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12.6 Cases and Problems

Learning on the Web (AACSB)

Discounting Retailers

There was a time when Kmart was America’s number-one discount retailer and Sears, Roebuck & Co. was the seventh largest corporation in the world. Things have changed since Wal-Mart came on the scene. In the forty-five years since Sam Walton opened the first Wal-Mart store in Rogers, Arkansas, the company has propelled itself to the number-one spot in discount retailing, and (even more impressive) has higher sales than any other company in the world. Over this same forty-five-year period, Target emerged as a major player in the retail industry. The forty-five-year period wasn’t kind to Kmart and Sears, and both stores watched their dominance in the retail market slip away. In an effort to reverse the downward spiral of both retailers, in November 2004, Sears and Kmart merged into a new company called Sears Holdings. To learn more about how Wal-Mart, Target, and Sears Holdings are doing today, go to the National Retail Federation’s Web site (http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=112) and click on STORES Top 100 Retailers to access a report that ranks the 2006 top 100 retailers. After reading the introduction and reviewing the list of top retailers, prepare a report comparing the three retailers on the following:

  • Sales and percentage increase or decrease in sales
  • Net income (or loss) and percentage increase or decrease in net income
  • Number of stores and percentage increase or decrease in number of stores
  • Net income as a percentage of sales

Based on your analysis and reading, answer the following questions:

  1. Do you believe that Target will be able to compete against Wal-Mart in the future? If so, how?
  2. What about Sears Holdings? Will the company survive?
  3. Some people criticize Wal-Mart for forcing other retailers out of business and for lowering the average wage for retail workers. Is this a legitimate criticism? In your opinion, has Wal-Mart helped the American people or hurt them?

Career Opportunities

Is a Career in Accounting for You?

Do you want to learn what opportunities are available for people graduating with degrees in accounting? Go to the Web site of the American Institute of Certified Public Accountants (http://www.startheregoplaces.com) and click on the “Today’s CPA” icon (top, left). Scroll down to the bottom of the page and click on “Video” to watch the video clip featuring a CPA. Then click on “CPAs Exclusives” (left sidebar) and read about other featured accountants. Select a job that interests you and answer each of the following questions:

  • What is the job like?
  • Why does the accountant enjoy the job?
  • Why does the job seem interesting to you?

Explore career options in public accounting and business and industry. Learn about earning potential in these fields. Select the career path you find most appealing and answer these questions:

  1. What opportunities would be available to you if you followed this career path?
  2. How much should you expect to earn at the beginning of your career? After five years? After fifteen years?

Ethics Angle (AACSB)

Counting Earnings before They Hatch

You recently ran into one of your former high school teachers. You were surprised to learn that he’d left teaching, gone back to school, and, a little more than a year ago, started a business that creates Web sites for small companies. It so happens that he needs a loan to expand his business, and the bank wants financial statements. When he found out that you were studying accounting, he asked whether you’d look over a set of statements that he’d just prepared for his first year in business. Because you’re anxious to show off your accounting aptitude, you agreed.

First, he showed you his income statement. It looked fine: revenues (from designing Web sites) were $94,000, expenses were $86,000, and net income was $8,000. When you observed how unusual it was that he’d earned a profit in his first year, he seemed a little uneasy.

“Well,” he confessed, “I fudged a little when I prepared the statements. Otherwise, I’d never get the loan.”

He admitted that $10,000 of the fees shown on the income statement was for work he’d recently started doing for a client (who happened to be in big trouble with the IRS). “It isn’t like I won’t be earning the money,” he explained. “I’m just counting it a little early. It was easy to do. I just added $10,000 to my revenues and recorded an accounts receivable for the same amount.”

You quickly did the math: without the $10,000 payment for the client in question, his profit of $8,000 would become a loss of $2,000 (revenues of $84,000 less expenses of $86,000).

As your former teacher turned to get his balance sheet, you realized that, as his accountant, you had to decide what you’d advise him to do. The decision is troublesome because you agree that if he changes the income statement to reflect the real situation, he won’t get the bank loan.

  1. What did you decide to do, and why?
  2. Assuming that he doesn’t change the income statement, will his balance sheet be incorrect? How about his statement of cash flows? What will happen to next year’s income: will it be higher or lower than it should be?
  3. What would happen to your former teacher if he gave the bank the fraudulent financial statements and the bank discovered the truth? How could the bank learn the truth?

