c.
15.04%.
d.
45.13%.
74. Refer to the Grogan Inc. information above. Grogan’s return on common stockholders’ equity
(ROCSE) ratio for 2012 is: (round to two decimal places)
a.
43.12%.
b.
72.23%.
c.
46.78%.
d.
65.69%.
75. Refer to the Grogan Inc. information above. Grogan had an average of 7,000 shares of common stock
outstanding during 2012. The company’s earnings per share for 2012 is: (round to two decimal
places)
a.
$ 6.82.
b.
$15.00.
c.
$10.39.
d.
$ 5.14.
76. Refer to the Grogan Inc. information above. Grogan had an average of 7,000 shares of common stock
outstanding during 2012. At the end of the year, the market price per share was $100. The company’s
price earnings (P/E) ratio for 2012 is: (round to two decimal places)
a.
9.62 to 1.
b.
6.67 to 1.
c.
14.66 to 1.
d.
19.44 to 1.
77. Which ratio gives an indication of how investors believe a company’s stock will perform in the future
compared to other companies?
a.
Return on stockholders’ equity
b.
Earnings per share
c.
Price earnings (P/E)
d.
Return on assets
SHORT ANSWER
1. Why do decision-makers analyze financial statements and how is ratio analysis useful in the process?
2. Discuss one limitation of financial statement analysis.
3. How is horizontal analysis performed and how is it used in financial statement analysis?
4. How is vertical analysis performed and how is it used in financial statement analysis?
5. What is meant by the term liquidity and why are stakeholders interested in ratios that measure it?
6. Answer the following questions:
A.
What is the formula to compute working capital?
B.
What does it measure?
C.
What would be the implication for a company that has negative working capital?
Working capital = Current assets − Current liabilities
7. How is the current ratio calculated, and how is it interpreted?
8. How do the current and acid-test (quick) ratios differ as far as their formulas and what does each one
measure?
9. What is one weakness of either the current or acid-test (or quick) ratio?
10. How is the ratio of cash flow from operations to current liabilities computed and interpreted?
11. Munson Auto Parts Inc. is a retailer of auto parts and supplies. They often deliver auto parts to various
mechanic shops around town allowing the shops to pay for the parts delivered within 45 days.
Recently, Munson’s accountant has computed that the accounts receivable turnover ratio is “7”.
Assuming the company is open 365 days a year, is the company receiving payment from its customers
in a timely enough fashion? Explain.
12. List three ratios that are measures of liquidity .
13. What is meant by the term solvency and why are stakeholders interested in ratios that measure it?
14. Schulte Enterprises has a debt-to-equity ratio of .67 in 2012. How would you interpret this ratio?
15. How is the times interest earned ratio computed? List one of the weaknesses of this ratio and list the
comparable ratio that improves upon these weaknesses.
16. List two ratios that are measures of solvency.
17. How are profitability ratios used by different stakeholders? List one profitability ratio.
18. Indicate whether each of the following ratios are better measures of liquidity (L), solvency (S), or
profitability (P).
a.
Price earnings (P/E) ratio
b.
Debt-to-equity ratio
c.
Return on assets
d.
Current ratio
e.
Accounts receivable turnover
f.
Times interest earned ratio
g.
Earnings per share
h.
Return on common stockholders’ equity
a.
P
b.
S
c.
P
d.
L
e.
L
f.
S
g.
P
h.
P
PROBLEM
1. Cheshire Inc. had the following condensed income statements for the years ending December 31, 2012
and 2011.
Cheshire Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
2011
$ change
% change
Net sales revenue
$500,000
$400,000
Cost of goods sold
200,000
150,000
Gross profit
$300,000
$250,000
Operating expenses
100,000
110,000
Income before taxes
$200,000
$140,000
Income taxes
60,000
42,000
Net income
$140,000
$ 98,000
Required: Using horizontal analysis, complete the comparative income statement by computing dollar
change ($change) and percentage change (% change). Round percentages to two decimal places.
2. Cheshire Inc. had the following condensed income statements for the years ending December 31, 2012
and 2011.
Cheshire Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
Percent
2011
Percent
Net sales revenue
$500,000
$400,000
Cost of goods sold
200,000
150,000
Gross profit
$300,000
$250,000
Operating expenses
100,000
110,000
Income before taxes
$200,000
$140,000
Income taxes
60,000
42,000
Net income
$140,000
$ 98,000
Cheshire Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
2011
$ change
% change
Net sales revenue
$500,000
$400,000
$100,000
25.00%
Cost of goods sold
200,000
150,000
50,000
33.33%
Gross profit
$300,000
$250,000
$ 50,000
20.00%
Operating expenses
100,000
110,000
(9.09)%
Income before taxes
$200,000
$140,000
$ 60,000
42.86%
Income taxes
60,000
42,000
18,000
42.86%
Net income
$140,000
$ 98,000
$ 42,000
42.86%
Required: Using vertical analysis, prepare common-size comparative income statements for 2012 and
2011. Round percentages to two decimal places.
3. Vance Inc. had the following condensed income statements for the years ending December 31, 2012
and 2011.
