Compensation Pools; Residual Income; Includes a Review of Chapter 19 McCoy Brands Inc.(MBI) is a retailer of consumer products. The company made two acquisitions in previous years todiversify its product lines. In 2017, MBI acquired a consumer electronics firm producing computers.MBI now (2019) has three divisions: Consumer Electronics, Office Supplies, and Computers. Thefollowing information (in thousands) presents operating revenue, operating income, and investedassets of the company over the last 3 years:Revenue Income AssetsConsumer Electronics2017 $155,780 $16,750 $84,5502018 125,480 9,500 90,4502019 90,950 5,700 92,450Office Supplies2017 48,750 2,100 22,5002018 45,660 2,340 21,9002019 52,800 3,250 18,000Computers2017 100,500 2,350 21,4502018 95,400 1,650 22,5502019 114,350 2,575 24,100The number of executives covered by MBI’s current compensation package follows:2017 2018 2019Consumer Electronics 300 350 375Office Supplies 40 40 37Computers 120 140 185The current compensation package is an annual bonus award. Senior executives share in thebonus pool, which is calculated as 10% of the company’s annual residual income. Residual incomeis defined as operating income minus an interest charge of 6% of invested assets.Required1. Compute asset turnover, return on sales, and return on investment (ROI) for each division and for eachyear. Use year-end rather than average asset values. Round to 2 decimal places.2. Use the ratios computed in requirement 1 to explain the differences in profitability of the three divisions.3. Compute the total bonus amount to be paid during each year; also compute individual executive bonusamounts. Round to the nearest whole dollar.4. If the bonuses were calculated by divisional residual income, what would the individual bonus amountsbe? Round to the nearest whole dollar.5. Discuss the advantages and disadvantages of basing the bonus on MBI’s residual income compared todivisional residual income.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Compensation Pools; Residual Income; Includes a Review of Chapter 19 McCoy Brands Inc.
(MBI) is a retailer of consumer products. The company made two acquisitions in previous years to
diversify its product lines. In 2017, MBI acquired a consumer electronics firm producing computers.
MBI now (2019) has three divisions: Consumer Electronics, Office Supplies, and Computers. The
following information (in thousands) presents operating revenue, operating income, and invested
assets of the company over the last 3 years:
Revenue Income Assets
Consumer Electronics
2017 $155,780 $16,750 $84,550
2018 125,480 9,500 90,450
2019 90,950 5,700 92,450
Office Supplies
2017 48,750 2,100 22,500
2018 45,660 2,340 21,900
2019 52,800 3,250 18,000
Computers
2017 100,500 2,350 21,450
2018 95,400 1,650 22,550
2019 114,350 2,575 24,100
The number of executives covered by MBI’s current compensation package follows:
2017 2018 2019
Consumer Electronics 300 350 375
Office Supplies 40 40 37
Computers 120 140 185
The current compensation package is an annual bonus award. Senior executives share in the
bonus pool, which is calculated as 10% of the company’s annual residual income. Residual income
is defined as operating income minus an interest charge of 6% of invested assets.
Required
1. Compute asset turnover, return on sales, and
year. Use year-end rather than average asset values. Round to 2 decimal places.
2. Use the ratios computed in requirement 1 to explain the differences in profitability of the three divisions.
3. Compute the total bonus amount to be paid during each year; also compute individual executive bonus
amounts. Round to the nearest whole dollar.
4. If the bonuses were calculated by divisional residual income, what would the individual bonus amounts
be? Round to the nearest whole dollar.
5. Discuss the advantages and disadvantages of basing the bonus on MBI’s residual income compared to
divisional residual income.
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