Question #6

Remember, prices are falling. Under LIFO, the most recent purchases flow to COGS. So, LIFO results in lower COGS, higher earnings, higher taxes, and lower cash flows. (Module 13.5, LOS 13.e) SnapPrints and NetPhoto Case Scenario Josephine Howard, CFA, is an equity analyst for an investment bank. She is preparing financial reports for two publicly traded digital photography companies, SnapPrints and Net Photo. Howard just attended a CFA Institute-sponsored conference on detecting quality issues in financial statements and is eager to apply what she has learned. SnapPrints provides photo prints and various other photo-related products, including calendars, T-shirts, and coffee mugs. NetPhoto is SnapPrints' largest competitor. NetPhoto has been receiving increasing attention from the analyst community due to its high sales growth rate, although NetPhoto's sales are still less than 50% of SnapPrints' sales. During the conference, Howard learned about the importance of analyzing accruals to evaluate earnings quality. Therefore, Howard is going to analyze the accruals for each company as part of her review. Howard remembers a discussion from the conference about disaggregating income into its major components to improve earnings forecasts, but she cannot remember which component (cash or accruals) should receive a higher weighting in the forecast. Howard gathered the following data from the income statement and statement of cash flows for SnapPrints. Selected SnapPrints Income Statement Items (000s) Year Ended December 31, 2009 Sales 45,000 Cost of Good Sold (30,000) Depreciation Expense (3,000) SG&A Expense (2,000) Interest Expense (1,500) Income Tax Expense (3,000) Net Income 5,500 Cash Flows for SnapPrints (000s) Year Ended December 31, 2009 Cash from Operations 6,500 Cash from Investing (3,500) Cash from Financing (1,200) Change in Cash 1,800 Howard collected the following balance sheet data for NetPhoto. Selected Balance Sheet items for NetPhoto as of December 31, in $Ms 2009 2008 2009 2008 Cash 5,500 4,500 Accounts Payable 4,500 4,300 Accounts Receivable 6,500 5,500 Short-term Notes Payable 5,800 6,500 Inventory 11,500 14,000 Long-Term Debt 28,500 29,750 Fixed Assets, Net 35,000 34,300 Total Liabilities 38,800 40,550 Common Stock 15,000 12,800 Retained Earnings 4,700 4,950 Total Assets 58,500 58,300 Total Liabilities and Equity 58,500 58,300 Howard has concerns about revenue recognition practices at both firms and has collected the following data. 2009 2008 2007 2006 SnapPrints Revenue 45,000 44,000 44,400 38,500 Cash Collections 43,000 45,000 44,000 37,000 NetPhoto Revenue 22,000 15,000 11,500 7,500 Cash Collections 11,000 12,000 8,500 7,000