115. Select the ratio that each statement below most properly satisfies by placing the letter of the ratio in the
space provided.
1. An income statement measure of the ability
Return on common
2. A measure of the degree of protection
3. A measure that compares only the most
4. The relationship between dividends and the
5. A measure that tells an investor the
proportion of earnings that a company pays in
6. A ratio that compares the amount of debt that
by dividing the market price per share by the
7. A measure viewed by many investors as an
important indicator of stock values. It is found
8. A measure of the company’s ability to pay its
9. A measure of the company’s success in
116. The following items were taken from the financial statements of Small, Inc. over a three-year period:
2008
2007
2006
Net Sales
$340,000
$330,000
$300,000
Cost of Goods Sold
209,000
201,000
186,000
Gross Profit
$131,000
$129,000
$114,000
Required:
Using horizontal analysis and 2006 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain
whether the trends are favorable or unfavorable for each item.
2007
2006
Net Sales
110%
100%
Cost of Goods Sold
108%
100%
Gross Profit
113%
100%
117. Figure 14-1.
Financial statements for Grange Company appear below:
Grange Company
Comparative Balance Sheet
December 31, 2007 and 2006
2007
2006
Current assets:
Cash and marketable securities
$ 180,000
$ 160,000
Accounts receivable, net
150,000
120,000
Inventory
100,000
100,000
Prepaid expenses
40,000
50,000
Total current assets
470,000
430,000
Noncurrent assets:
Plant & equipment, net
1,390,000
1,320,000
Total assets
$1,860,000
$1,750,000
Current liabilities:
Accounts payable
$ 130,000
$ 130,000
Accrued liabilities
60,000
80,000
Notes payable, short term
100,000
100,000
Total current liabilities
290,000
310,000
Noncurrent liabilities:
Bonds payable
270,000
300,000
Total liabilities
560,000
610,000
Stockholders’ equity:
Preferred stock, $5 par, 5%
100,000
100,000
Common stock, $5 par
220,000
220,000
Additional paid-in capital—common stock
190,000
190,000
Retained earnings
790,000
630,000
Total stockholders’ equity
1,300,000
1,140,000
Total liabilities & stockholders’ equity
$1,860,000
$1,750,000
Grange Company
Income Statement
For the Year Ended December 31, 2007
Sales (all on account)
$2,400,000
Cost of goods sold
1,680,000
Gross margin
720,000
Operating expenses
280,000
Net operating income
440,000
Interest expense
30,000
Net income before taxes
410,000
Income taxes (30%)
123,000
Net income
$ 287,000
Dividends during 2007 totaled $127,000 , of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, 2007 was $100.
Refer to Figure 14-1. Required: Compute the following liquidity ratios for 2007:
a. Current ratio
b. Quick ratio
c. Accounts Receivable Turnover Ratio
d. Inventory Turnover Ratio
e. Inventory Turnover in Days
118. Figure 14-1.
Financial statements for Grange Company appear below:
Grange Company
Comparative Balance Sheet
December 31, 2007 and 2006
2007
2006
Current assets:
Cash and marketable securities
$ 180,000
$ 160,000
Accounts receivable, net
150,000
120,000
Inventory
100,000
100,000
Prepaid expenses
40,000
50,000
Total current assets
470,000
430,000
Noncurrent assets:
Plant & equipment, net
1,390,000
1,320,000
Total assets
$1,860,000
$1,750,000
Current liabilities:
Accounts payable
$ 130,000
$ 130,000
Accrued liabilities
60,000
80,000
Notes payable, short term
100,000
100,000
Total current liabilities
290,000
310,000
Noncurrent liabilities:
Bonds payable
270,000
300,000
Total liabilities
560,000
610,000
Stockholders’ equity:
Preferred stock, $5 par, 5%
100,000
100,000
Common stock, $5 par
220,000
220,000
Additional paid-in capital—common stock
190,000
190,000
Retained earnings
790,000
630,000
Total stockholders’ equity
1,300,000
1,140,000
Total liabilities & stockholders’ equity
$1,860,000
$1,750,000
Grange Company
Income Statement
For the Year Ended December 31, 2007
Sales (all on account)
$2,400,000
Cost of goods sold
1,680,000
Gross margin
720,000
Operating expenses
280,000
Net operating income
440,000
Interest expense
30,000
Net income before taxes
410,000
Income taxes (30%)
123,000
Net income
$ 287,000
Dividends during 2007 totaled $127,000 , of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, 2007 was $100.
