of sales.
c. The above projections indicate an increase in inventories from $1,203 to $2,486 over five years,
representing a compound annual rate of growth of 15.62 percent [= ($2,486/$1,203)^(1/5)–1].
Ending Inventories
Year +1 $ 1,203 x 1.1562 = $1,391
Year +2 $1,391 x 1.1562 = $1,608
Year +3 $1,608 x 1.1562 = $1,859
Year +4 $1,859 x 1.1562 = $2,150
Year +5 $2,150 x 1.1562 = $2,486
These smoothed inventory forecasts more closely match the assumptions of smooth growth in sales and costs of
goods sold.
d. Benson inventories actually decreased from $1,358 at the end of 2009 to $1,203 at the end of 2010, a
decline of 11.4 percent. Using this growth rate leads to the following projections of inventories and implied
turnover rates:
Ending Inventories Implied Turnover

Year +1 $1,203 x 0.886 = $1,066 $3,952/[($1,203 + $1,066)/2] = 3.48
Year +2 $1,066 x 0.886 = $944 $4,410/[($1,066 + $944)/2] = 4.39
Year +3 $944 x 0.886 = $836 $4,922/[($944 + $836)/2] = 5.53
Year +4 $836 x 0.886 = $741 $5,493/[($836 + $741)/2] = 6.97
Year +5 $741 x 0.886 = $656 $6,130/[($741 + $656)/2] = 8.77
This problem demonstrates that simply assuming that past growth rates will persist can lead to unreasonable
forecasts. In this case, it is highly unlikely that Benson can continue to decrease inventory while at the same
time generating an increase in sales. It would be very unusual for a retail bookstore such as Benson to be able
to achieve 8.77 inventory turns a year by Year +5.
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the red glare and the muffled tom-toms. There are vocal qualities
peculiar to men, and vocal qualities peculiar to beasts; and it is
terrible to hear the one when the source should yield the other.
Animal fury and orgiastic license here whipped themselves to
demoniac heights by howls and squawking ecstasies that tore and
reverberated through those nighted woods like pestilential tempests
from the gulfs of hell. Now and then the less organized ululations
would cease, and from what seemed a well-drilled chorus of hoarse
voices would rise in singsong chant that hideous phrase or ritual:
"Ph'nglui mglw'nafh Cthulhu R'lyeh wgah'nagl fhtagn."
Then the men, having reached a spot where the trees were thinner,
came suddenly in sight of the spectacle itself. Four of them reeled,
one fainted, and two were shaken into a frantic cry which the mad
cacophony of the orgy fortunately deadened. Legrasse dashed
swamp water on the face of the fainting man, and all stood trembling
and nearly hypnotized with horror.
In a natural glade of the swamp stood a grassy island of perhaps an
acre's extent, clear of trees and tolerably dry. On this now leaped
and twisted a more indescribable horde of human abnormality than
any but a Sime or an Angarola could paint. Void of clothing, this
hybrid spawn were braying, bellowing and writhing about a
monstrous ring-shaped bonfire; in the center of which, revealed by
occasional rifts in the curtain of flame, stood a great granite monolith
some eight feet in height; on top of which, incongruous in its
diminutiveness, rested the noxious carven statuette. From a wide
circle of ten scaffolds set up at regular intervals with the flame-girt
monolith as a center hung, head downward, the oddly marred bodies
of the helpless squatters who had disappeared. It was inside this
circle that the ring of worshipers jumped and roared, the general
direction of the mass motion being from left to right in endless
bacchanale between the ring of bodies and the ring of fire.
It may have been only imagination and it may have been only
echoes which induced one of the men, an excitable Spaniard, to
fancy he heard antiphonal responses to the ritual from some far and
unillumined spot deeper within the wood of ancient legendry and
horror. This man, Joseph D. Galvez, I later met and questioned; and
he proved distractingly imaginative. He indeed went so far as to hint
of the faint beating of great wings, and of a glimpse of shining eyes
and a mountainous white bulk beyond the remotest trees—but I
suppose he had been hearing too much native superstition.
Actually, the horrified pause of the men was of comparatively brief
duration. Duty came first; and although there must have been nearly
a hundred mongrel celebrants in the throng, the police relied on their
firearms and plunged determinedly into the nauseous rout. For five
minutes the resultant din and chaos were beyond description. Wild
blows were struck, shots were fired, and escapes were made; but in
the end Legrasse was able to count some forty-seven sullen
prisoners, whom he forced to dress in haste and fall into line
between two rows of policemen. Five of the worshipers lay dead,
and two severely wounded ones were carried away on improvised
stretchers by their fellow-prisoners. The image on the monolith, of
course, was carefully removed and carried back by Legrasse.
Examined at headquarters after a trip of intense strain and
weariness, the prisoners all proved to be men of a very low, mixed-
blooded, and mentally aberrant type. Most were seamen, and a
sprinkling of negroes and mulattoes, largely West Indians or Brava
Portuguese from the Cape Verde Islands, gave a coloring of
voodooism to the heterogeneous cult. But before many questions
were asked, it became manifest that something far deeper and older
than negro fetishism was involved. Degraded and ignorant as they
were, the creatures held with surprizing consistency to the central
idea of their loathsome faith.
They worshiped, so they said, the Great Old Ones who lived ages
before there were any men, and who came to the young world out of
the sky. Those Old Ones were gone now, inside the earth and under
the sea; but their dead bodies had told their secrets in dreams to the
first man, who formed a cult which had never died. This was that
cult, and the prisoners said it had always existed and always would
exist, hidden in distant wastes and dark places all over the world
until the time when the great priest Cthulhu, from his dark house in
the mighty city of R'lyeh under the waters, should rise and bring the
earth again beneath his sway. Some day he would call, when the
stars were ready, and the secret cult would always be waiting to
liberate him.
Meanwhile no more must be told. There was a secret which even
torture could not extract. Mankind was not absolutely alone among
the conscious things of earth, for shapes came out of the dark to visit
the faithful few. But these were not the Great Old Ones. No man had
ever seen the Old Ones. The carven idol was great Cthulhu, but
none might say whether or not the others were precisely like him. No
one could read the old writing now, but things were told by word of
mouth. The chanted ritual was not the secret—that was never
spoken aloud, only whispered. The chant meant only this: "In his
house at R'lyeh dead Cthulhu waits dreaming."
Only two of the prisoners were found sane enough to be hanged,