Vance Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
2011
$ change
% change
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Gross profit
$200,000
$220,000
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
$ 70,000
Income taxes
3,750
14,000
Net income
$ 21,250
$ 56,000
Required: Using horizontal analysis, complete the comparative income statement by computing dollar
change ($change) and percentage change (% change). Round percentages to two decimal places.
Vance Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
2011
$ change
% change
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Operating expenses
175,000
150,000
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
2011
Net sales revenue
$500,000
100.00%
$400,000
100.00%
Cost of goods sold
200,000
150,000
Gross profit
$300,000
$250,000
Operating expenses
100,000
110,000
Income before taxes
$200,000
$140,000
Income taxes
60,000
42,000
Net income
$140,000
28.00%
$ 98,000
4. Vance Inc. had the following condensed income statements for the years ending December 31, 2012
and 2011.
Vance Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
Percent
2011
Percent
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Gross profit
$200,000
$220,000
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
$ 70,000
Income taxes
3,750
14,000
Net income
$ 21,250
$ 56,000
Required: Using vertical analysis, prepare common-size income statements for 2012 and 2011. Round
percentages to two decimal places.
Vance Inc.
Comparative Income Statements
For the year ending December 31, 2012 and 2011
2012
Percent
2011
Percent
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Gross profit
$200,000
$220,000
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
$ 70,000
Income taxes
3,750
14,000
Net income
$ 21,250
$ 56,000
5. Morrell Inc. had the following information available from its 2011 and 2012 condensed balance sheets
Morrell Inc.
Comparative Balance Sheets
At December 31, 2012 and 2011
Income before taxes
$ 25,000
$ 70,000
(64.29)%
Income taxes
3,750
14,000
(73.21)%
2012
2011
$ change
% change
Current assets
$ 90,000
$ 50,000
Long-term assets
300,000
200,000
Total assets
$390,000
$250,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
Total liabilities
$ 70,000
$ 70,000
Common stock
$ 90,000
$ 90,000
Retained earnings
230,000
90,000
Total stockholders’ equity
$320,000
$180,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
Required: Using horizontal analysis, complete the comparative income statement by computing dollar
change ($change) and percentage change (% change). Round percentages to two decimal places.
6. Morrell Inc. had the following information available from its 2011 and 2012 condensed balance sheets
Morrell Inc.
Comparative Balance Sheets
At December 31, 2012 and 2011
2012
Percent
2011
Percent
Current assets
$ 90,000
$ 50,000
Morrell Inc.
Comparative Balance Sheets
At December 31, 2012 and 2011
2012
2011
$ change
% change
Current assets
$ 90,000
$ 50,000
$ 40,000
Long-term assets
300,000
200,000
100,000
Total assets
$390,000
$250,000
$140,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
20,000
Retained earnings
230,000
90,000
140,000
155.56%
Total stockholders’ equity
$320,000
$180,000
$140,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
$140,000
Long-term assets
300,000
200,000
Total assets
$390,000
$250,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
Total liabilities
$ 70,000
$ 70,000
Common stock
$ 90,000
$ 90,000
Retained earnings
230,000
90,000
Total stockholders’ equity
$320,000
$180,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
Required: Using vertical analysis, prepare common-size income statements for 2012 and 2011. Round
percentages to two decimal places.
7. Pluto Toys is a local retailer. The following selected information is available from their 2011 and 2012
financial statements:
Accounts receivable at 12/31/11
$
235,000
Accounts receivable at 12/31/12
300,000
Inventory at 12/31/11
225,000
Inventory at 12/31/12
500,000
Net credit sales for 2012
2,500,000
Cost of goods sold for 2012
1,125,000
Percent
Percent
Current assets
$ 90,000
$ 50,000
Long-term assets
300,000
200,000
Total assets
$390,000
$250,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
Total liabilities
$ 70,000
$ 70,000
Common stock
$ 90,000
$ 90,000
Retained earnings
230,000
90,000
Total stockholders’ equity
$320,000
$180,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
Net income for 2012
500,000
Required:
A.
Compute Pluto’s accounts receivable turnover for 2012. (Round your answer to 2
decimal places.)
B.
Compute Pluto’s inventory turnover for 2012. (Round your answer to 2 decimal places.)
8. Global Corporation is a local retailer. The following selected information is available from their 2011
and 2012 financial statements:
Accounts receivable at 12/31/11
$
300,000
Accounts receivable at 12/31/12
100,000
Inventory at 12/31/11
165,000
Inventory at 12/31/12
330,000
Net credit sales for 2012
1,650,000
Cost of goods sold for 2012
825,000
Net income for 2012
450,000
Required:
A.
Compute Global’s accounts receivable turnover for 2012. (round to 2 decimal places)
B.
