Ex. 14.5
4,395,253$
2,821,455
(Dollars in thousands, except per share amounts)
Net sales ……………………………………………………………….
Less: Cost of goods sold …………………………………………………
…
a. SPINX, INC
Statement of Earnings
For the Year Ended December 31, 2015
…
Ex. 14.6 a. =Operating income
Average total assets
b. =
c.
Ex. 14.7 a.
b. (1)
Ex. 14.8 a.
b.
c.
Net income
Average total stockholders’
equity
Investment recommendations will vary depending upon the companies students select.
Students should be cautioned that investment recommendations should never be based
Return on assets
Return on equity
The financial measures computed by the students will vary depending upon the
companies they select. Industry norm figures may also vary depending upon the
Based on their findings, students should comment on the price volatility of their stocks
during the past 52 weeks, and attempt to assess investor expectations as reflected by the
p/e ratio of the companies they select.
2014, so net income must represent a smaller percentage.
Total expenses grew faster than net sales. Net income must have increased at a
lower percentage than net sales.
Computation of percentage changes:
There are several explanations for why a company’s stockholders’ equity might increase
during a year. The most common are:
-Net income (increases retained earnings, an element of stockholders’ equity)
-Sale of stock previously authorized, but unissued
stockholders’ equity from other sources that cannot be identified from the information
provided.
Hill Education.
Ex. 14.9
a.
b.
c.
The number of Home Depot stores has stayed relatively stable over the 2008-2012
period. The number of stores declined by 30 between 2008 and 2009, then increased
The trend in the relationship of net earning to sales is strongly favorable, from 2008
to 2012, the percentage has steadily grown from 3.2% in 2008 to 6.1% in 2012. This
As measured by the current ratio, liquidity has increased. The current ratio has
improved from 1.20 (to 1) in 2008 to 1.34 (to 1) in 2012, although this ratio declined
the higher this turnover is, the more liquid is the company because inventory is being
converted into cash more rapidly.
Hill Education.
Ex. 14.10
Accepting the job offer from Alpha Research might be justified in terms of the
company’s liquidity, profitability, and the growth potential of its common stock.
Liquidity: At first glance, the high current and quick ratios of Omega Scientific make
it appear to be more liquid than Alpha Research. However, these figures may also
indicate that the company is having problems converting accounts receivable and
Hill Education.
Ex. 14.11 a. (1)
(2)
b.
2015: 5 times ($750,000 ÷ $150,000 average accounts receivable)
Gross profit percentage:
2014: 33% [($610,000 − $408,000) ÷ $610,000]
2015: 34% [($750,000 − $495,000) ÷ $750,000]
Inventory turnover:
There are three favorable trends. First, the growth in net sales from $610,000 to
$750,000. This represents an increase of 23% ($140,000 increase, divided by
2014: 4 times ($408,000 ÷ $102,000 average inventory)
2015: 4.5 times ($495,000 ÷ $110,000 average inventory)
Hill Education.
Ex. 14.13
a.
1.3 to 1 ($130,000 ÷ $100,000)
2015
Current ratio: 2.0 to 1 ($160,000 ÷ $80,000)
Note: Number of common shares outstanding is $100,000 ÷ $5 par, or 20,000 shares.
[($45,000 increase in retained earnings + $16,000 dividends) ÷ 20,000 shares]
2014
Brazil
Italian Stone
Marble Co. Products
a. 54,000$
($1,200,000 x .05) ……………………. 60,000$
b.
Net income as a percentage of stockholders’ equity
Ex. 14.14
Net income ($1,800,000 x .03)………………………
…
Hill Education.
20 Minutes, Easy
a. Common size income statement:
Outdoor World Industry
I
nc.
A
verag
e
Sales
(
net
)
100
%
100
%
Cost of
g
oods sold
49
58
Gross
p
rofit on sales 51
%
42
%
O
p
eratin
g
ex
p
enses:
Sellin
g
21
%
16
%
General and administrativ
e
17
20
Total o
p
eratin
g
ex
p
enses
38%
36%
O
p
eratin
g
income 13
%
6%
Income tax ex
p
ens
e
6
3
Net income 7% 3%
b.
SOLUTIONS TO PROBLEMS SET
A
Outdoor World, Inc.’s operating results are significantly better than the average
performance within the industry. As a percentage of sales revenue, operating income and net
As a percentage of sales, Outdoor World, Inc.’s selling expenses are five percent higher than
the industry average (21% compared to 16%). These higher expenses may explain the
PROBLEM 14.1
A
OUTDOOR WORLD INC.
Hill Education.
25 Minutes, Medium
2015 201
4
a. Net sales:
(
$172,800 ÷ .06
)
2,880,000
$
(
$189,000 ÷ .075
)
2,520,000
$
b. Cost of
g
oods sold in dollars:
$
(
$
g
(
)
%
(
$1,386,000 ÷ $2,520,000
)
55
%
c. O
p
eratin
g
ex
p
enses in dollars:
($1,008,000 gross profit – $230,400 income before tax) 777,600$
(
$1,134,000
g
ross
p
rofit – $252,000 income before tax
)
882,000
$
p
g
p
(
(
d.
2015 201
4
Net sales 2,880,000$ 2,520,000$
Cost of
g
oods sold 1,872,000 1,386,000
Gross
p
rofit 1,008,000
$
1,134,000
$
$
$
$
For the Year Ended December 31, 2015 and December 31, 201
4
PROBLEM 14.2
A
DONELSON, INC
DONELSON, INC.
Condensed Comparative Income Statemen
t
Hill Education.
e.
PROBLEM 14.2
A
NELSON, INC. (concluded)
Favorable and unfavorable trends:
Favorable trends. One favorable trend is the $360,000 increase in net sales, which represented
an increase of about 14% over the prior year. A second favorable trend is the decrease in
more than offsets the increase in net sales and the reduction in operating expenses, and
accounts for the declines in income before income taxes and in net income. As it appears that
the company’s problems in 2015 stem from the higher cost of merchandise being purchased
from the new supplier, management should consider either raising its selling prices or looking
for a less costly source of supply.
Hill Education.
15 Minutes, Easy
a. Current assets:
Cash 69,400$
Marketable securitie
s
175,040
Accounts receivabl
e
230,540
Inventor
y
179,600
Unexpired insuranc
e
4
,
500
Total current assets 659,080$
Current liabilities:
Notes pa
y
abl
e
70,000$
b. The current ratio is 2.86 to 1. It is computed by dividing the current assets of $659,080 by the
The company appears to be in a strong position as to short-run debt-paying ability. It has
almost three dollars of current assets for each dollar of current liabilities. Even if some losses
are sustained in the sale of the merchandise on hand or in the collection of the accounts
receivable, it appears probable that the company would still be able to pay its debts as they
PROBLEM 14.3
A
ROGAND GROCERY, INC.
Hill Education.