and the rest were committed to various institutions. All denied a part
in the ritual murders, and averred that the killing had been done by
Black-winged Ones which had come to them from their immemorial
meeting-place in the haunted wood. But of those mysterious allies no
coherent account could ever be gained. What the police did extract
came mainly from an immensely aged mestizo named Castro, who
claimed to have sailed to strange ports and talked with undying
leaders of the cult in the mountains of China.
Old Castro remembered bits of hideous legend that paled the
speculations of theosophists and made man and the world seem
recent and transient indeed. There had been eons when other
Things ruled on the earth, and They had had great cities. Remains of
Them, he said the deathless Chinamen had told him, were still to be
found as Cyclopean stones on islands in the Pacific. They all died
vast epochs of time before man came, but there were arts which
could revive Them when the stars had come round again to the right
positions in the cycle of eternity. They had, indeed, come themselves
from the stars, and brought Their images with Them.
These Great Old Ones, Castro continued, were not composed
altogether of flesh and blood. They had shape—for did not this star-
fashioned image prove it?—but that shape was not made of matter.
When the stars were right, They could plunge from world to world
through the sky; but when the stars were wrong, They could not live.
But although They no longer lived, They would never really die. They
all lay in stone houses in Their great city of R'lyeh, preserved by the
spells of mighty Cthulhu for a glorious resurrection when the stars
and the earth might once more be ready for Them. But at that time
some force from outside must serve to liberate Their bodies. The
spells that preserved Them intact likewise prevented Them from
making an initial move, and They could only lie awake in the dark
and think whilst uncounted millions of years rolled by. They knew all
that was occurring in the universe, for Their mode of speech was
transmitted thought. Even now They talked in Their tombs. When,
after infinities of chaos, the first men came, the Great Old Ones
spoke to the sensitive among them by molding their dreams; for only
thus could Their language reach the fleshly minds of mammals.
Then, whispered Castro, those first men formed the cult around
small idols which the Great Ones showed them; idols brought in dim
eras from dark stars. That cult would never die till the stars came
right again, and the secret priests would take great Cthulhu from His
tomb to revive His subjects and resume His rule of earth. The time
would be easy to know, for then mankind would have become as the
Great Old Ones; free and wild and beyond good and evil, with laws
and morals thrown aside and all men shouting and killing and
reveling in joy. Then the liberated Old Ones would teach them new
ways to shout and kill and revel and enjoy themselves, and all the
earth would flame with a holocaust of ecstasy and freedom.
Meanwhile the cult, by appropriate rites, must keep alive the memory
of those ancient ways and shadow forth the prophecy of their return.
In the elder time chosen men had talked with the entombed Old
Ones in dreams, but then something had happened. The great stone
city R'lyeh, with its monoliths and sepulchers, had sunk beneath the
waves; and the deep waters, full of the one primal mystery through
which not even thought can pass, had cut off the spectral
intercourse. But memory never died, and high priests said that the
city would rise again when the stars were right. Then came out of the
earth the black spirits of earth, moldy and shadowy, and full of dim
rumors picked up in caverns beneath forgotten sea-bottoms. But of
them old Castro dared not speak much. He cut himself off hurriedly,
and no amount of persuasion or subtlety could elicit more in this
direction. The size of the Old Ones, too, he curiously declined to
mention. Of the cult, he said that he thought the center lay amid the
pathless deserts of Arabia, where Irem, the City of Pillars, dreams
hidden and untouched. It was not allied to the European witch-cult,
and was virtually unknown beyond its members. No book had ever
really hinted of it, though the deathless Chinamen said that there
were double meanings in the Necronomicon of the mad Arab Abdul
Alhazred which the initiated might read as they chose, especially the
much-discussed couplet:
"That is not dead which can eternal lie,

