16. The following information pertains to Bailey Corporation:
Profit margin for 2013
10.0%
Total assets, 12/31/12
$430,000
Total assets, 12/31/13
$470,000
Net income, 2013
$ 30,000
Calculate the return on assets for 2013. Round your answer to two decimal places.
17. For 2013, Black & White Corporation had average total assets of $300,000, net sales of $250,000, net
income of $20,000, net cash flows from operating activities of $30,000, dividend payments of
$15,000, purchases of plant assets of $70,000, and sales of plant assets of $30,000. Using this
information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free
cash flow. Round amounts to one decimal place.
18. For 2013, Castro Corporation had average total assets of $580,000, net sales of $480,000, net income
of $30,000, net cash flows from operating activities of $40,000, dividend payments of $24,000,
purchases of plant assets of $132,000, and sales of plant assets of $56,000. Using this information,
compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow.
Round amounts to one decimal place.
19. a. Indicate the effect of a sale of merchandise on account (on credit) on each of the following items.
Assume the selling price exceeds the cost of the inventory. Use “Increase,” “Decrease,” or “No effect”
to express your answer for each, and place your answers in the spaces provided.
Current ratio
Quick ratio
Inventory turnover
Asset turnover
b. Indicate the effect of a payment of an account payable on each of the following items. Assume that
the first two ratios exceeded 1.0 before the transaction. Use “Increase,” “Decrease,” or “No effect” to
express your answer for each, and place your answers in the spaces provided.
Current ratio
Quick ratio
Return on equity
Receivable turnover
Current ratio
Increase
Quick ratio
Increase
Inventory turnover
Increase
Asset turnover
Increase
Current ratio
Increase
Quick ratio
Increase
Return on equity
No effect
Receivable turnover
No effect
PROBLEM
1. Lois Kent has owned and managed the operations of a small chain of sporting goods stores for the past
two years. She has asked her administrative assistant to provide her with some annual reports of other
companies that sell sporting goods as well as some published reports showing norms for the sporting
goods industry so that Lois can compare the financial ratios of her company with those of other
companies that sell sporting goods. Discuss the limitations of using comparisons with other companies
and industry norms, which Lois needs to remember.
2. Eva Gomez is considering investing money in the common stock of Casa Corporation. She has
obtained the annual report of the company and calculated several financial ratios. Eva knows that her
calculations are accurate, but does not know if the ratios indicate favorable or unfavorable things about
the company. What three standards of comparison are available to Eva? What would each of the
standards tell her about her ratios?
3. At the end of its first year of operations, Andrews Company calculated its depreciation expense using
three different methods. Following are the calculations using these methods:
Straight-line
$45,000
Double-declining balance
78,000
Production
62,000
Net income for Andrews Company using the straight-line method of depreciation is $92,000. Using
this information, answer the following questions. calculate the following items:
a. What would net income be using the double-declining balance method?
b. What would net income be using the production method?
4. The following selected amounts were extracted from the financial statements of H225 Corporation.
Year 4
Year 3
Year 2
Year 1
Net sales
$350,000
$340,000
$330,000
$300,000
Cost of goods sold
218,000
209,000
201,000
186,000
Gross margin
132,000
131,000
129,000
114,000
Compute the following for net sales, cost of goods sold, and gross margin. (Round answers to the
nearest tenth of 1 percent.)
a. The percentage change from Year 1 to Year 2
b. The percentage change from Year 2 to Year 3
c. The percentage change from Year 3 to Year 4
Net sales
10.0 percent increase
[($330,000 – $300,000) ÷ $300,000]
Cost goods sold
[($201,000 – $186,000) ÷ $186,000]
Gross margin
13.2 percent increase
[($129,000 – $114,000) ÷ $114,000]
Net sales
3.0 percent increase
[($340,000 – $330,000) ÷ $330,000]
Cost goods sold
4.0 percent increase
[($209,000 – $201,000) ÷ $201,000]
Gross margin
1.6 percent increase
[($131,000 – $129,000) ÷ $129,000]
Net sales
2.9 percent increase
[($350,000 – $340,000) ÷ $340,000]
Cost goods sold
4.3 percent increase
[($218,000 – $209,000) ÷ $209,000]
Gross margin
0.8 percent increase
[($132,000 – $131,000) ÷ $131,000]
5. Prepare a trend analysis of the following data using 2011 as the base year. Place your answers in the
chart provided. Comment on the trend.
2013
2012
2011
Net sales
$216,000
$220,000
$200,000
Gross margin
122,080
117,600
112,000
Net income
19,200
21,600
20,000
2013
2012
2011
Net sales
Gross margin
Net income
109
105
96
108
6. Prepare a trend analysis of the following data, using 2011 as the base year. Place your answers in the
chart provided. Comment on the trend.
2013
2012
2011
Net sales
$324,000
$330,000
$300,000
Net income
33,000
31,800
30,000
2013
2012
2011
Net sales
Net income
7. Using the following information from an annual report, prepare a vertical analysis of the consolidated
statement of earnings for the fiscal year ended June 30, 2013. (Round percentage answers to one
decimal place.)
