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32. Both return on assets and asset turnover improve in 2006, largely due to the decrease in
average assets rather than to a modest increase in net income and sales.
Return on equity also increases in 2006. Although it is true that net income has increased in
2006, the improvement in return on equity is mainly due to a large decrease in shareholders'
equity from the large dividend declared and paid in 2005. Average shareholders' equity for 2005
is large because it still reflects the pre-dividend 2004 retained earnings.
Earnings per share increase as well in 2006, due to the reduction in the average number of shares
outstanding because of purchases of treasury stock as well as an increase in net income.
The following information has been adapted from the 2004 and 2005 annual reports of
Amazon.com's worldwide operations, available online at
http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsAnnual
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Year Ended December 31,
2005 2004 2003
Net sales $8,490 $6,921 $5,264
Cost of sales 6,451 5,319 4,007
Gross profit 2,039 1,602 1,257
Operating expenses
Fulfillment 745 601 495
Marketing 198 162 128
Technology & content 451 283 257
General & administrative 166 124 104
Other operating expense (income) 47 (8) 3
Total operating expenses 1,607 1,162 987
Income from operations 432 440 270
Interest income 44 28 22
Interest expense (92) (107) (130)
Other income (expense), net 44 (6) (123)
Total non-operating expense (4) (85) (231)
Income before income taxes 428 355 39
Income tax expense 95 (233) 4
Net income $ 333 $ 588 $ 35
Additional information that might be useful:
Weighted average shares outstanding 412 406 395
AMAZON.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year Ended December 31,
2005 2004 2003
Net cash provided by operating activities $ 733 $566 $393
Net cash (used in) provided by investing activities (830) (268) 303
Net cash used in financing activities (193) (97) (332)
Net (decrease) increase in cash $( 290) $201 $364
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
December 31,
ASSETS 2005 2004 2003
Current assets:
Cash $1,013 $1,303 $ 1,102
Short-term investments 987 476 293
Inventories 566 480 294
Accounts receivable 274 199 131
Other current assets 89 81 1
Total current assets 2,929 2,539 1,821
Property, plant & equipment (net) 348 246 224
Goodwill 159 139 69
Other assets 260 324 48
Total assets $3,696 $3,248 $2,162
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $1,366 $1,142 $ 820
Accrued expenses & other current liabilities 563 478 433
Total current liabilities 1,929 1,620 1,253
Long-term debt & other 1,521 1,855 1,945
Total liabilities 3,450 3,475 3,198
Shareholders' equity (deficit)
Common stock 4 4 4
Additional paid-in capital 2,263 2,123 1,896
Retained earnings (deficit) (2,021) (2,354) (2,936)
Total shareholders' equity (deficit) 246 (227) (1,036)
Total liabilities & shareholders' equity (deficit)$3,696$3,248 $2,162
108) Divide the class into teams of three or four people. Each team member should work the
following problem separately outside of class. Then give the students time in class to compare
answers with their teammates and put together a final, correct copy of the problem. Each team
should turn in only one copy of the problem for grading. All team members will receive the same
grade.
Use the adapted financial statements from Amazon.com, Inc. to answer the following questions:
1. Calculate the current ratio for 2004.
2. Calculate the current ratio for 2005.
3. Did the current ratio improve in 2005?
4. Calculate the cash from operations to current liabilities for 2004.
5. Calculate the cash from operations to current liabilities for 2005.
6. Did the cash from operations to current liabilities improve in 2005?
7. Calculate the inventory turnover ratio for 2004.
8. Calculate the inventory turnover ratio for 2005.
9. Did the inventory turnover ratio improve in 2005?
10. Calculate the accounts receivable turnover ratio for 2004.
11. Calculate the accounts receivable turnover ratio for 2005.
12. Did the accounts receivable turnover ratio improve in 2005?
13. Use the liquidity ratios you have just calculated to discuss Amazon.com's liquidity.
14. Calculate the return on assets for 2004.
15. Calculate the return on assets for 2005.
16. Did the return on assets improve in 2005?
17. Calculate the asset turnover ratio for 2004.
18. Calculate the asset turnover ratio for 2005.
19. Did the asset turnover ratio improve in 2005?
20. Calculate the return on equity for 2004. (Amazon.com has issued no preferred stock)
21. Calculate the return on equity for 2005. (Amazon.com has issued no preferred stock)
22. Did the return on equity improve in 2005?
23. Calculate the gross profit ratio for 2004.
24. Calculate the gross profit ratio for 2005.
25. Did the gross profit ratio improve in 2005?
26. Calculate earnings per share for 2004. (Amazon.com has issued no preferred stock)
27. Calculate earnings per share for 2005. (Amazon.com has issued no preferred stock)
28. Did earnings per share improve in 2005?
29. Use the profitability ratios you have just calculated to discuss Amazon.com's profitability.
30. Based on ALL of the ratios you have just calculated, do you consider Amazon.com to be a
good investment? Why?