And with strange eons even death may die."
Legrasse, deeply impressed and not a little bewildered, had inquired

in vain concerning the historic affiliations of the cult. Castro,
apparently, had told the truth when he said that it was wholly secret.
The authorities at Tulane University could shed no light upon either
cult or image, and now the detective had come to the highest
authorities in the country and met with no more than the Greenland
tale of Professor Webb.
The feverish interest aroused at the meeting by Legrasse's tale,

corroborated as it was by the statuette, is echoed in the subsequent
correspondence of those who attended, although scant mention
occurs in the formal publication of the society. Caution is the first
care of those accustomed to face occasional charlatanry and
imposture. Legrasse for some time lent the image to Professor
Webb, but at the latter's death it was returned to him and remains in
his possession, where I viewed it not long ago. It is truly a terrible
thing, and unmistakably akin to the dream-sculpture of young Wilcox.
That my uncle was excited by the tale of the sculptor I did not
wonder, for what thoughts must arise upon hearing, after a
knowledge of what Legrasse had learned of the cult, of a sensitive
young man who had dreamed not only the figure and exact
hieroglyphics of the swamp-found image and the Greenland devil
tablet, but had come in his dreams upon at least three of the precise
words of the formula uttered alike by Eskimo diabolists and mongrel
Louisianans? Professor Angell's instant start on an investigation of
the utmost thoroughness was eminently natural; though privately I
suspected young Wilcox of having heard of the cult in some indirect
way, and of having invented a series of dreams to heighten and
continue the mystery at my uncle's expense. The dream-narratives
and cuttings collected by the professor were, of course, strong
corroboration; but the rationalism of my mind and the extravagance
of the whole subject led me to adopt what I thought the most
sensible conclusions. So, after thoroughly studying the manuscript
again and correlating the theosophical and anthropological notes
with the cult narrative of Legrasse, I made a trip to Providence to see
the sculptor and give him the rebuke I thought proper for so boldly
imposing upon a learned and aged man.
Wilcox still lived alone in the Fleur-de-Lys Building in Thomas Street,
a hideous Victorian imitation of Seventeenth Century Breton
architecture which flaunts its stuccoed front amidst the lovely
Colonial houses on the ancient hill, and under the very shadow of
the finest Georgian steeple in America. I found him at work in his
rooms, and at once conceded from the specimens scattered about
that his genius is indeed profound and authentic. He will, I believe,
be heard from sometime as one of the great decadents; for he has
crystallized in clay and will one day mirror in marble those
nightmares and fantasies which Arthur Machen evokes in prose, and
Clark Ashton Smith makes visible in verse and in painting.
Dark, frail, and somewhat unkempt in aspect, he turned languidly at
my knock and asked me my business without rising. When I told him
who I was, he displayed some interest; for my uncle had excited his
curiosity in probing his strange dreams, yet had never explained the
reason for the study. I did not enlarge his knowledge in this regard,
but sought with some subtlety to draw him out.
In a short time I became convinced of his absolute sincerity, for he
spoke of the dreams in a manner none could mistake. They and their
subconscious residuum had influenced his art profoundly, and he
showed me a morbid statue whose contours almost made me shake
with the potency of its black suggestion. He could not recall having
seen the original of this thing except in his own dream bas-relief, but
the outlines had formed themselves insensibly under his hands. It
was, no doubt, the giant shape he had raved of in delirium. That he
really knew nothing of the hidden cult, save from what my uncle's
relentless catechism had let fall, he soon made clear; and again I
strove to think of some way in which he could possibly have received
the weird impressions.
He talked of his dreams in a strangely poetic fashion; making me see
with terrible vividness the damp Cyclopean city of slimy green stone
—whose geometry, he oddly said, was all wrong—and hear with
frightened expectancy the ceaseless, half-mental calling from
underground: "Cthulhu fhtagn," "Cthulhu fhtagn."
These words had formed part of that dread ritual which told of dead
Cthulhu's dream-vigil in his stone vault at R'lyeh, and I felt deeply
moved despite my rational beliefs. Wilcox, I was sure, had heard of
the cult in some casual way, and had soon forgotten it amidst the
mass of his equally weird reading and imagining. Later, by virtue of
its sheer impressiveness, it had found subconscious expression in
dreams, in the bas-relief, and in the terrible statue I now beheld; so
that his imposture upon my uncle had been a very innocent one. The
youth was of a type, at once slightly affected and slightly ill-
mannered, which I could never like; but I was willing enough now to
admit both his genius and his honesty. I took leave of him amicably,
and wish him all the success his talent promises.
The matter of the cult still remained to fascinate me, and at times I
had visions of personal fame from researches into its origin and
connections. I visited New Orleans, talked with Legrasse and others
of that old-time raiding-party, saw the frightful image, and even
questioned such of the mongrel prisoners as still survived. Old
Castro, unfortunately, had been dead for some years. What I now
heard so graphically at first hand, though it was really no more than
a detailed confirmation of what my uncle had written, excited me
afresh; for I felt sure that I was on the track of a very real, very
secret, and very ancient religion whose discovery would make me an
anthropologist of note. My attitude was still one of absolute
materialism, as I wish it still were, and I discounted with almost
inexplicable perversity the coincidence of the dream notes and odd
cuttings collected by Professor Angell.
One thing which I began to suspect, and which I now fear I know, is
that my uncle's death was far from natural. He fell on a narrow hill
street leading up from an ancient waterfront swarming with foreign
mongrels, after a careless push from a negro sailor. I did not forget
the mixed blood and marine pursuits of the cult-members in
Louisiana, and would not be surprized to learn of secret methods
and poison needles as ruthless and as anciently known as the
cryptic rites and beliefs. Legrasse and his men, it is true, have been
let alone; but in Norway a certain seaman who saw things is dead.
Might not the deeper inquiries of my uncle after encountering the
sculptor's data have come to sinister ears? I thing Professor Angell
died because he knew too much, or because he was likely to learn
too much. Whether I shall go as he did remains to be seen, for I
have learned much now.
3. The Madness from the Sea.