June 30, 2013
(In millions)
Net sales
$23,724
Cost of sales
16,642
Gross margin
$ 7,082
Selling, general, and administrative expenses
$ 5,486
Depreciation, amortization, and asset write-offs
556
Total operating expenses
$ 6,042
Income from operations
$ 1,040
Interest expense
(182)
Interest and other income
22
Earnings before income taxes
$ 880
Income taxes
322
Net earnings
$ 558
Net sales*
108
110
110
106
June 30, 2013
% of Net Sales
(In millions)
(In millions)
Net sales
Cost of sales
Gross margin
Selling, general, and administrative expenses
Depreciation, amortization and asset write-offs
Total operating expenses
Income from operations
Interest expense
Interest and other income
Earnings before income taxes
Income taxes
Net earnings
8. Using the following information from an annual report, prepare a vertical analysis of the consolidated
balance sheet at June 30, 2013. (Round percentage answers to one decimal place.)
June 30, 2013
(In millions)
Cash and cash equivalents
$ 584
Accounts and other receivables
182
Merchandise inventories
2,027
Prepaid expenses and other current assets
80
June 30, 2013
(In millions)
(In millions)
Net sales
Cost of sales
Gross margin
Selling, general, and administrative expenses
Depreciation, amortization and asset write-offs
Total operating expenses
Income from operations
Interest expense
Interest and other income
Earnings before income taxes
Income taxes
Net earnings
Total current assets
$2,873
Real estate, net
$2,342
Other, net
2,113
Total property and equipment
$4,455
Goodwill, net
$ 374
Other assets
651
Total assets
$8,353
Short-term borrowings
$ 278
Accounts payable
1,617
Accrued expenses and other current liabilities
836
Income taxes payable
107
Total current liabilities
$2,838
Long-term debt
$1,230
Deferred income taxes
362
Other liabilities
243
Total liabilities
$4,673
Common stock
$ 30
Additional paid-in capital
453
Retained earnings
4,757
Foreign currency translation adjustments
(137)
Treasury shares, at cost
(1,423)
Total stockholders’ equity
$3,680
Total liabilities and stockholders’ equity
$8,353
June 30, 2013
% of Total Assets
(In millions)
(In millions)
Cash and cash equivalents
Accounts and other receivables
Merchandise inventories
Prepaid expenses and other current assets
Total current assets
Real estate, net
Other, net
Total property and equipment
Goodwill, net
Other assets
Total assets
% of Equities
Short-term borrowings
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Foreign currency translation adjustments
Treasury shares, at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
Cash and cash equivalents
Accounts and other receivables
Merchandise inventories
Prepaid expenses and other current assets
Total current assets
Real estate, net
Other, net
Total property and equipment
Goodwill, net
Other assets
Short-term borrowings
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Foreign currency translation adjustments
Treasury shares, at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
9. Using the following information from an annual report, prepare a horizontal analysis of the
consolidated statements of earnings. (Round percentage answers to one decimal place.)
(In millions except per share data)
6/30/2013
6/30/2012
Net sales
$11,862
$11,170
Cost of sales
8,321
8,191
Gross margin
$ 3,541
$ 2,979
Selling, general, and administrative expenses
$ 2,743
$ 2,443
Depreciation, amortization, and asset write-offs
278
255
Total operating expenses
$ 3,021
$ 2,698
Other charges
0
294
Total operating expenses and other charges
$ 3,021
$ 2,992
Income (loss) from operations
$ 520
($ 13)
Interest expense
(91)
(102)
Interest and other income
11
9
Earnings (loss) before income taxes
$ 440
($ 106)
Income taxes
161
26
Net earnings (loss)
$ 279
($ 132)
Basic earnings (loss) per share
$ 1.14
($ 0.50)
Increase
(Decrease)
(In millions except per share data)
6/30/2013
6/30/2012
Amount
Percentage
Net sales
Cost of sales
Gross margin
Selling, general, and administrative expenses
Depreciation, amortization, and asset
write-offs
Total operating expenses
Other charges
Total operating expenses and other charges
Income (loss) from operations
Interest expense
Interest and other income
Earnings (loss) before income taxes
Income taxes
Net earnings (loss)
Basic earnings (loss) per share
10. Using the following information reported in an annual report, prepare a horizontal analysis of the
consolidated balance sheets. (Round percentage answers to one decimal place.)
(In millions)
6/30/2013
6/30/2012
Cash and cash equivalents
$ 584
$ 410
Accounts and other receivables
182
204
Merchandise inventories
2,027
1,902
Prepaid expenses and other current assets
80
81
Total current assets
$2,873
$2,597
Real estate, net
$2,342
$2,354
Other, net
2,113
1,872
Total property and equipment
$4,455
$4,226
Goodwill, net
$ 374
$ 347
Other assets
651
729
Total assets
$8,353
$7,899
Short-term borrowings
$ 278
$ 156
Accounts payable
1,617
1,415
(In millions except per share data)
Amount
Selling, general, and administrative expenses
Total operating expenses
Other charges
(294)
(100.0)
Total operating expenses and other charges
Interest expense
(102)
(11)
Interest and other income
2
Earnings (loss) before income taxes
Net earnings (loss)
Basic earnings (loss) per share