Accounts payable
$ 198,000
$ 280,600
Long-term bonds payable
1,000,000
1,000,000
Preferred stock, 10%, $100 par
450,000
450,000
Common stock, no par
1,800,000
1,800,000
Retained earnings
685,000
301,400
Total liabilities and equities
$4,133,000
$3,832,000
Income Statement
December 31, 2008
Sales, net
$5,400,000
Less cost of goods sold
3,240,000
Gross margin
2,160,000
Less operating expenses
1,010,000
Net operating income
1,150,000
Interest expense
80,000
Net income before taxes
1,070,000
Less income taxes
321,000
Net income
$ 749,000
There were 72,000 shares of common stock outstanding throughout the 2008. Dividends on common stock amounted to $320,400 and dividends on
preferred stock amounted to $45,000. The market value of a share of common stock was $54 at the end of 2008. The income tax rate is 30%.
Refer to Figure 14-3. Required: Calculate the following liquidity ratios for 2008.
a. Current Ratio
b. Quick Ratio
c. Accounts Receivable Turnover Ratio
d. Inventory Turnover Ratio
e. Inventory Turnover in Days
Current ratio = current assets / current liabilities = 1,478,000/198,000 = 7.46 to 1
126. 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
Accounts payable
$ 198,000
$ 280,600
Long-term bonds payable
1,000,000
1,000,000
Preferred stock, 10%, $100 par
450,000
450,000
Common stock, no par
1,800,000
1,800,000
Retained earnings
685,000
301,400
Total liabilities and equities
$4,133,000
$3,832,000
Income Statement
December 31, 2008
Sales, net
$5,400,000
Less cost of goods sold
3,240,000
Gross margin
2,160,000
Less operating expenses
1,010,000
Net operating income
1,150,000
Interest expense
80,000
Net income before taxes
1,070,000
Less income taxes
321,000
Net income
$ 749,000
There were 72,000 shares of common stock outstanding throughout the 2008. Dividends on common stock amounted to $320,400 and dividends on
preferred stock amounted to $45,000. The market value of a share of common stock was $54 at the end of 2008. The income tax rate is 30%.
Refer to Figure 14-3. Required: Calculate the following leverage ratios for 2008.
a. Times interest earned ratio.
b. Debt ratio.
c. Debt to equity ratio.
Times interest earned = Net operating income / Interest expense = $1,150,000 / $80,000= 14.38 times
Debt ratio = Total Liabilities / Total Assets = 1,198,000 / 4,133,000 = .29 to 1
127. 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
Accounts payable
$ 198,000
$ 280,600
Long-term bonds payable
1,000,000
1,000,000
Preferred stock, 10%, $100 par
450,000
450,000
Common stock, no par
1,800,000
1,800,000
Retained earnings
685,000
301,400
Total liabilities and equities
$4,133,000
$3,832,000
Income Statement
December 31, 2008
Sales, net
$5,400,000
Less cost of goods sold
3,240,000
Gross margin
2,160,000
Less operating expenses
1,010,000
Net operating income
1,150,000
Interest expense
80,000
Net income before taxes
1,070,000
Less income taxes
321,000
Net income
$ 749,000
There were 72,000 shares of common stock outstanding throughout the 2008. Dividends on common stock amounted to $320,400 and dividends on
preferred stock amounted to $45,000. The market value of a share of common stock was $54 at the end of 2008. The income tax rate is 30%.
Refer to Figure 14-3. Required: Calculate the following profitability ratios for 2008.
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 = 749,000 / 5,400,000 = .1387 or 13.87%
128. 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
Accounts payable
$ 198,000
$ 280,600
Long-term bonds payable
1,000,000
1,000,000
Preferred stock, 10%, $100 par
450,000
450,000
Common stock, no par
1,800,000
1,800,000
Retained earnings
685,000
301,400
Total liabilities and equities
$4,133,000
$3,832,000
Income Statement
December 31, 2008
Sales, net
$5,400,000
Less cost of goods sold
3,240,000
Gross margin
2,160,000
Less operating expenses
1,010,000
Net operating income
1,150,000
Interest expense
80,000
Net income before taxes
1,070,000
Less income taxes
321,000
Net income
$ 749,000
There were 72,000 shares of common stock outstanding throughout the 2008. Dividends on common stock amounted to $320,400 and dividends on
preferred stock amounted to $45,000. The market value of a share of common stock was $54 at the end of 2008. The income tax rate is 30%.