If heaven ever wishes to grant me a boon, it will be a total effacing of
the results of a mere chance which fixed my eye on a certain stray
piece of shelf-paper. It was nothing on which I would naturally have
stumbled in the course of my daily round, for it was an old number of
an Australian journal, Sydney Bulletin for April 18, 1925. It had
escaped even the cutting bureau which had at the time of its
issuance been avidly collecting material for my uncle's research.
I had largely given over my inquiries into what Professor Angell
called the "Cthulhu Cult," and was visiting a learned friend of
Paterson, New Jersey, the curator of a local museum and a
mineralogist of note. Examining one day the reserve specimens
roughly set on the storage shelves in a rear room of the museum, my
eye was caught by an odd picture in one of the old papers spread
beneath the stones. It was the Sydney Bulletin I have mentioned, for
my friend has wide affiliations in all conceivable foreign parts; and
the picture was a half-tone cut of a hideous stone image almost
identical with that which Legrasse had found in the swamp.
Eagerly clearing the sheet of its precious contents, I scanned the
item in detail; and was disappointed to find it of only moderate
length. What it suggested, however, was of portentous significance
to my flagging quest; and I carefully tore it out for immediate action.
It read as follows:
MYSTERY DERELICT FOUND AT SEA
Vigilant Arrives With Helpless Armed New Zealand Yacht in Tow.
One Survivor and Dead Man Found Aboard. Tale of Desperate Battle
and Deaths at Sea. Rescued Seaman Refuses Particulars of
Strange Experience. Odd Idol Found in His Possession. Inquiry to
Follow.
The Morrison Co.'s freighter Vigilant, bound from Valparaiso, arrived

