22
Analyzing Financial
1. Investor’s needs: profitability, dividends, financing, etc.
Creditor’s needs: can company pay debts on time?
Management’s needs: are we operating efficiently?
2. Disagree. It is used on comparative statements.
4. Disagree. The vertical analysis of financial statements provides the same results as
common size financial statements.
6. Ratios can be expressed as amounts, percentages, fractions, or stated ratios.
7. A. Liquidity: ability to meet short-term obligations.
9. A low turnover indicates a slow collection process and/or lots of bad debts.
11. A low ratio would mean creditors would be likely to be paid, since the ratio indicates
the amount of assets that are financed by creditors.
13. The question in this case is whether Loon Company is holding too much cash at the
risk of alienating customers. The company‘s goal is to serve the best interest of the
SOLUTIONS TO CONCEPT CHECKS
1.
Amount
Percent
Increase/Decrease
a.
$190
32.8%
Increase
b.
(190)
(24.7)%
Decrease
Percent of Total Assets
14.8%
16.4%
18.0%
50.8%
3.
Net Sales
100.00%
Cost of Goods Sold
25.00%
Gross Profit
75.00%
Operating Expenses
31.25%
Net Income
43.75%
4.
2015
2014
2013
2012
Sales
246%
161%
137%
100%
Gross Profit
211%
161%
211%
100%
Net Income
331%
150%
100%
100%
5.
a.
Current assets
/ Current
liabilities
= Current ratio
$52,000
/ $17,000
= 3.06
b.
(Current assets
– Merchandise
Inventory
– Prepaid expenses)
/ Current
liabilities
= Acid Test
ratio
($52,000
– $5,000
– $12,000)
/ $17,000
= 2.06
c.
Net sales
/ Total assets
= Asset turnover
$270,000
/ $170,000
= 1.59
d.
Gross profit
/ Net sales
= Gross profit rate
$108,000
/ $270,000
= 40.00%
SOLUTIONS TO SET A EXERCISES
22A-1.
AUSTER COMPANY
COMPARATIVE INCOME STATEMENT
FOR THE YEARS ENDED DEC. 31 2016 AND 2015
AMOUNT OF
PERCENT OF
INCREASE OR
INCREASE OR
DECEMBER 31
DECREASE DURING
DECREASE DURING
2016
2015
2016
2016
Net Sales
$150
0
0
0
00
$70
0
0
0
00
$80
0
0
0
00
1
1
4
29%
Cost of Goods Sold
39
0
0
0
00
21
5
0
0
00
17
5
0
0
00
8
1
40
Gross Profit from Sales
111
0
0
0
00
48
5
0
0
00
62
5
0
0
00
1
2
8
87
Operating Expenses
17
5
0
0
00
12
0
0
0
00
5
5
0
0
00
4
5
83
Operating Income
93
5
0
0
00
36
5
0
0
00
57
0
0
0
00
1
5
6
16
Less Interest Expense
4
6
0
0
00
3
5
0
0
00
1
1
0
0
00
3
1
43
Net Income
$88
9
0
0
00
$33
0
0
0
00
$55
9
0
0
00
1
6
9
39%
22A-2.
TIMOTHY CO.
COMMON SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2016 AND 2015
2016
2015
Net Sales
1
0
0
00%
1
0
0
00%
Cost of Goods Sold
7
3
33
8
8
75
Gross Profit from Sales
2
6
67
1
1
25
Operating Expenses
1
0
67
4
00
Net Income
1
6
00%
7
25%
EXERCISES (CONTINUED)
22A-3.
HAYNES COMPANY
COMMON SIZE COMPARATIVE BALANCE SHEET
DECEMBER 31, 2016 AND 2015
2016
2015
Current Assets
1
8
9%
1
6
8%
Plant and Equipment
8
1
1
8
3
2
Total Assets
1
0
0
0%
1
0
0
0%
Current Liabilities
2
7%
9
2%
Long-term Liabilities
6
3
2
6
0
Common Stock
5
4
5
5
4
6
Retained Earnings
3
6
5
1
0
2
Total Liabilities and Stockholders’ Equity
1
0
0
0%
1
0
0
0%
22A-4.