Refer to Figure 14-3. Required: Calculate the following profitability ratios.
a. Price-earnings ratio
b. Dividend yield
c. Dividend payout ratio
Dividend yield = Dividends per common share / Market price per common share = (320,400 / 72,000) / 54 = 4.45 / 54 = 8.24%
Dividend payout ratio = Common dividends / (Net income – Preferred dividends) = 320,400 / (749,000 – 45,000) = 45.5%
129. Presented below are selected data from the financial statements of Harper Company for 2008, 2007, and
2006.
2008
2007
2006
Total assets
$1,205,000
$952,000
$945,000
Cost of goods sold
360,000
420,000
440,000
Inventory
56,000
64,000
53,000
Net income
65,000
25,000
16,000
A Calculate Harper’s inventory turnover ratio for 2008 and 2007.
B. Calculate the number of days in inventory at December 31, 2008? At December 31, 2007? Assume 365 days in a year.
C. Explain the implications of your calculations with respect to inventory management.
130. Presented below are selected data from the financial statements of eMonstore.com. for 2008, 2007, and
2006.
2008
2007
2006
Total assets
$650,000
$821,000
$800,000
Net credit sales
800,000
650,000
720,000
Accounts receivable
85,000
79,000
74,000
A. Calculate eMonstore.com’s accounts receivable turnover ratio for 2008 and 2007.
B. Calculate the number of days the average balance of receivables is outstanding before being converted into cash (turnover in days) for 2008 and
2007.
C. What problems do you see with the company’s credit policy if the terms are net 30 days? Explain.
2008: 365/9.8 = 37.2 2007: 365/8.5 = 42.9
Cost of goods sold/Average inventory =
2008: $360,000/[($56,000 + $64,000)/2] = 6.0 times
2007: $420,000/[($64,000 + $53,000)/2] = 7.2 times
Number of days in the period/Inventory turnover =
2008: 365/6.0 = 60.8 days
2007: 365/7.2 = 50.7 days
131. The following information is summarized from the balance sheets of Kress Inc. and Ross Corp. at
December 31, 2008. Neither company has inventory.
Kress
Ross
Current Assets:
Cash and cash equivalents
$ 340,800
$100,200
Short-term investments
12,000
7,600
Accounts receivable, net
377,000
42,000
Notes receivable, net
36,300
18,000
Other current assets
207,400
40,000
Total current assets
$ 973,500
$207,800
Current liabilities
$ 860,900
$150,000
Other liabilities
5,000,400
300,500
Stockholders’ equity
2,400,300
800,700
1.
Using the information provided above,
compute the following for each company at
December 31, 2008:
A.
Current Ratio
B.
Quick Ratio
2.
Comment briefly on the liquidity of each of
these two companies. Which company
appears to be the most liquid?
Kress
Ross
Current assets
$973,500 = 1.13 to 1
$207,800 = 1.39 to 1
Kress
Ross
Current liabilities
$860,900
$150,000
132. Figure 14-4.
Use the following information that was obtained from the 2008 and 2007 financial statements of James
Company, Norris Corporation, and Zorro Company to answer the questions that follow:
(In millions)
James
Norris
Zorro
Accounts receivable
12/31/08
$ 33,000
$ 22,000
$ 41,500
12/31/07
30,000
12,800
42,600
Inventory
12/31/08
22,600
12,600
54,200
12/31/07
23,900
32,800
44,000
Net sales (Credit)
2008
620,000
320,000
510,000
2007
610,000
310,000
760,000
Cost of goods sold
2008
211,000
406,000
311,000
2007
156,000
200,000
310,000
Refer to Figure 14-4. Compare the three companies and answer the following:
A.
Compute the accounts receivable turnover ratio for each company for 2008.
B.
Which company appears to have the best liquidity position based solely on the accounts receivable turnover? Explain.
James
$620,000/[($33,000 + $30,000)/2] = 19.7 times
Norris
$320,000/[($22,000 + $12,800)/2] = 18.4 times
Zorro
$510,000/[($41,500 + $42,600)/2] = 12.1 times
133. Figure 14-4.
Use the following information that was obtained from the 2008 and 2007 financial statements of James
Company, Norris Corporation, and Zorro Company to answer the questions that follow:
(In millions)
James
Norris
Zorro
Accounts receivable
12/31/08
$ 33,000
$ 22,000
$ 41,500
12/31/07
30,000
12,800
42,600
Inventory
12/31/08
22,600
12,600
54,200
12/31/07
23,900
32,800
44,000
Net sales (Credit)
2008
620,000
320,000
510,000
2007
610,000
310,000
760,000
Cost of goods sold
2008
211,000
406,000
311,000
2007
156,000
200,000
310,000
Refer to Figure 14-4. Compare the three companies and answer the following:
A.