this morning at its wharf in Darling Harbour, having in tow the battled
and disabled but heavily armed steam yacht Alert of Dunedin, N. Z.,
which was sighted April 12th in S. Latitude 34° 21', W. Longitude
152° 17', with one living and one dead man aboard.
The Vigilant left Valparaiso March 25th, and on April 2d was driven
considerably south of her course by exceptionally heavy storms and
monster waves. On April 12th the derelict was sighted; and though
apparently deserted, was found upon boarding to contain one
survivor in a half-delirious condition and one man who had evidently
been dead for more than a week.
The living man was clutching a horrible stone idol of unknown origin,
about a foot in height, regarding whose nature authorities at Sydney
University, the Royal Society, and the Museum in College Street all
profess complete bafflement, and which the survivor says he found
in the cabin of the yacht, in a small carved shrine of common pattern.
This man, after recovering his senses, told an exceedingly strange
story of piracy and slaughter. He is Gustaf Johansen, a Norwegian of
some intelligence, and had been second mate of the two-masted
schooner Emma of Auckland, which sailed for Callao February 20th,
with a complement of eleven men.
The Emma, he says, was delayed and thrown widely south of her
course by the great storm of March 1st, and on March 22d, in S.
Latitude 49° 51´, W. Longitude 128° 34´, encountered the Alert,
manned by a queer and evil-looking crew of Kanakas and half-
castes. Being ordered peremptorily to turn back, Capt. Collins
refused; whereupon the strange crew began to fire savagely and
without warning upon the schooner with a peculiarly heavy battery of
brass cannon forming part of the yacht's equipment.
The Emma's men showed fight, says the survivor, and though the
schooner began to sink from shots beneath the waterline they
managed to heave alongside their enemy and board her, grappling
with the savage crew on the yacht's deck, and being forced to kill
them all, the number being slightly superior, because of their
particularly abhorrent and desperate though rather clumsy mode of
fighting.
Three of the Emma's men, including Capt. Collins and First Mate
Green, were killed; and the remaining eight under Second Mate
Johansen proceeded to navigate the captured yacht, going ahead in
their original direction to see if any reason for their ordering back had
existed.
The next day, it appears, they raised and landed on a small island,
although none is known to exist in that part of the ocean; and six of
the men somehow died ashore, though Johansen is queerly reticent
about this part of his story and speaks only of their falling into a rock
chasm.
Later, it seems, he and one companion boarded the yacht and tried
to manage her, but were beaten about by the storm of April 2nd.
From that time till his rescue on the 12th, the man remembers little,
and he does not even recall when William Briden, his companion,
died. Briden's death reveals no apparent cause, and was probably
due to excitement or exposure.
Cable advices from Dunedin report that the Alert was well known
there as an island trader, and bore an evil reputation along the
waterfront. It was owned by a curious group of half-castes whose
frequent meetings and night trips to the woods attracted no little
curiosity; and it had set sail in great haste just after the storm and
earth tremors of March 1st.
Our Auckland correspondent gives the Emma and her crew an
excellent reputation, and Johansen is described as a sober and
worthy man.
The admiralty will institute an inquiry on the whole matter beginning
tomorrow, at which every effort will be made to induce Johansen to
speak more freely than he has done hitherto.
This was all, together with the picture of the hellish image; but what a
train of ideas it started in my mind! Here were new treasuries of data
on the Cthulhu Cult, and evidence that it had strange interests at sea
as well as on land. What motive prompted the hybrid crew to order
back the Emma as they sailed about with their hideous idol? What
was the unknown island on which six of the Emma's crew had died,
and about which the mate Johansen was so secretive? What had the
vice-admiralty's investigation brought out, and what was known of
the noxious cult in Dunedin? And most marvelous of all, what deep
and more than natural linkage of dates was this which gave a malign
and now undeniable significance to the various turns of events so
carefully noted by my uncle?
March 1st—our February 28th according to the International Date
Line—the earthquake and storm had come. From Dunedin the Alert
and her noisome crew had darted eagerly forth as if imperiously
summoned, and on the other side of the earth poets and artists had
begun to dream of a strange, dank Cyclopean city whilst a young
sculptor had molded in his sleep the form of the dreaded Cthulhu.
March 23rd the crew of the Emma landed on an unknown island and
left six men dead; and on that date the dreams of sensitive men
assumed a heightened vividness and darkened with dread of a giant
monster's malign pursuit, whilst an architect had gone mad and a
sculptor had lapsed suddenly into delirium! And what of this storm of
April 2nd—the date on which all dreams of the dank city ceased, and
Wilcox emerged unharmed from the bondage of strange fever? What
of all this—and of those hints of old Castro about the sunken, star-
born Old Ones and their coming reign; their faithful cult and their
mastery of dreams? Was I tottering on the brink of cosmic horrors
beyond man's power to bear? If so, they must be horrors of the mind
alone, for in some way the second of April had put a stop to
whatever monstrous menace had begun its siege of mankind's soul.
That evening, after a day of hurried cabling and arranging, I bade my

host adieu and took a train for San Francisco. In less than a month I
was in Dunedin; where, however, I found that little was known of the
strange cult-members who had lingered in the old sea taverns.
Waterfront scum was far too common for special mention; though
there was vague talk about one inland trip these mongrels had
made, during which faint drumming and red flame were noted on the
distant hills.
In Auckland I learned that Johansen had returned with yellow hair
turned white after a perfunctory and inconclusive questioning at
Sydney, and had thereafter sold his cottage in West Street and
sailed with his wife to his old home in Oslo. Of his stirring experience
he would tell his friends no more than he had told the admiralty
officials, and all they could do was to give me his Oslo address.
After that I went to Sydney and talked profitlessly with seamen and
members of the vice-admiralty court. I saw the Alert, now sold and in
commercial use, at Circular Quay in Sydney Cove, but gained
nothing from its non-committal bulk. The crouching image with its
cuttlefish head, dragon body, scaly wings, and hieroglyphed
pedestal, was preserved in the Museum at Hyde Park; and I studied
it long and well, finding it a thing of balefully exquisite workmanship,
and with the same utter mystery, terrible antiquity, and unearthly
strangeness of material which I had noted in Legrasse's smaller
specimen. Geologists, the curator told me, had found it a monstrous
puzzle; for they vowed that the world held no rock like it. Then I
thought with a shudder of what old Castro had told Legrasse about
the primal Great Ones: "They had come from the stars, and had
brought Their images with Them."
Shaken with such a mental revolution as I had never before known, I
now resolved to visit Mate Johansen in Oslo. Sailing for London, I re-
embarked at once for the Norwegian capital; and one autumn day
landed at the trim wharves in the shadow of the Egeberg.
Johansen's address, I discovered, lay in the Old Town of King Harold
Haardrada, which kept alive the name of Oslo during all the
centuries that the greater city masqueraded as "Christiania." I made
the brief trip by taxicab, and knocked with palpitant heart at the door
of a neat and ancient building with plastered front. A sad-faced
woman in black answered my summons, and I was stung with
disappointment when she told me in halting English that Gustaf
Johansen was no more.
He had not long survived his return, said his wife, for the doings at
sea in 1925 had broken him. He had told her no more than he had
told the public, but had left a long manuscript—of "technical matters"
as he said—written in English, evidently in order to safeguard her
from the peril of casual perusal. During a walk through a narrow lane
near the Gothenburg dock, a bundle of papers falling from an attic
window had knocked him down. Two Lascar sailors at once helped
him to his feet, but before the ambulance could reach him he was
dead. Physicians found no adequate cause for the end, and laid it to
heart trouble and a weakened constitution.
I now felt gnawing at my vitals that dark terror which will never leave
me till I, too, am at rest; "accidentally" or otherwise. Persuading the
widow that my connection with her husband's "technical matters"
was sufficient to entitle me to his manuscript, I bore the document
away and began to read it on the London boat.
It was a simple, rambling thing—a naive sailor's effort at a post-facto
diary—and strove to recall day by day that last awful voyage. I can
not attempt to transcribe it verbatim in all its cloudiness and
redundance, but I will tell its gist enough to show why the sound of
the water against the vessel's sides became so unendurable to me
that I stopped my ears with cotton.
Johansen, thank God, did not know quite all, even though he saw
the city and the Thing, but I shall never sleep calmly again when I
think of the horrors that lurk ceaselessly behind life in time and in
space, and of those unhallowed blasphemies from elder stars which
dream beneath the sea, known and favored by a nightmare cult
ready and eager to loose them on the world whenever another
earthquake shall heave their monstrous stone city again to the sun
and air.
Johansen's voyage had begun just as he told it to the vice-admiralty.

