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Green Domes, Inc. builds environmentally sensitive structures. The company\'s 20

ID: 2444922 • Letter: G

Question

Green Domes, Inc. builds environmentally sensitive structures. The company's 2014 revenues totaled 2,760 million. At December 31, 2014, and 2013, the company had, respectively, 658 million and 603 million in current assets. The December 31, 2014 and 2013 balance sheets and income statement report the following amounts:

At year end (in millions)                                                                              2014                   2013

Liabilities and stockholders equity

current liabilities:

              accounts payable                                                                        107                         179

             accrued expenses                                                                         97                          177

             employee compensation and benefits                                             45                         15

           current portion of long-term debt                                                        7                           20

           total current liabilities                                                                       256                         391

long-term debt                                                                                             1384                     1300

post-retirement benefits payable                                                                   102                      154

other liabilities                                                                                              8                              20

stockholders equity                                                                                        1951                       1492

total liabilities and stockholders equity                                                                 3701                 3357

year end (in millions)

cost of goods sold                                                                                         1546                         1650

Requirements:

1. Describe each of Greene Domes, Inc.'s liabilities and state how the liability arose.

2. What were the company's total assets at December 31, 2014? Evaluate the company's leverage and debt ratios at the end of 2013 and 2014. Did the company improve, deteriorate or remain about the same over the year?

3. Assume that beginning and ending inverntories for both periods did not differ by a material amount. Accounts payable at the end of 2012 was 190 million. Calculate accounts payable turnover as a ratio and days' payable outstanding (DPO) for 2013 and 2014. Calculate current ratios for 2013 and 2014 as well. Evaluate whether the company improved or deteriorated from the standpoint of ability to cover accounts payable and current liabilities over the year.

Explanation / Answer

(1)

a) Accounts payable is the money that Greene owes to its suppliers and other working capital payments due within 1 year.

b) Accrued expenses are expenses that accrued during the year but were not paid.

c) Employee compensation & benefits arise from the unpaid ortion of employee compensation not yet paid during the year.

d) Current portion of long term debt is that portion of total long term debt whose repayment falls due within one year.

e) Long term debt is the debt issued repayment of which falls due after one year.

f) Post-retirement benefits payable are the pension liabilities arising out of the employees working with Greene.

(2)

(i) By accounting equation, Total assets = Total liabilities and Equity = $3,701 million (31st Dec 2014)

(ii) Leverage ratio = (Short term debt + long term debt) / shareholder equity

2013, Leverage = (20 + 1,300) / 1,492 = 0.8847, or 88.47%

2014, leverage = (7 + 1,384) / 1,951 = 0.7129 or 71.29%

So company's reliance on debt has reduced which is an improvement.

(iii) Debt ratio = (Short term debt + long term debt) / Total assets

2013, debt ratio = (20 + 1,300) / 3,357** = 0.3932 or 39.32%

2014, debt ratio = (7 + 1,384) / 3,701 = 0.3758 or 37.58%

There is reduction in debt ratio, so improvement in the company's performance in the debt aspect.

NOTE: Out of 3 multi-part questions, the first 2 are answered in full.