Houston House (Pty) Ltd and Whitney Holdings are competitors in the same industry. The following information was summarised from a recent annual report of Houston House (Pty) Ltd (In millions) Receivables: December 31, 2015 R 1,968 December 31, 2014 642 Revenue for the year ended: December 31, 2015 46,980 December 31, 2014 40,023 The following information was summarised from a recent annual report of Whitney Holdings: (In millions) Accounts and notes receivable, net December 31, 2015 R 246 December 31, 2014 264 Revenues for the year ended: December 31, 2015 4,335 December 31, 2014 4,251 Required: 1. Calculate the accounts receivable turnover ratios for Houston House and Whitney Holdings for the most recent year. 2. Calculate the average collection period, in days, for both companies for the most recent year. Comment on the reasonableness of the collection periods for these companies considering the nature of their business. 3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing? 4 PBA4807 MAY/JUNE 2018 PORTFOLIO EXAMINATION [TURN OVER] Question 2 [15 marks] Phoenix Photography Company experienced a sharp decrease in Net Income during the year 2016. Madea Perry, the owner of the company, anticipates a need for a Bank loan in the year 2017. Late in 2016, Perry instructed Reunion Mann, the accountant, and friend of his to record a R10, 000 sale of portraits to the Perry family even though the photos will not be shot until January 2017. Perry told Reunion not to make the following December 31 2016 adjusting entries Salaries owed to employees R 20000 Prepaid insurance that has expired 2000 Required: 1. Compute the overall effect of these transactions on the company’s reported income for 2016. Is the reported net income overstated or understated. 2. Why did Madea take these actions? Are they ethical? Give your reason, identifying the parties that benefitted and those that were harmed by Madea’s actions. Use the ethical decision making model which factor (economic, legal or ethical) seems to be taking precedence? Identify the stakeholders and potential consequences to each. 3) As a personal friend of Perry’s, what advice would you give to him? Question 3 [10 marks] You are Chief Financial Officer for Alpha Resorts. You are reviewing the following transactions: 1. Adding a new patio deck to the resort’s upscale restaurant, R180, 000 2. Painting the ocean side beach houses, R75, 000 3. Purchasing additional golf carts, R25, 000 4. Rebuilding the engine in the resort’s airport shuttle bus, R10, 000 5. Replacing the old air conditioning unit in the golf shop with a more efficient one, R20, 000 Your accountant has capitalized all of these items and intends to depreciate them over the appropriate asset’s remaining useful life as originally estimated. 5 PBA4807 MAY/JUNE 2018 PORTFOLIO EXAMINATION [TURN OVER] Indicate whether you agree or disagree with your accountant’s treatment of each item. In those cases where you disagree, state the proper treatment of that expenditure. Use the following table: Expenditure Agree or Disagree? Proper Treatment, if Disagree 1. Adding a new patio deck to the resort’s ocean side bar, R180,000 2. Painting 10 ocean front beach houses, R75,000 3. Purchasing additional golf carts for the club house, R25,000 4. Rebuilding the engine in the resort’s airport shuttle bus, R10,000 5. Replacing the pro shop’s old air conditioning unit with a more efficient one, R20,000 Question 4 [15 marks] Lunar Company (Pty) Ltd‘s balance sheets for the last two years are provided below Balance Sheets 2013 2012 Cash R 82,000 R 40,000 Accounts Receivable 180,000 150,000 Inventory 170,000 200,000 Equipment 200,000 140,000 Accum. Depreciation (72,000) (60,000) Total Assets R560,000 R470,000 Accounts Payable R100,000 R 80,000 L/T Notes Payable 100,000 50,000 Ordinary Shares 250,000 250,000 6 PBA4807 MAY/JUNE 2018 PORTFOLIO EXAMINATION [TURN OVER] Retained Earnings 110,000 90,000 Total Liabilities & Shareholders’ Equity R560,000 R470,000 The company’s income statement for 2013 is provided below: Income Statement 2013 Sales R345,000 Expenses: Cost of Goods Sold R120,000 Operating Expenses 58,000 Depreciation Expense 20,000 Interest Expense 2,000 200,000 Operating Income 145,000 Gain on Sale-- Equipment* 5,000 Income before Taxes 150,000 Tax Expense 30,000 Net Income R120,000 *The company sold equipment for R57, 000 that had a cost of R60, 000 Required: Prepare the company’s Statement of Cash flows for 2013. Use the direct method of computing cash flows from operating activities.