The following information has been adapted from the 2004 and 2005 annual reports of
Halliburton Company's worldwide operations, available online at
http://ir.halliburton.com/phoenix.zhtml?c=67605&p=irol-irhome
HALLIBURTON COMPANY
Consolidated Statements of Operations
Years ended December 31
Millions of dollars and shares except per share data2005 2004 2003
Total revenue $20,994 $20,466 $16,271
OPERATING COSTS AND EXPENSES
Cost of sales 18,146 19,323 15,268
General and administrative 380 361 330
Gain on sales of business assets (net) (194) (55) (47)
Total operating costs and expenses 18,332 19,629 15,551
OPERATING INCOME 2,662 837 720
Interest expense (207) (229) (139)
Interest income 64 44 30
Other, net (83) (26) (38)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 2,436 626 573
Income tax expense (79) (241) (234)
Income (loss) from discontinued operations, net
of tax (expense) benefit of $(1), $180, and $(6) 1 (1,364) (1,151)
NET INCOME (LOSS) $2,358 $(979) $(812)
Other information that might be useful: 2005 2004 2003
Weighted average common shares outstanding 505 437 434
Cash dividends per share $0.50 $0.50 $0.50
Market price of common stock $62.04 $37.39 $25.00
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
Years ended December 31
Millions of dollars 2005 2004 2003
Cash flows from operating activities $ 701 $ 928 $ (775)
Cash flows from investing activities 493 (398) (729)
Cash flows from financing activities (720) 283 1,636
Increase in cash $ 474 $ 813 $ 132
HALLIBURTON COMPANY
Consolidated Balance Sheets
December 31
(in millions) 2005 2004 2003
ASSETS
CURRENT ASSETS:
Cash $ 2,391 $ 1,917 $ 1,815
Short-term investments - 891 -
Receivables 4,801 5,751 4,765
Inventories 953 791 695
Other current assets 1,182 680 644
TOTAL CURRENT ASSETS 9,327 10,030 7,919
Property, plant & equipment, net 2,648 2,553 2,526
Goodwill 765 795 670
Long-term investments 382 541 579
Other long-term assets 1,888 1,945 3,805
TOTAL ASSETS $15,010 $15,864 $15,499
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,967 $ 2,339 $ 1,776
Unearned revenue 661 553 741
Accrued wages and benefits 648 473 400
Current maturities of long-term debt 361 347 22
Short-term notes payable 22 15 -
Other current liabilities 778 3,405 3,625
TOTAL CURRENT LIABILITIES 4,437 7,132 6,564
Long-term debt 2,813 3,593 3,415
Other long-term liabilities 1,243 1,099 2,873
TOTAL LIABILITIES 8,493 11,824 12,852
SHAREHOLDERS' EQUITY:
Common stock and paid-in capital in excess of par 4,135 3,758 1,415
Retained earnings 2,756 759 1,809
6,891 4,517 3,224
Less treasury stock, at cost (374) (477) (577)
TOTAL SHAREHOLDERS' EQUITY 6,517 4,040 2,647
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $15,010 $15,864 $15,499
109) Divide the class into teams of three or four people. Each team member should work the
following problem separately outside of class. Then give the students time in class to compare
answers with their teammates and put together a final, correct copy of the problem. Each team
should turn in only one copy of the problem for grading. All team members will receive the same
grade.