Refer to Figure 14-1: Required: Compute the following leverage ratios for 2007:
a. Times interest earned ratio
b. Debt ratio
c. Debt to equity ratio
119. Figure 14-1.
Financial statements for Grange Company appear below:
Grange Company
Comparative Balance Sheet
December 31, 2007 and 2006
2007
2006
Current assets:
Cash and marketable securities
$ 180,000
$ 160,000
Accounts receivable, net
150,000
120,000
Inventory
100,000
100,000
Prepaid expenses
40,000
50,000
Total current assets
470,000
430,000
Noncurrent assets:
Plant & equipment, net
1,390,000
1,320,000
Total assets
$1,860,000
$1,750,000
Current liabilities:
Accounts payable
$ 130,000
$ 130,000
Accrued liabilities
60,000
80,000
Notes payable, short term
100,000
100,000
Total current liabilities
290,000
310,000
Noncurrent liabilities:
Bonds payable
270,000
300,000
Total liabilities
560,000
610,000
Stockholders’ equity:
Preferred stock, $5 par, 5%
100,000
100,000
Common stock, $5 par
220,000
220,000
Additional paid-in capital—common stock
190,000
190,000
Retained earnings
790,000
630,000
Total stockholders’ equity
1,300,000
1,140,000
Total liabilities & stockholders’ equity
$1,860,000
$1,750,000
Grange Company
Income Statement
For the Year Ended December 31, 2007
Sales (all on account)
$2,400,000
Cost of goods sold
1,680,000
Gross margin
720,000
Operating expenses
280,000
Net operating income
440,000
Interest expense
30,000
Net income before taxes
410,000
Income taxes (30%)
123,000
Net income
$ 287,000
Dividends during 2007 totaled $127,000 , of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, 2007 was $100.
Refer to Figure 14-1. Required: Compute the following profitability ratios for 2007:
a. Return on Sales
b. Return on Total Assets
c. Return on Common Stockholders’ Equity
d. Earnings per share
Return on Sales = Net Income / Sales = 287,000 / 2,400,000 = .1196 or 11.96%
120. Figure 14-1.
Financial statements for Grange Company appear below:
Grange Company
Comparative Balance Sheet
December 31, 2007 and 2006
2007
2006
Current assets:
Cash and marketable securities
$ 180,000
$ 160,000
Accounts receivable, net
150,000
120,000
Inventory
100,000
100,000
Prepaid expenses
40,000
50,000
Total current assets
470,000
430,000
Noncurrent assets:
Plant & equipment, net
1,390,000
1,320,000
Total assets
$1,860,000
$1,750,000
Current liabilities:
Accounts payable
$ 130,000
$ 130,000
Accrued liabilities
60,000
80,000
Notes payable, short term
100,000
100,000
Total current liabilities
290,000
310,000
Noncurrent liabilities:
Bonds payable
270,000
300,000
Total liabilities
560,000
610,000
Stockholders’ equity:
Preferred stock, $5 par, 5%
100,000
100,000
Common stock, $5 par
220,000
220,000
Additional paid-in capital—common stock
190,000
190,000
Retained earnings
790,000
630,000
Total stockholders’ equity
1,300,000
1,140,000
Total liabilities & stockholders’ equity
$1,860,000
$1,750,000
Grange Company
Income Statement
For the Year Ended December 31, 2007
Sales (all on account)
$2,400,000
Cost of goods sold
1,680,000
Gross margin
720,000
Operating expenses
280,000
Net operating income
440,000
Interest expense
30,000
Net income before taxes
410,000
Income taxes (30%)
123,000
Net income
$ 287,000
Dividends during 2007 totaled $127,000 , of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, 2007 was $100.
