Financial Accounting, 7e by Pfeiffer , Hanlon, Magee 2023 , Solution Manual Chapter 1

C1-47. (40 minutes)

LO 2, 3, 5 a. The Gap, Inc.: ROE = $351 / [($3,316 + $3,553)/2] = 10.22%

Nordstrom, Inc.: ROE = $496 / [($979 + $873)/2] = 53.56% b. The Gap, Inc.: Debt-to-equity = ($13,679 - $3,316) / $3,316 = 3.13

Nordstrom had the higher ROE.

Nordstrom, Inc.: Debt-to-equity = ($9,737 - $979) / $979 = 8.95 c.

Nordstrom relies more on debt than The Gap.

INC.

The Gap: $6,133 / $16,383 = 37.4%

Nordstrom: $5,592 / $15,524 = 36.0% d. Nordstrom earned a higher ROE than The Gap (53.56% vs. 10.22%). Nordstrom’s debt-to-equity ratio is 8.95 vs. about 3.13 for The Gap. The Gap reported a slightly higher gross profit per dollar of sales revenue (37.4% vs. 36.0% for Nordstrom). These two percentages are very close, reflecting the similarity of their retail operations. One important difference (not provided or apparent in the information supplied) is that Nordstrom has a larger consumer credit business than The Gap.

C1-48. (30 minutes)

LO 5 a. JetBlue: ROE = $569 / {[($11,918-$7,119) + ($10,959 - $6,274)] /2} = 12.0%

Southwest: ROE = $2,300 / {[($25,895-$16,063) + ($26,243-$16,390] /2} = 23.4% b. JetBlue: Debt-to-equity = $7,119 / ($11,918 - $7,119) = 1.48

Southwest: Debt-to-equity = $16,063 / ($25,895 - $16,063) = 1.63 c. JetBlue: $569 / $8,094 = 7.0%

Southwest: $2,300 / $22,428 = 10.3% d. JetBlue’s ROE was 12.0% for the year. In comparison, Southwest earned an ROE of 23.4% in 2019. Both of these ROE numbers are near or above the average for Fortune 500 companies. Currently, Southwest uses more creditor financing. This has changed over time, JetBlue carried more debt just 7 years ago. Southwest’s debt-toequity ratio is 1.63 compared to a debt-to-equity ratio of 1.48 for JetBlue. In terms of income per dollar of sales, JetBlue’s reported net income equaled 7.0% of revenues, while Southwest reported net income equal to 10.3% of revenues. Overall, Southwest appears to be a bit more profitable than JetBlue. However, airlines have unique operating characteristics that require closer examination to fully understand these profitability measures. For example, during the Covid pandemic, airlines were adversely affected as travel decreased significantly, and social distancing required planes to fly at less than full capacity. It will be interesting to monitor which airlines rebound to pre-pandemic profitability when air travel resumes.

C1-49. (20 minutes)

LO 1, 3, 5 a. $342,000 Assets - $54,000 Liabilities = $288,000 Net Assets. $86,400 Average Annual Income / $288,,000 Investment = 30% return. Seale's return would be 24% ($86,400 Average Annual Income / $360,000 Investment), assuming no adjustment is made for Meg’s salary. (See part b.) b. No. Withdrawals do not affect net income, because they are not part of the firm's operating activities. However, in calculating Krey's return in part a, Seale might wish to "impute" an amount for Krey's half-time work in computing Krey's return on investment. Thus, if Seale believes that Krey's services are worth $21,600 (half of the $43,200 salary she expects to pay a full-time manager), annual income should be calculated at $64,800 instead of $86,400. If Seale hires a full-time manager at $43,200, her return will be only 12% [($86,400 - $43,200)/$360,000].

©Cambridge Business Publishers, 2023

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