Use the adapted financial statements from Halliburton Company to answer the following
questions:
1. Calculate the current ratio for 2004.
2. Calculate the current ratio for 2005.
3. Did the current ratio improve in 2005?
4. Calculate cash from operations to current liabilities for 2004.
5. Calculate cash from operations to current liabilities for 2005.
6. Did cash from operations to current liabilities improve in 2005?
7. Calculate the accounts receivable turnover ratio for 2004.
8. Calculate the accounts receivable turnover ratio for 2005.
9. Did the accounts receivable turnover ratio improve in 2005?
10. Use the liquidity ratios you have just calculated to discuss Halliburton Company's liquidity.
11. Calculate the debt-to-equity ratio for 2004.
12. Calculate the debt-to-equity ratio for 2005.
13. Did the debt-to-equity ratio improve in 2005?
14. Use the solvency ratio you have just calculated to discuss Halliburton Company's solvency.
15. Calculate the return on assets for 2004.
16. Calculate the return on assets for 2005.
17. Did the return on assets improve in 2005?
18. Calculate the asset turnover ratio for 2004.
19. Calculate the asset turnover ratio for 2005.
20. Did the asset turnover ratio improve in 2005?
21. Calculate the return on equity for 2004. (Halliburton has no preferred stock)
22. Calculate the return on equity for 2005. (Halliburton has no preferred stock)
23. Did the return on equity improve in 2005?
24. Calculate earnings per share for 2004. (Halliburton has no preferred stock)
25. Calculate earnings per share for 2005. (Halliburton has no preferred stock)
26. Did earnings per share improve in 2005?
27. Use the profitability ratios you have just calculated to discuss Halliburton's profitability.
28. Calculate the price-earnings ratio for 2004.
29. Calculate the price-earnings ratio for 2005.
30. Did the price-earnings ratio improve in 2005?
31. Calculate the dividend yield ratio for 2004.
32. Calculate the dividend yield ratio for 2005.
33. Did the dividend yield ratio improve in 2005?
34. Based on ALL of the ratios you have just calculated, do you consider Halliburton Company
to be a good investment? Why?
34. This is a very risky investment, as evidenced by the changes in net income and the market
price of the stock over the three-year period. The liquidity ratios indicate that Halliburton will
have no trouble paying its current liabilities in the short-run, although it may have some future
cash-flow problems. The solvency ratios show that Halliburton is heavily dependent on debt, and
although it has no immediate problems paying interest, the volatility of its earnings may create
solvency problems in the future. Although the company was very profitable in 2005, it lost
money in both 2004 and 2003. If the company can duplicate its 2005 operating results, it will be
very successful. However, it is operating in a particularly risky environment, and its earning are
subject to a great deal of variability. The price-earnings ratio, although much improved in 2005,
is still low, showing that the market perceives Halliburton as a questionable investment.
XOAXOA: 3
XOAXOA: Analytic skills, Dynamics of the global economy, Team, Communication abilities
XOAXOA: LO 10-3
110) Indicate which of the following ratios should be used in each situation. Some ratios may be
used more than once. Others may not be used at all.
a. solvency
b. profitability
c. market indicator
d. liquidity
_____ 1. Complete Coverage, a silkscreen ink supplier, wants to determine whether or not Team
Shirts can pay its bills on time.
_____ 2. Nancy is trying to decide if Team Shirts' stock is a good investment.
_____ 3. Team Shirts is planning to enter into a long-term business relationship with
CottonWorks, a fabric supplier.
_____ 4. First Bank is considering a loan application from Team Shirts for $5,000.
111) Indicate which of the following ratios are being used in each situation. Some ratios may be
used more than once. Others may not be used at all.
a. solvency
b. profitability
c. market indicator
d. liquidity
_____ 1. Block Investors Group is evaluating whether or not to invest a large amount of money
in Team Shirts and wants to make sure that Team Shirts will survive over a long period of time.
_____ 2. Tory Hudson is looking at the P/E ratios and dividend yields of companies in order to
locate promising stocks.
_____ 3. The managers of Merlot Manufacturing are trying to raise the earnings per share
number for the quarter.
_____ 4. First Bank is reviewing the current ratio of Team Shirts in order to determine whether
or not to lend it money.
_____ 5. The annual bonus for the managers of Axon Corporation is based on a set increase in
the gross profit margin.
112) Indicate which of the following analytical tools should be used in each situation:
a. current ratio
b. inventory turnover ratio
c. accounts receivable turnover ratio
_____ 1. Team Shirts is trying to determine whether its credit policy is strict enough to minimize
the risk of slow paying customers.
_____ 2. First Bank is trying to determine whether Team Shirts can meet its short-term
obligations.
_____ 3. Team Shirts is trying to determine if its GoGator T-shirt line is selling successfully.