Refer to Figure 14-1: Required: Calculate the following profitability ratios.
a. Price-earnings ratio
b. Dividend yield
c. Dividend payout ratio
121. Using the following selected items from the comparative balance sheet of Alcon Company, illustrate
horizontal and vertical analysis.
December 31, 2007
December 31, 2006
Accounts Receivable
$ 880,000
$ 600,000
Inventory
920,000
750,000
Total Assets
4,000,000
3,000,000
December 31, 2007
December 31, 2006
Accounts Receivable
147%
100%
Inventory
123%
100%
Total Assets
133%
100%
December 31, 2007
December 31, 2006
Accounts Receivable
22%
20%
Inventory
23%
25%
Total Assets
100%
100%
Dividend yield = Dividends per common share / Market price per common share = (122,000 / 44,000) / 100 = 2.77 / 100 = 2.77%
Dividend payout ratio = Common dividends / (Net income – Preferred dividends) = 122,000 / (287,000 – 5,000) = 43.3%
122. Figure 14-2.
The current asset section of the balance sheets of the Shamrock Company as of June 30, 2008 and 2007 is
presented below.
2008
2007
Cash and cash equivalents
$ 75,000
$ 58,800
Trade accounts receivable, net
157,500
193,200
Inventory
208,200
253,400
Other current assets
18,400
15,500
Total current assets
$ 459,100
$ 520,900
Total assets
$2,650,000
$3,430,000
Refer to Figure 14-2. In the spaces provided below, complete a horizontal analysis of the current asset section of Shamrock Company’s balance
sheet for 2008. Your answers for “% Change” should be rounded to one decimal place, e.g., 10.3%. Provide a short evaluation of this analysis.
$ Change
% Change
$ Change
% Change
Cash and cash equivalents
$ 16,200
27.6%
Trade accounts receivable, net
(35,700)
(18.5%)
Other current assets
2,900
18.7%
123. Figure 14-2.
The current asset section of the balance sheets of the Shamrock Company as of June 30, 2008 and 2007 is
presented below.
2008
2007
Cash and cash equivalents
$ 75,000
$ 58,800
Trade accounts receivable, net
157,500
193,200
Inventory
208,200
253,400
Other current assets
18,400
15,500
Total current assets
$ 459,100
$ 520,900
Total assets
$2,650,000
$3,430,000
Refer to Figure 14-2: In the spaces provided below, complete a vertical analysis of the current asset section of Shamrock Company’s balance sheets
for 2007 and 2008. Your answers should be rounded to one decimal place, e.g., 10.3%.
2008
2007
2008
2007
Cash and cash equivalents
2.8%
1.7%
Trade accounts receivable, net
5.9%
5.6%
Other current assets
0.7%
0.5%
124. Use the selected data presented below from the financial statements of Buster Corp. for 2008 and 2007 to
make the required financial ratio calculations:
2008
2007
Net income
$110,000
$123,000
Cash dividends paid on preferred stock
$12,000
$15,000
Cash dividends paid on common stock
$42,000
$38,000
Weighted average number of common shares outstanding
105,000
95,000
Market price per share of common stock at the end of
the year
$16.00
$13.00
Required: Calculate the following financial ratios for 2008.
a. Earnings per share
b. Price-earnings ratio
c. Dividend yield
125. Figure 14-3.
Condensed financial statements for Black Company appear below:
Comparative Balance Sheets
2008
2007
Cash
$ 128,000
$ 201,000
Accounts receivable
472,000
438,000
Inventories
797,000
673,000
Prepaid expenses
81,000
92,000
Plant and equipment (net)
2,655,000
2,428,000
Total assets
$4,133,000
$3,832,000
Price-earnings ratio = Market price/Earnings per share = $16.00/$0.93 = 17.2 to 1
Dividend yield = Common dividends per share/Market price per share = ($42,000/105,000)/$16 = 2.5%