Compute the number of days inventory is held before being sold for each company for 2008.
B.
Which company appears to have the best liquidity position based solely on the inventory analysis? Explain.
James
$211,000/[($22,600 + $23,900)/2] = 9.1 times
Norris
$406,000/[($12,600 + $32,800)/2] = 17.9 times
Zorro
$311,000/[($54,200 + $44,000)/2] = 6.3 times
James
365/9.1 = 40.1 days
Norris
365/17.9 = 20.4 days
Zorro
365/6.3 = 57.9 days
134. The following information is available from the balance sheets at the end of 2008 and 2007 for Shelley
Company:
2008
2007
Accounts payable
$ 80,000
$ 40,000
Accrued liabilities
65,000
25,000
Taxes payable
10,000
20,000
Short-term notes payable
-0-
60,000
Bonds payable due within next year
200,000
200,000
Total current liabilities
$ 355,000
$ 345,000
Bonds payable
$ 800,000
$ 300,000
Common stock, $5 par
$1,000,000
$1,000,000
Retained earnings
695,000
55,000
Total stockholders’ equity
$1,695,000
$1,055,000
Total liabilities and stockholders’ equity
$2,850,000
$1,700,000
Net income for 2008and 2007 was $340,000 and $300,000, respectively. Interest expense was $45,000 for 2008 and the tax rate is 30%. Answer the
following:
A.
Calculate the return on common stockholders’ equity ratio for 2008.
B.
Calculate the return on total assets ratio for 2008.
C.
What is the difference between the return on stockholders’ equity ratio and the return on assets ratio?
135. Smith Inc. is a wholesaler of snow skiing gear. During 2008, Smith expanded its retail business by adding
over 50 shops. The following information is obtained from the comparative financial statements included in the
company’s 2008 annual report.
Dec. 31, 2008
Dec. 31, 2007
Total liabilities
$26,000,000
$18,000,000
Total stockholders’ equity
34,000,000
38,000,000
FOR THE FISCAL YEARS ENDED
Dec. 31
2008
2007
Depreciation expense
$ 2,000,000
$ 6,000,000
Interest expense
3,400,000
3,200,000
Income tax expense
12,600,000
18,100,000
Net income
6,000,000
15,000,000
Net cash provided by operations
41,000,000
(400,000)
Total dividends paid
2,000,000
12,000,000
Cash used to purchase plant assets
32,000,000
18,000,000
Payments on long-term debt
1,600,000
1,800,000
1.
Using the information provided above,
compute the following for 2008 and 2007:
A.
Debt-to-equity ratio (at each year-end)
B.
Times interest earned ratio
2.
Briefly explain the implications of your
findings with respect to these two
leverage ratios..
A. Total liabilities/Total stockholders’ equity =
2008: $26,000,000/$34,000,000 = .76 to 1
2007: $18,000,000/$38,000,000 = .47 to 1
B. (Net income + interest expense + income tax expense)/Interest expense =
2008: ($6,000,000 + $3,400,000 + $12,600,000)/$3,400,000 = 6.47 to 1
2007: ($15,000,000 + $3,200,000 + $18,100,000)/$3,200,000 = 11.34 to 1
debt. It indicates that Smith Inc. earns about 6.5 times as much as the amount of interest expense incurred.
136. The two major forms of common-size analysis are horizontal analysis and vertical analysis. What type of
information or insights can be obtained by using these two techniques of financial statement analysis? Explain
how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or
competitive companies.
137. The use of estimates, cost, alternative accounting methods, the presence of atypical data, and
diversification of firms are all factors that may limit the usefulness of financial statement analysis. Identify a
ratio and explain how one or more of the limiting factors can affect the usefulness of that ratio.
138. Why is liquidity important for businesses?
139. What do profitability ratios measure and what is their significance?
140. Carter Company has a return on assets of 12% and a return on common stockholders’ equity of 15%. What
causes the difference in the two returns?