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Why might a profitable motel shut down in the long run if the land on which it is located becomes extremely valuable due to surrounding economic development? What kinds of costs are involved in making a decision to shut down?

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Why might a profitable motel shut down in the long run if the land on which it is located becomes extremely valuable due to surrounding economic development?

If the hotel owner conducts a profit analysis and finds that even though the hotel is profitable, the income that could be generated from either selling or leasing the land is more profitable than the hotel profits, there is a great incentive to stop the hotel operations, shut down the hotel and lease/sell the hotel/land.

Because the area has been built up so heavily by economic development, the owner, based ...

Solution Summary

The solution looks at reasons a profitable motel might still be shut down if the value of its land increases due to economic development in the surrounding environment and the costs and decisions to be paid and made here. 369 words.

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Accounting Questions McCormick & Company 2009 Annual Report

See the attached file.

The questions are related to McCormick & Company 2009 annual report.


Problem 1

The following questions all relate to McCormick's 2009 Statements of Cash Flow,
Balance sheet, and Income Statement.

(1) The change in accounts receivable, net of allowance in the balance sheet is $15.4
($380.7 mm-$365.3mm), yet the cash flow statement states that accounts receivable
decreased by $45.8 million. Conjecture why this might be so.

(2) McCormick's cash flow statement states that they spent $82.4 million on capital
expenditures. Assuming that all capital expenditures relate to property and equipment, determine
the amount of property and equipment sold at historical prices. See Footnote 17 (p.63) for a better
description of property, plant and equipment.

(3) In footnote 17 McCormick reports supplemental information on inventories. Assuming that
McCormick sales of finished goods is identified as cost of goods sold, determine the cost of
goods manufactured during the year.

(4) McCormick Reports an accounts payable of $283.6 on November 30, 2009. What does this
account relate to?

(5) Assume that all the trade accounts payable reported in the balance sheet on p. 41 is for
purchases of raw materials. Assuming that McCormick purchased $500 million of raw materials,
determine the cash paid for the raw materials.

Problem 2
The following questions relate to the stockholder's equity section of the CBS.

(1) What is the number and dollar value of common stock outstanding on November 30,

(2) McCormick has voting and non-voting shares. Suggest some reasons why a company
would want to have two types of common shares.

(3) Assuming all shares were issued at the same time, determine the market value of the
voting and non-voting shares at the time they were issued.

(4) Why would the issue price for the two types of shares be different?

(5) Report the amount of cash dividends declared for common stockholders in 2009. Assume the
company declares and pays the same amount of dividends for voting and non-voting shares. Is
this amount different from the amount paid for cash dividends reported in the cash flow
statement? Why or why not?

Problem 3
(1) Note 1 (P45) states that McCormick expenses the cost of advertising in the period in
which they first run. Since advertising has probable future benefits, is
McCormick violating GAAP? If not, justify the policy.

2) Note 1 (p.45) states that software development cost is being capitalized by the firm.
However, Not 2 (p.45) states that all research and development costs are being expensed
as incurred. Justify what appears to be two contradictory statements.

3) Note 1 (p.45) states that prepaid allowances are capitalized and amortized against net
sales. Provide an example of simple income statement that shows how the amortization
of prepaid is reported.

4) Note 1 (P44) and Footnote 17 (p.63) states that McCormick uses the straight-line
method for depreciation reporting. Assume there is no salvage value for the plant and

(a) Determine the approximate average useful life of depreciable assets held by

(b) Determine how long depreciable assets held by McCormick have been used, on

(c) Assuming McCormick does not purchase any further assets the following year and
decides to use the double declining depreciation method in 2010, determine the expected
depreciation for fiscal year 2010.

(5) In the Consolidated Cash Flow Statement, the depreciation and amortization is added
to net income to determine operating cash flows. Would McCormick's cash flows increase
more if the company had reported twice as much depreciation and amortization in the income

Problem 4

(1) Yahoo Finance states McCormick's P/E ratio as 16.46 on Nov. 15, 2010. Explain what this

(2) Yahoo Finance shows that the price to book ratio for the most recent quarter is 4.24 on Nov.
15, 2010, and the P/E ratio is 16.46. How are these two ratios related?

(3) Yahoo Finances shows that price to sales ratio is 1.77 and the P/E ratio for the trailing twelve
months is 16.46. How are these two ratios related?

(4) Yahoo Finance reports McCormick ROA as 9.71% and ROE as 26.09% on November 15,
2010 for the training twelve months. Justify why ROE is nearly three times higher than ROA.

Problem 5
This problem relates to the Cash Flow statement in P.42 and the Note 6 (p. 48 and 49).

a) McCormick reports that it issued a $250 million of 5.25% notes due 2013 with net cash
proceeds received of $248.0 million. Determine McCormick's market or borrowing rate.
(Hint: use the Rate function in Excel)

b) McCormick's also reports that on December 2007 issued another $250 million, 10
year bond with a coupon rate of 5.75%. Assume this is a semi-annual bond and the
expected yield (or market) rate is 6.25%. Determine the cash proceeds from this bond.
(Hint: please do not use the $248.3 million they report)

c) McCormick's reports expected rental expense under operation leases on p.49. If all the
operating leases were converted to capital leases at McCormick's borrowing rate of
6.25%, by how would assets and liabilities increase. Assume all payments after
2014 are expected to be paid in 2015. (Hint: please use the NPV function in Excel)

d) Recalculate the debt to equity ratio following the conversion of operating leases to
capital leases and explain how this might affect the company's risk rating.

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