115
214) Use the following information from the current year financial statements of a company to
calculate the ratios below:
(a) Current ratio.
(b) Accounts receivable turnover. (Assume the prior year’s accounts receivable balance was
$100,000.)
(c) Days’ sales uncollected.
(d) Inventory turnover. (Assume the prior year’s inventory was $50,200.)
(e) Times interest earned ratio.
(f) Return on common stockholders’ equity. (Assume the prior year’s common stock balance was
$480,000 and the retained earnings balance was $128,000.)
(g) Earnings per share (assuming the corporation only has common stock outstanding).
(h) Price earnings ratio. (Assume the company’s stock is selling for $26 per share.)
(i) Divided yield ratio. (Assume that the company paid $1.25 per share in cash dividends.)
Income statement data:
Sales (all on credit) $1,075,000
Cost of goods sold 575,000
Gross profit on sales $ 500,000
Operating expenses 305,000
Operating income $ 195,000
Interest expense 20,400
Income before taxes $ 174,600
Income taxes 74,000
Net income $ 100,600
Balance sheet data:
Cash $ 38,400
Accounts receivable 120,000
Inventory 56,700
Prepaid Expenses 24,000
Total current assets $ 239,100
Total plant assets 708,900
Total assets $ 948,000
Accounts payable $ 91,200
Interest payable 4,800
Long-term liabilities 204,000
Total liabilities $ 300,000
Common stock, $10 par 480,000
Retained earnings 168,000
Total liabilities and equity $ 948,000
215) Financial information for Sigma Company is presented below. Calculate the following
ratios for Year 2:
(a) Inventory turnover.
(b) Accounts receivable turnover.
(c) Return on total assets.
(d) Times interest earned.
(e) Total asset turnover.
Year 2 Year 1
Assets:
Cash $ 18,000 $ 22,000
Marketable securities 25,000 0
Accounts receivable 38,000 42,000
Inventory 61,000 52,000
Prepaid insurance 6,000 9,000
Long-term investments 49,000 20,000
Plant assets, net 218,000 225,000
Total assets $415,000 $370,000
Net income after interest expense and taxes $ 62,250
Sales (all on credit) 305,000
Cost of goods sold 123,000
Interest expense 15,600
Income tax expense 27,000
118
216) The following summaries from the income statements and balance sheets of Kouris
Company and Brittania, Inc. are presented below.
(1) For both companies for Year 2, compute the:
(a) Current ratio
(b) Acid-test ratio
(c) Accounts receivable turnover
(d) Inventory turnover
(e) Days’ sales in inventory
(f) Days’ sales uncollected
Which company do you consider to be the better short-term credit risk? Explain.
(2) For both companies for Year 2, compute the:
(a) Profit margin ratio
(b) Return on total assets
(c) Return on common stockholders’ equity
Which company do you consider to have better profitability ratios?
Kouris Company Consolidated Balance Sheets
(in millions)
Dec. 31
Year 2 Year 1
Assets
Current assets:
Cash and cash equivalents $ 634.0 $ 575.5
Accounts receivable, net of allowance 2,101.1 1,804.1
Inventories 1,514.9 1,373.8
Other current assets 429.9 401.3
Total current assets 4,679.9 4,154.7
Property, plant, and equipment, net 1,620.8 1,614.5
Other long term assets 413.2 670.8
Total assets $6,713.9 $6,440.0
Liabilities and Stockholders’ Equity
119
Current liabilities:
Current portion of long-term debt $ 205.7 $ 55.3
Notes payable 75.4 425.2
Accounts payable 572.7 504.4
Accrued liabilities 1,054.2 765.3
Income taxes payable 107.2 83.0
Total current liabilities 2,015.2 1,833.2
Long term liabilities 708.0 767.8
Total liabilities 2,723.2 2,601.0
Stockholders’ equity:
Common stock 2.8 2.8
Contributed capital in excess of par value 589.0 538.7
Unearned stock compensation (0.6) (5.1)
Accumulated other comprehensive loss (239.7) (192.4)
Retained earnings 3,639.2 3,495.0
Total stockholders’ equity 3,990.7 3,839.0
Total liabilities and stockholders’ equity $6,713.9 $6,440.0
Kouris Company
Consolidated Statement of Income
December 31, Year 2
(in millions)
Revenues $10,697.0
Cost of sales 6,313.6
Gross profit 4,383.4
Operating expenses 3,137.6
Operating income 1,245.8
Interest expense 42.9
Other revenues and expenses 79.9
Income before tax 1,123.0
Income taxes 382.9
Income before effect of accounting change 740.1
Cumulative effect of accounting change, net of tax 266.1
Net income $ 474.0
120
Brittania, Inc.