2015
2014
2013
2012
Sales
184%
156%
128%
100%
Gross Profit
137
114
90
100
Net Income
125
104
57
100
22A-5.
a.
Net sales
/ Total assets
= Asset turnover
$820,000
/ $280,000
= 2.93
b.
Cost of goods sold
/ Average Inventory
= Inventory turnover
$712,000
/ $78,500
= 9.07
c.
Net credit sales
/ Average accounts receivable
= Accounts receivable turnover
$820,000
/ $44,500
= 18.43
SOLUTIONS TO SET B EXERCISES
22B-1.
ALTON COMPANY
COMPARATIVE INCOME STATEMENT
FOR THE YEARS ENDED DEC. 31 2016 AND 2015
AMOUNT OF
PERCENT OF
INCREASE OR
INCREASE OR
DECEMBER 31
DECREASE
DECREASE DURING
2016
2015
DURING 2016
2016
Net Sales
$70
0
0
0
00
$60
0
0
0
00
$10
0
0
0
00
1
6
67%
Cost of Goods Sold
35
0
0
0
00
19
0
0
0
00
16
0
0
0
00
8
4
21
Gross Profit from Sales
35
0
0
0
00
41
0
0
0
00
(6
0
0
0
00)
(
1
4
63)
Operating Expenses
17
6
0
0
00
12
6
0
0
00
5
0
0
0
00
3
9
68
Operating Income
17
4
0
0
00
28
4
0
0
00
(11
0
0
0
00)
(
3
8
73)
Less Interest Expense
5
0
0
0
00
4
3
0
0
00
7
0
0
00
1
6
28
Net Income
$12
4
0
0
00
$24
1
0
0
00
$(11
7
0
0
00)
(
4
8
55)%
22B-2.
TODD CO.
COMMON SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2016 AND 2015
2016
2015
Net Sales
1
0
0
00%
1
0
0
00%
Cost of Goods Sold
7
8
00
6
8
00
Gross Profit from Sales
2
2
00
3
2
00
Operating Expenses
1
1
60
5
60
Net Income
1
0
40%
2
6
40%
2016
2015
Current Assets
1
6
7%
1
2
6%
Plant and Equipment
8
3
3
8
7
4
Total Assets
1
0
0
0%
1
0
0
0%
Current Liabilities
2
2%
8
8%
Long-term Liabilities
5
3
2
5
8
Common Stock
5
6
2
5
5
5
Retained Earnings
3
6
3
9
9
Total Liabilities and Stockholders’ Equity
1
0
0
0%
1
0
0
0%
EXERCISES (CONTINUED)
22B-4.