Compute Global’s inventory turnover for 2012. (round to 2 decimal places)
Accounts receivable turnover = Net credit sales Average accounts receivable
Accounts receivable turnover = $1,650,000 [($300,000 + $100,000)/2]
Accounts receivable turnover = 8.25 times
Inventory turnover = Cost of goods sold Average inventory
Inventory turnover = $825,000 [($165,000 + $330,000)/2]
Inventory turnover = 3.33 times
Accounts receivable turnover = Net credit sales Average accounts receivable
Accounts receivable turnover = $2,500,000 [($235,000 + $300,000)/2]
Accounts receivable turnover = 9.35 times
Inventory turnover = Cost of goods sold Average inventory
Inventory turnover = $1,125,000 [($225,000 + $500,000)/2]
Inventory turnover = 3.10 times
9. Brigman Inc. has the following financial statement information for 2012 and 2011:
Balance Sheet Information:
2012
2011
Assets:
Cash
$ 10,250
$ 51,210
Accounts receivable
7,500
8,325
Inventory
1,750
1,665
Total current assets
$ 19,500
$ 61,200
Property and Equipment (net)
60,000
45,000
Total assets
$ 79,500
$106,200
Liabilities:
Accounts payable
$ 4,500
$ 1,500
Salaries payable
1,500
500
Total current liabilities
$ 6,000
$ 2,000
Notes payable
12,500
18,000
Total liabilities
$ 18,500
$ 20,000
Stockholders’ Equity:
Common stock
$ 40,000
$ 40,000
Retained earnings
21,000
46,200
Total stockholders’ equity
$ 61,000
$ 86,000
Total liabilities and stockholders’ equity
$ 79,500
$106,200
Income Statement Information:
Net sales
$ 50,000
$ 55,500
Cost of goods sold
17,500
16,650
Gross profit
$ 32,500
$ 38,850
Selling and administrative expenses
5,000
5,550
Interest expense
1,250
1,800
Income before income taxes
$ 26,250
$ 31,500
Income tax expense
5,250
6,300
Net income
$ 21,000
$ 25,200
Other Information:
Number of common shares outstanding
4,000
4,000
Dividends paid
$ 0
$ 0
Market price per share (12/31)
$40
$30
Income tax rate
20%
20%
Required: Compute the following ratios for the year ending December 31, 2012: (round to two decimal
places)
A.
Current ratio
B.
Quick (or acid-test) ratio
C.
Accounts receivable turnover
D.
Debt-to-equity ratio
E.
Times interest earned ratio
10. Brigman Inc. has the following financial statement information for 2012 and 2011:
Balance Sheet Information:
2012
2011
Assets:
Cash
$ 10,250
$ 51,210
Accounts receivable
7,500
8,325
Inventory
1,750
1,665
Total current assets
$ 19,500
$ 61,200
Property and Equipment (net)
60,000
45,000
Total assets
$ 79,500
$106,200
Liabilities:
Accounts payable
$ 4,500
$ 1,500
Salaries payable
1,500
500
Total current liabilities
$ 6,000
$ 2,000
Notes payable
12,500
18,000
Total liabilities
$ 18,500
$ 20,000
Current ratio = Current assets Current liabilities
Current ratio = 3.25
Quick ratio = (Current assets − Inventories − Prepaids) Current liabilities
Quick ratio = ($19,500 − $1,750) $6,000
Quick ratio = 2.96
Accounts receivable turnover = Net sales Average accounts receivable
Accounts receivable turnover = $50,000 [($7,500 + $8,325)/2]
Accounts receivable turnover = 6.32 times
Debt-to-equity ratio = Total liabilities Total stockholders’ equity
Debt-to-equity ratio = $18,500 $61,000
Debt-to-equity ratio = .3033 or 30.33%
Stockholders’ Equity:
Common stock
$ 40,000
$ 40,000
Retained earnings
21,000
46,200
Total stockholders’ equity
$ 61,000
$ 86,000
Total liabilities and stockholders’ equity
$ 79,500
$106,200
Income Statement Information:
Net sales
$ 50,000
$ 55,500
Cost of goods sold
17,500
16,650
Gross profit
$ 32,500
$ 38,850
Selling and administrative expenses
5,000
5,550
Interest expense
1,250
1,800
Income before income taxes
$ 26,250
$ 31,500
Income tax expense
5,250
6,300
Net income
$ 21,000
$ 25,200
Other Information:
Number of common shares outstanding
4,000
4,000
Dividends paid
$ 0
$ 0
Market price per share (12/31)
$40
$30
Income tax rate
20%
20%
Required: Compute the following ratios for the year ending December 31, 2012: (round to two decimal
places)
A.
Inventory turnover
B.
Return on assets (ROA) ratio
C.
Asset turnover ratio
D.
Earnings per share (EPS)
E.
Price earnings (P/E) ratio
Inventory turnover = Cost of goods sold Average inventory
Inventory turnover = $17,500 [($1,750 + $1,665)/2]
Inventory turnover = 10.25 times
Return on assets = [Net income + Interest expense (net of tax)] Average total assets
Return on assets = [$21,000 + $1,250 (1 − .20)] [($79,500 + $106,200)/2]
Return on assets = 0.2369 or 23.69%
Asset turnover = Net sales Average total assets
Asset turnover = $50,000 [(79,500 + $106,200)/2]
Asset turnover = 0.54 times
Earnings per share = $21,000 4,000
Earnings per share = $5.25