The Emma, in ballast, had cleared Auckland on February 20th, and
had felt the full force of that earthquake-born tempest which must
have heaved up from the sea-bottom the horrors that filled men's
dreams. Once more under control, the ship was making good
progress when held up by the Alert on March 22nd, and I could feel
the mate's regret as he wrote of her bombardment and sinking. Of
the swarthy cult-fiends on the Alert he speaks with significant horror.
There was some peculiarly abominable quality about them which
made their destruction seem almost a duty, and Johansen shows
ingenuous wonder at the charge of ruthlessness brought against his
party during the proceedings of the court of inquiry. Then, driven
ahead by curiosity in their captured yacht under Johansen's
command, the men sight a great stone pillar sticking out of the sea,
and in S. Latitude 47° 9', W. Longitude 126° 43' come upon a
coastline of mingled mud, ooze, and weedy Cyclopean masonry
which can be nothing less than the tangible substance of earth's
supreme terror—the nightmare corpse-city of R'lyeh, that was built in
measureless eons behind history by the vast, loathsome shapes that
seeped down from the dark stars. There lay great Cthulhu and his
hordes, hidden in green slimy vaults and sending out at last, after
cycles incalculable, the thoughts that spread fear to the dreams of
the sensitive and called imperiously to the faithful to come on a
pilgrimage of liberation and restoration. All this Johansen did not
suspect, but God knows he soon saw enough!
I suppose that only a single mountain-top, the hideous monolith-
crowned citadel whereon great Cthulhu was buried, actually
emerged from the waters. When I think of the extent of all that may
be brooding down there I almost wish to kill myself forthwith.
Johansen and his men were awed by the cosmic majesty of this
dripping Babylon of elder demons, and must have guessed without
guidance that it was nothing of this or of any sane planet. Awe at the
unbelievable size of the greenish stone blocks, at the dizzying height
of the great carven monolith, and at the stupefying identity of the
colossal statues and bas-reliefs with the queer image found in the
shrine on the Alert, is poignantly visible in every line of the mate's
frightened description.
Without knowing what futurism is like, Johansen achieved something
very close to it when he spoke of the city; for instead of describing
any definite structure or building, he dwells only on the broad
impressions of vast angles and stone surfaces—surfaces too great
to belong to anything right or proper for this earth, and impious with
horrible images and hieroglyphs. I mention his talk about angles
because it suggests something Wilcox had told me of his awful
dreams. He had said that the geometry of the dream-place he saw
was abnormal, non-Euclidean, and loathsomely redolent of spheres
and dimensions apart from ours. Now an unlettered seaman felt the
same thing whilst gazing at the terrible reality.
Johansen and his men landed at a sloping mud-bank on this
monstrous Acropolis, and clambered slipperily up over titan oozy
blocks which could have been no mortal staircase. The very sun of
heaven seemed distorted when viewed through the polarizing
miasma welling out from this sea-soaked perversion, and twisted
menace and suspense lurked leeringly in those crazily elusive
angles of carven rock where a second glance showed concavity after
the first showed convexity.
Something very like fright had come over all the explorers before
anything more definite than rock and ooze and weed was seen.
Each would have fled had he not feared the scorn of the others, and
it was only half-heartedly that they searched—vainly, as it proved—
for some portable souvenir to bear away.
It was Rodriguez the Portuguese who climbed up the foot of the
monolith and shouted of what he had found. The rest followed him,
and looked curiously at the immense carved door with the now
familiar squid-dragon bas-relief. It was, Johansen said, like a great
barn-door; and they all felt that it was a door because of the ornate
lintel, threshold, and jambs around it, though they could not decide
whether it lay flat like a trap-door or slantwise like an outside cellar-
door. As Wilcox would have said, the geometry of the place was all
wrong. One could not be sure that the sea and the ground were
horizontal, hence the relative position of everything else seemed
fantasmally variable.
Briden pushed at the stone in several places without result. Then
Donovan felt over it delicately around the edge, pressing each point
separately as he went. He climbed interminably along the grotesque
stone molding—that is, one would call it climbing if the thing was not
after all horizontal—and the men wondered how any door in the
universe could be so vast. Then, very softly and slowly, the acre-
great panel began to give inward at the top; and they saw that it was
balanced.
Donovan slid or somehow propelled himself down or along the jamb
and rejoined his fellows, and everyone watched the queer recession
of the monstrously carven portal. In this fantasy of prismatic
distortion it moved anomalously in a diagonal way, so that all the
rules of matter and perspective seemed upset.
The aperture was black with a darkness almost material. That
tenebrousness was indeed a positive quality; for it obscured such
parts of the inner walls as ought to have been revealed, and actually
burst forth like smoke from its eon-long imprisonment, visibly
darkening the sun as it slunk away into the shrunken and gibbous
sky on flapping membranous wings. The odor arising from the newly
opened depths was intolerable, and at length the quick-eared
Hawkins thought he heard a nasty, slopping sound down there.
Everyone listened, and everyone was listening still when It lumbered
slobberingly into sight and gropingly squeezed Its gelatinous green
immensity through the black doorway into the tainted outside air of
