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
116
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?
Dec. 31
Year 2
Year 1
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
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
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
Dec. 31,
Dec. 31,
Year 2
Year 1
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
________.