Team-Building Skills (AACSB)

Taking Stock of Ratios

Your class has been told that each group of three students will receive a share of stock in one of three companies in the same industry. But there’s a catch: each group has to decide which of the companies it wants to own stock in. To reach this decision, your team will use ratio analysis to compare the three companies. Each team member will analyze one of the companies using the ratios presented in this chapter. Then, you’ll get together, compare your results, and choose a company. Here are the details of the project:

  1. The team selects a group of three companies in the same industry. Here are just a few examples:

    • Auto manufacturers. Ford, General Motors, Toyota
    • Airlines. Southwest, Continental, American Airlines
    • Drug companies. GlaxoSmithKline, Eli Lilly & Co., Bristol-Myers Squibb
    • Specialty retailers. Bed Bath & Beyond, Pottery Barn, Pier 1 Imports
    • Computers. Hewlett Packard, Gateway, Apple Computer
  2. Every team member gets a copy of one company’s most recent annual report (which includes its financial statements) from the company’s Web site (investor section).
  3. Every member calculates the following ratios for the company for the last two years: gross profit margin, net profit margin, inventory turnover (if applicable), return on assets, current ratio, debt-to-equity, and interest coverage.
  4. Get together as a group and compare your results. Decide as a group which company you want to own stock in.
  5. Write a report indicating the company that your team selected and explain your choice. Attach the following items to your team report:

    1. A brief explanation of each ratio (how to calculate it and what it means)
    2. Detailed calculations showing how each ratio was determined
    3. A chart comparing the ratios for the three companies

The Global View (AACSB)

Why Aren’t Shoes Made in the USA?

Having just paid $70 for a pair of athletic shoes that were made in China, you wonder why they had to be made in that country. Why weren’t they made in the United States, where lots of people need good-paying jobs? You also figure that the shoe company must be making a huge profit on each pair it sells. Fortunately, you were able to get a breakdown of the costs for making a pair of $70 athletic shoes:From Tom Vanderbilt, The Sneaker Book: Anatomy of an Industry and an Icon (New York: The New Press, 1998), 111.

Production labor $2.75
Materials 9.00
Rent, equipment 3.00
Supplier’s operating profit 1.75
Duties 3.00
Shipping 0.50
Cost to the Manufacturer $20.00
Research and development 0.25
Promotion and advertising 4.00
Sales, distribution, administration 5.00
Shoe company’s operating profit 6.25
Cost to the Retailer $35.50
Retailer’s Rent 9.00
Personnel 9.50
Other 7.00
Retailer’s operating profit 9.00
Cost to Consumer $70.00

You’re surprised at a few of these items. First, out of the $70, the profit made by the manufacturer was only $6.25. Second, at $2.75, labor accounted for only about 4 percent of the price you paid. The advertising cost ($4.00) was higher than the labor cost. If labor isn’t a very big factor in the cost of the shoes, why are they made in China?

Deciding to look further into this puzzle, you discover that the $2.75 labor cost was for two hours of work. Moreover, that $2.75 includes not only the wages paid to the workers, but also labor-related costs, such as food, housing, and medical care.

That’s when you begin to wonder. How much would I have to pay for the same shoes if they were made in the United States? Or what if they were made in Mexico? How about Spain? To answer these questions, you need to know the hourly wage rates in these countries. Fortunately, you can get this information by going to the Foreign Labor section of the Bureau of Labor Statistics Web site (http://www.bls.gov/news.release/ichcc.t02.htm). The table you want is “Hourly Compensation Costs in U.S. Dollars for Production Workers in Manufacturing.” Use the most recent hourly compensation figures.

To investigate this issue further, you should do the following:

  1. Recalculate the cost of producing the shoes in the United States and two other countries of your choice. Because operating profit for the supplier, the shoe company, and the retailer will change as the cost to make the shoe changes, you have decided to determine this profit using the following percentage rates:

    • Supplier’s operating profit: 10 percent of its costs
    • Shoe company’s operating profit: 20 percent of its costs (including the cost paid to the supplier to make the shoes)
    • Retailer’s operating profit: 15 percent of its costs (including the cost paid to the shoe company)
  2. Prepare a report that does the following:

    • Shows the selling price of the shoe for each manufacturing country (the United States and the other two countries you selected)
    • Lists any costs other than labor that might change if shoe production was moved to the United States
    • Identifies other factors that should be considered when selecting a manufacturing country
    • Indicates possible changes to production methods that would make production in the United States less costly
  3. Finally, draw some conclusions: Do you, as a U.S. citizen, benefit from shoe production in foreign countries? Does the United States benefit overall? Does the world benefit? Should shoe production return to the United States?