2015
2014
2013
2012
Sales
187%
158%
129%
100%
Gross Profit
138
113
91
100
Net Income
128
109
58
100
22-7
PROBLEM 22A-1
PERCENT OF
INCREASE OR
2016
4%
7
1
2
3
9
5%
8)%
6)
7)
1
9
8
0
4
5%
9
5
7
9
0
1
(6
(8
(7
4
2
6
7
1
1
1
5
5
2
3
3
1
7
6
7
3
2
1
AMOUNT OF
INCREASE OR
2016
00
00
00
00
00
00
00
00)
00)
00)
00
00
00
00
00
00
LORD CORPORATION
COMPARATIVE BALANCE SHEET
DECEMBER 31, 2016 AND 2015
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
8
8
0
8
0
0
0
0
0
0
8
8
8
7
3
0
3
3
0
3
5
0
5
0
5
5
3
8
3
$
9
36
$46
$1
$47
$(1
(2
(3
$6
2
$21
23
$44
$47
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
2015
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
6
7
0
3
6
0
6
0
2
2
5
7
0
9
9
6
$3
16
14
1
$35
$115
$150
$22
23
$45
$42
$87
$28
34
$62
$150
2016
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
8
8
0
8
0
0
0
0
0
0
8
8
8
3
0
0
6
9
0
9
5
2
7
5
2
5
2
7
9
$4
26
50
1
$81
$116
$197
$20
21
$41
$48
$90
$49
58
$107
$197
(a)
Assets
Current Assets:
Cash
Accounts Receivable, Net
Merchandise Inventory
Prepaid Expenses
TT Total Current Assets
Plant and Equipment:
Office Equipment, Net
Total Assets
Liabilities
Current Liabilities:
Notes Payable
Accounts Payable
Total Current Liabilities
Long-Term Liabilities:
Mortgage Payable
Total Liabilities
Stockholders’ Equity
Common Stock, $1 Par
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
PROBLEM 22A-1 (CONCLUDED)
LORD CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 2016
(b)
2016
Percent
Assets
Current Assets:
Cash
$4
3
0
0
00
2
2
Accounts Receivable, Net
26
0
0
0
00
1
3
1
Merchandise Inventory
50
0
0
0
00
2
5
3
Prepaid Expenses
1
6
8
0
00
0
8
Total Current Assets
$81
9
8
0
00
4
1
4
Plant and Equipment:
Office Equipment, Net
$116
0
0
0
00
5
8
6
Total Assets
$197
9
8
0
00
1
0
0
0
Liabilities
Current Liabilities
Notes Payable
$20
5
0
0
00
1
0
4
Accounts Payable
21
2
0
0
00
1
0
7
Total Current Liabilities
$41
7
0
0
00
2
1
1
Long-Term Liabilities
Mortgage Payable
$48
5
0
0
00
2
4
5
Total Liabilities
$90
2
0
0
00
4
5
6
Stockholders’ Equity
Common Stock, $1 Par
$49
5
0
0
00
2
5
0
Retained Earnings
58
2
8
0
00
2
9
4
Total Stockholders’ Equity
$107
7
8
0
00
5
4
4
Total Liabilities and Stockholders’ Equity
$197
9
8
0
00
1
0
0
0
22-9
PROBLEM 22A-2
WOOD COMPANY
COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2016 AND 2015
PERCENT OF
INCREASE OR
DECREASE
DURING 2016
3)
9
6)
3)
0)
0)
3
1)
0
0
0
(2
5
2
3
6
9
4
1
0
0
0
(1
(3
(1
(2
3
(1
5
5
5
AMOUNT OF
INCREASE OR
DECREASE DURING
2016
00)
00
00)
00)
00)
00)
00
00)
00
00
00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2
8
$(7
10
(17
(25
(4
(29
12
(1
13
5
7
2015
00
00
00
00
00
00
00
00
00
00
00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
4
6
$305
170
135
75
25
100
35
9
26
10
$15
2016
00
00
00
00
00
00
00
00
00
00
00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
6
4
$298
180
118
50
21
71
47
8
39
15
$23
(a)
Net Sales
Cost of Goods Sold
Gross Profit from Sales
Operating Expenses:
Selling
General and Administrative
Total Operating Expenses
Operating Income
Less Interest Expense
Income before Taxes
Income Taxes
Net Income
PROBLEM 22A-2 (CONTINUED)
(b)
WOOD COMPANY
INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 2016
2016
Percent
Net Sales
$298
0
0
0
00
1
0
0
0
Cost of Goods Sold
180
0
0
0
00
6
0
4
Gross Profit from Sales
118
0
0
0
00
3
9
6
Operating Expenses:
Selling
50
0
0
0
00
1
6
8
General and Administrative
21
0
0
0
00
7
0
Total Operating Expenses
71
0
0
0
00
2
3
8
Operating Income
47
0
0
0
00
1
5
8
Less Interest Expense
8
0
0
0
00
2
7
Income before Taxes
39
0
0
0
00
1
3
1
Income Taxes
15
6
0
0
00
5
2
Net Income
$23
4
0
0
00
7
9