that poison city of madness.
Poor Johansen's handwriting almost gave out when he wrote of this.
Of the six men who never reached the ship, he thinks two perished
of pure fright in that accursed instant. The Thing can not be
described—there is no language for such abysms of shrieking and
immemorial lunacy, such eldritch contradictions of all matter, force,
and cosmic order. A mountain walked or stumbled. God! What
wonder that across the earth a great architect went mad, and poor
Wilcox raved with fever in that telepathic instant? The Thing of the
idols, the green, sticky spawn of the stars, had awaked to claim his
own. The stars were right again, and what an age-old cult had failed
to do by design, a band of innocent sailors had done by accident.
After vigintillions of years great Cthulhu was loose again, and
ravening for delight.
Three men were swept up by the flabby claws before anybody
turned. God rest them, if there be any rest in the universe. They
were Donovan, Guerrera and Angstrom. Parker slipped as the other
three were plunging frenziedly over endless vistas of green-crusted
rock to the boat, and Johansen swears he was swallowed up by an
angle of masonry which shouldn't have been there; an angle which
was acute, but behaved as if it were obtuse. So only Briden and
Johansen reached the boat, and pulled desperately for the Alert as
the mountainous monstrosity flopped down the slimy stones and
hesitated floundering at the edge of the water.
Steam had not been suffered to go down entirely, despite the
departure of all hands for the shore; and it was the work of only a
few moments of feverish rushing up and down between wheels and
engines to get the Alert under way. Slowly, amidst the distorted
horrors of that indescribable scene, she began to churn the lethal
waters; whilst on the masonry of that charnel shore that was not of
earth the titan Thing from the stars slavered and gibbered like
Polypheme cursing the fleeing ship of Odysseus. Then, bolder than
the storied Cyclops, great Cthulhu slid greasily into the water and
began to pursue with vast wave-raising strokes of cosmic potency.
Briden looked back and went mad, laughing shrilly as he kept on
laughing at intervals till death found him one night in the cabin whilst
Johansen was wandering deliriously.
But Johansen had not given out yet. Knowing that the Thing could
surely overtake the Alert until steam was fully up, he resolved on a
desperate chance; and, setting the engine for full speed, ran
lightning-like on deck and reversed the wheel. There was a mighty
eddying and foaming in the noisome brine, and as the steam
mounted higher and higher the brave Norwegian drove his vessel
head on against the pursuing jelly which rose above the unclean
froth like the stern of a demon galleon. The awful squid-head with
writhing feelers came nearly up to the bowsprit of the sturdy yacht,
but Johansen drove on relentlessly.
There was a bursting as of an exploding bladder, a slushy nastiness
as of a cloven sunfish, a stench as of a thousand opened graves,
and a sound that the chronicler would not put on paper. For an
instant the ship was befouled by an acrid and blinding green cloud,
and then there was only a venomous seething astern; where—God
in heaven!—the scattered plasticity of that nameless sky-spawn was
nebulously recombining in its hateful original form, whilst its distance
widened every second as the Alert gained impetus from its mounting
steam.
That was all. After that Johansen only brooded over the idol in the
cabin and attended to a few matters of food for himself and the
laughing maniac by his side. He did not try to navigate after the first
bold flight, for the reaction had taken something out of his soul. Then
came the storm of April 2nd, and a gathering of the clouds about his
consciousness. There is a sense of spectral whirling through liquid
gulfs of infinity, of dizzying rides through reeling universes on a
comet's tail, and of hysterical plunges from the pit to the moon and
from the moon back again to the pit, all livened by a cachinnating
chorus of the distorted, hilarious elder gods and the green, bat-
winged mocking imps of Tartarus.
Out of that dream came rescue—the Vigilant, the vice-admiralty
court, the streets of Dunedin, and the long voyage back home to the
old house by the Egeberg. He could not tell—they would think him
mad. He would write of what he knew before death came, but his
wife must not guess. Death would be a boon if only it could blot out
the memories.
That was the document I read, and now I have placed it in the tin box
beside the bas-relief and the papers of Professor Angell. With it shall
go this record of mine—this test of my own sanity, wherein is pieced
together that which I hope may never be pieced together again. I
have looked upon all that the universe has to hold of horror, and
even the skies of spring and the flowers of summer must ever
afterward be poison to me. But I do not think my life will be long. As
my uncle went, as poor Johansen went, so I shall go. I know too
much, and the cult still lives.
Cthulhu still lives, too, I suppose, again in that chasm of stone which
has shielded him since the sun was young. His accursed city is
sunken once more, for the Vigilant sailed over the spot after the April
storm; but his ministers on earth still bellow and prance and slay
around idol-capped monoliths in lonely places. He must have been
trapped by the sinking whilst within his black abyss, or else the world
would by now be screaming with fright and frenzy. Who knows the
end? What has risen may sink, and what has sunk may rise.
Loathsomeness waits and dreams in the deep, and decay spreads
over the tottering cities of men. A time will come—but I must not and
can not think! Let me pray that, if I do not survive this manuscript, my
executors may put caution before audacity and see that it meets no
other eye.
[1] Found among the papers of the late Francis Wayland