Consolidated Balance Sheets
Dec. 31, Dec. 31,
Year 2 Year 1
Assets
Current assets:
Cash and cash equivalents $34.5 $22.2
Accounts receivable, net of allowance 15.5 14.7
Inventories 27.2 28.4
Other current assets 3.5 4.2
Total current assets 80.7 69.5
Property, plant, and equipment, net 5.7 7.0
Other long term assets 1.1 1.5
Total assets $87.5 $78.0
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 8.5 $ 6.6
Accrued liabilities 7.8 5.6
Total current liabilities 16.3 12.2
Long term liabilities 2.5 2.6
Total liabilities 18.8 14.8
Stockholders’ equity:
Common stock 2.3 2.3
Contributed capital in excess of par value 17.8 17.4
Unearned stock compensation (0.1) (0.5)
Accumulated other comprehensive loss (0.9) (1.3)
Treasury stock (6.3) (5.4)
Retained earnings 55.9 50.7
Total stockholders’ equity 68.7 63.2
Total liabilities and stockholders’ equity $87.5 $78.0
121
Brittania, Inc.
Consolidated Statement of Income
December 31, Year 2
(in millions)
Revenues $133.5
Cost of sales 87.3
Gross profit 46.2
Operating expenses 37.3
Operating income 8.9
Interest expense (0.1)
Other revenues and expenses 0.3
Income before tax 9.1
Income taxes 3.9
Net income $ 5.2
217) ________ applies analytical tools to general-purpose financial statements and related data
for making business decisions.
218) A common focus of financial statement users in evaluating a company’s performance and
financial condition includes evaluating its (1) ________, (2) ________, and (3) ________.
219) General-purpose financial statements include the (1)________, (2) ________, (3)
________, (4) ________ and (5) ________.
220) The four building blocks of financial analysis are (1)________, (2) ________, (3)
________ and (4) ________.
221) The standards for comparisons when interpreting measures from financial statement
analysis include (1) ________, (2) ________, (3) ________, and (4) ________.
222) The comparison of a company’s financial condition and performance across time is known
as ________.
223) The comparison of a company’s financial condition and performance to a base amount is
known as ________.
224) The measurement of key relationships between financial statement items is known as
________.
225) Three of the most common tools of financial analysis are (1) ________, (2) ________, and
(3) ________.
226) A good financial statement analysis report usually includes the following six sections: (1)
________, (2) ________, (3) ________, (4) ________ (5) ________, and (6) ________.
227) ________ financial statements are reports where financial amounts are placed side-by-side
in columns on a single statement for analytical purposes.
228) Trend percentage is calculated by dividing ________ by ________ and multiplying the
result by 100.
229) ________ is a method of analysis used to evaluate individual financial statement items or
groups of items in terms of a specific base amount.
230) The current ratio and acid-test ratio are used to reflect the ________ of a business.
231) The debt ratio, the equity ratio, debt-to-equity ratio, and times interest earned are all
________ ratios.
232) The gross margin ratio, return on total assets, and basic earnings per share are all ________
ratios.
233) ________ ratios include the price-earnings ratio and dividend yield.
234) Ratios may be expressed as (1) ________, (2) ________, or (3) ________.
235) A business segment is a part of a company that is separated by its (1) ________ or (2)
________.
236) The income level most likely to continue into the future is commonly referred to as
________.