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Chapter 17 - Analysis of Financial Statements
Problem 17-6BA (60 minutes)
Part 1 Effect of income taxes (debits or losses in parentheses)
Pretax
25% Tax
Effect After-Tax
e. Loss on hurricane damage..............................................(64,000)
(16,000) (48,000)
(45,000)
Part 2 Income from continuing operations (and its components)
c. Net sales.......................................................................... $2,640,000
b. Interest revenue.............................................................. 20,000
j. Gain from settling lawsuit............................................. 68,000
Total revenues and gains.............................................. 2,728,000
Income from continuing operations before taxes............. 1,044,000
d. Income taxes expense (25%)......................................... (261,000)
Income from continuing operations after taxes................ $ 783,000
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Chapter 17 - Analysis of Financial Statements
Problem 17-6BA (Concluded)
Part 3 Income from discontinued segment
l. Loss from operating a discontinued segment (after-tax)..................
$ (90,000)
Part 4 Income before extraordinary items
Income from cont. operations after taxes (from Part 2).................$ 783,000
Part 5 Net income
Income before extraordinary items.............................................$ 558,000
Extraordinary item:
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Chapter 17 - Analysis of Financial Statements
SERIAL PROBLEM — SP 17
Serial Problem — SP 17, Business Solutions (45 minutes)
1. Gross margin with services revenue
Gross margin = Total revenue – Cost of goods sold
= $44,000 - $14,052 = $29,948
Gross margin ratio = $29,948 / $44,000 = 68.1 %
Gross margin without services revenue
2. Current ratio = $95,568 / $875 = 109.2
Acid-test ratio = $90,924 / $875 = 103.9
4. Current assets are 79.4% of total assets ($95,568/$120,268)
Reporting in Action — BTN 17-1
1. Trend percents for selected income statement accounts
($ in millions) Fiscal
2013
Fiscal
2012
Fiscal
2011
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Chapter 17 - Analysis of Financial Statements
$170,910 $156,508 $108,249
Cost of sales.........................................................165.5% 136.3% 100.0%
$106,606 $87,846 $64,431
Net income............................................................142.9% 161.0% 100.0%
$37,037 $41,733 $25,922
2. Common-size percents for asset categories and accounts
($ in millions) Sep. 28, 2013 Sep. 29, 2012
Total current assets............................................. 35.4% 32.7%
$73,286 $57,653
Total assets as of September 28, 2013 and September 29, 2012 are $207,000 and $176,064, respectively.
3. For fiscal 2013, revenues grew at a lower rate than cost of sales,
however, for fiscal 2012, revenues grew at a higher rate than cost of
sales. Operating income grew at a higher rate than revenues for fiscal
The common-size percent figures in part 2 show a increase in current
assets (35.4% in 2013 vs. 32.7% in 2012) and smaller investment in
4. Answers depend on the financial statement information obtained.
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Chapter 17 - Analysis of Financial Statements
Comparative Analysis — BTN 17-2
1.
Key figures ($ millions) Apple Google
Cash and equivalents............. 6.9% $14,259 17.0% $18,898
Accounts receivable, net....... 6.3% 13,102 8.0% 8,882
Inventories............................... 0.9% 1,764 0.4% 426
2. Apple’s retained earnings make up a smaller percentage of its total
3. Apple’s cost of sales percent is higher at 62.4% compared to Google’s
at 43.2%.
4. Although Apple has almost twice as much inventory as a percent of
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Chapter 17 - Analysis of Financial Statements
Ethics Challenge — BTN 17-3
1. The CEO appears to have selectively chosen from the 11 available
ratios to present only the ones that show trends that are favorable to
2. The consequences of this action by the CEO might be mixed. It is likely
that the analysts will ask other questions that may reveal some
negative trends such as the trends in return and profit margins. The
CEO’s actions may become transparent to the analysts as they
Communicating in Practice — BTN 17-4
There is no set solution to this activity. Each team’s memorandum will vary
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Chapter 17 - Analysis of Financial Statements
Taking It to the Net — BTN 17-5
($ thousands) As of 12/31/2012 As of 12/31/2013
1. Profit margin ratio.................
$660,931/$6,644,252 = 9.9% $820,470/$7,146,079= 11.5%
2. Gross profit ratio...................
$2,859,882/ $6,644,252 = 43.0% $3,280,848/$7,146,079 = 45.9%
*An acceptable alternative solution would be to include minority interest in equity.
**Taken from consolidated statement of income.
Analysis and Interpretation: Hershey’s performance generally improved in
all areas evaluated for the profitability metrics reported in the table above
with the exception of return on common equity.
Teamwork in Action — BTN 17-6
Part 1
Team reports should look something like the following:
Horizontal Analysis
Horizontal analysis is comparing a company’s financial statement amounts
across time. We compare data from comparative statements that are
horizontally aligned; that is, we compare the same items from one period to
another period. The change disclosed by the comparison is generally
Example: Assume that prior year sales equal $240,000, and current year
sales equal $300,000. Horizontal analysis of sales yields a $60,000 increase
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Chapter 17 - Analysis of Financial Statements
Teamwork in Action (Concluded)
If a horizontal comparison is made over a number of periods, the
comparisons are made to corresponding amounts in a selected period
Vertical Analysis
Vertical analysis is comparing a company's financial statement amounts to
a base amount. Usually this base amount is a total or aggregate amount.
Example: Total assets for the period being analyzed = $500,000 (base
Part 2
Explanations of the four categories or areas of ratio analysis follow:
a. Liquidity analysis measures the availability of resources to meet short-
term cash requirements. Efficiency analysis measures how productive a
company is in using its assets.
dividend) relative to its market price.
Note: Students will select various ratios to illustrate these categories. Use
Exhibit 17.16 to verify the category, measurement, and use of each ratio.
Part 3
Each team member presents results to the entire team.
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Chapter 17 - Analysis of Financial Statements
Entrepreneurial Decision — BTN 17-7
1. No. Although the current ratio improved over the three-year period, the
acid-test ratio declined and accounts receivable and merchandise
2. No. The decreasing turnover of accounts receivable indicates the
company is collecting its receivables more slowly.
3. No. Sales are increasing and accounts receivable are turning more
4. Yes. To illustrate, if sales are assumed to equal $100 in 2013, the sales
trend shows that they would equal $125 in 2014 and $137 in 2015. Then,
5. No. The percent of return on equity declines from 12.25% in 2013 to
9.75% in 2015.
6. The dollar amount of selling expenses increased in 2014 and decreased
sharply in 2015. Again assuming sales figures of $100 in 2013, $125 in
Hitting the Road — BTN 17-8
One possible strategy to fulfill the requirements of this assignment is:
Assume that a $37,500 salary will be earned upon graduation at age 25.
If the annual amount invested does not change and you earn 10% for 40
Global Decision — BTN 17-9
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Chapter 17 - Analysis of Financial Statements
Key figures (KRW in millions) Samsung
Cash and equivalents......................................... 7.6% 16,284,780 ₩
Accounts receivable, net................................... 13.0% 27,875,934
Revenues............................................................. 100.0% 228,692,667
Total assets......................................................... 100.0% 214,075,018
Comparisons and comments:
Samsung’s cash and equivalents is greater than Apple and less than
Google as a percent of assets.
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