Thurston, of Boston.

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(download pdf) Financial Reporting Financial Statement Analysis and Valuation 7th Edition Whalen Test Bank full chapter

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Financial Reporting Financial

Statement Analysis and Valuation 7th

Financial Reporting Financial Statement Analysis and

Financial Reporting Financial Statement Analysis and

Financial Reporting Financial Statement Analysis and

Financial Reporting Financial Statement Analysis and

Financial Statement Analysis and Valuation 4th Edition

Financial Statement Analysis and Security Valuation 5th

Financial Statement Analysis and Security Valuation 5th

Financial Reporting and Analysis 7th Edition Gibson

1. The objective of forecasting is to develop

Sparky’s Selected Financial Statement data

Inventory $31,353 $30,850

Sparky’s Selected Financial Statement data

Inventory $31,353 $30,850

13. Card Sharks, Inc.

14. Card Sharks, Inc.

23. Common-size financial statements recast each statement item as

30. Realistic expectations are ____________________ and ____________________.

Glad Rags, Inc.

Inventory $ 5,548 $ 4,948

Goode Corp. Consolidated Statement of Income

Net Revenues $345,871

Goode Corp Consolidated Balance Sheet

Liabilities and Stockholders' Equity

A. See the information for Simmons Company.

B. See the information for Simmons Company.

Repair Specialists 2009 2010

The following summary information relates to Techtronics’ property, plant, and

Techtronics (amounts in millions) 2009 2010

60. Arco is an integrated manufacturer in capital-intensive industry. Nuwak manufactures more

($ amounts in millions) Year 3 Year 4

Saunders Corporation (amounts in millions of dollars) 2009 2010

b. Repeat requirement a. for selling and administrative expenses.

a. Compute the inventory turnover ratio for Benson for 2010.

1. The objective of forecasting is to develop

Sparky’s Selected Financial Statement data

Inventory $31,353 $30,850

Sparky’s Selected Financial Statement data

Inventory $31,353 $30,850

13. Card Sharks, Inc.

14. Card Sharks, Inc.

23. Common-size financial statements recast each statement item as

30. Realistic expectations are ____________________ and ____________________.

One disadvantage is that it may introduce artificial volatility in ending balances.

The seven steps are:

1. Project revenues from sales and other operating activities.

Suggested Solution from the text::

Cost of Goods Sold:

Gross Profit 1,170,907 1,317,345 1,538,999

Glad Rags, Inc.

Inventory $ 5,548 $ 4,948

a. Inventory Turnover 6.85

Annual Average Days Sales Year-end

2012 2013* 2014* 2015* 2016* 2017*

Sales Growth Rate 6%

Growth in A/R 9.90% 2.48% 9.46% 2.81% 9.09%

Sales Growth Rate 6%

Yearly Growth in A/R 9.90% 2.48% 9.46% 2.81% 9.09%

Compound Average growth in 6.69%

Beginning Balance $791 807 861 919 980 1,046

Growth in A/R 6.69% 6.69% 6.69% 6.69% 6.69%

Net Revenues $345,871

Goode Corp Consolidated Balance Sheet

30. Realistic expectations are and .

30. Realistic expectations are and .