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SERIAL PROBLEM — SP 17
Serial Problem — SP 17, Success Systems (45 minutes)
1. Gross margin with services revenue
Gross margin = Total revenue – Cost of goods sold
= $43,853 - $14,052 = $29,801
Gross margin without services revenue
2. Current ratio = $105,209 / $875 = 120.2
Acid-test ratio = $100,205 / $875 = 114.5
Reporting in Action — BTN 17-1
1. Trend percents for selected income statement accounts
($ in thousands)
2011
2010
2009
Revenues ..............................................................
169.7%
127.2%
100.0%
$2,656,949
$1,991,139
$1,565,887
Cost of goods sold ..............................................
163.4%
124.6%
100.0%
$1,916,366
$1,460,926
$1,172,668
Operating income ................................................
212.1%
133.8%
100.0%
$349,924
$220,721
$164,970
Non-operating expense (income) .......................
23.9%
15.8%
100.0%
$3,298
$2,180
$13,796
Income taxes (provision for income taxes) .......
237.4%
142.4%
100.0%
$119,051
$71,403
$50,157
Net income ............................................................
225.3%
145.7%
100.0%
$227,575
$147,138
$101,017
2. Common-size percents for asset categories and accounts
($ in thousands)
2011
2010
Total current assets .............................................
71.6%
76.1%
$878,676
$808,145
Property and equipment, net ..............................
17.4%
17.3%
$213,778
$184,011
Goodwill and other intangible assets ................
6.3%
2.9%
$77,718
$31,313
Total assets for 2011 and 2010 are $1,228,024 and $1,061,647, respectively.
3. For 2011 and 2010, revenues grew at a higher rate than cost of goods
sold. Operating income grew at a higher rate than revenues for 2011 and
2010. Non-operating expenses declined substantially in 2011 and 2010.
4. Answers depend on the financial statement information obtained.
Comparative Analysis — BTN 17-2
1.
Key figures ($ thousands)
Polaris
Arctic Cat
Cash and equivalents ............
26.5%
$325,336
5.4%
$14,700
Accounts receivable, net .......
9.4%
115,302
8.7%
23,732
Inventories ..............................
24.3%
298,042
22.5%
61,478
Retained earnings ..................
26.2%
321,831
65.0%
177,493
Cost of sales ...........................
72.1%
1,916,366
78.2%
363,142
Revenues................................
100.0%
2,656,949
100.0%
464,651
Total assets .............................
100.0%
1,228,024
100.0%
272,906
2. Arctic Cat’s retained earnings make up a much greater percentage of
3. Arctic Cat’s cost of sales percent is slightly higher at 78.2% compared
to Polaris’s at 72.1%.
4. Polaris has the higher percent of total assets in the form of inventory at
Ethics Challenge — BTN 17-3
1. The CEO appears to have selectively chosen from the 11 available
ratios to present only the ones that show trends that are favorable to
2. The consequences of this action by the CEO might be mixed. It is likely
that the analysts will ask other questions that may reveal some
negative trends such as the trends in return and profit margins. The
CEO’s actions may become transparent to the analysts as they
Communicating in Practice — BTN 17-4
There is no set solution to this activity. Each team’s memorandum will
vary based on the industry and companies chosen for analysis.
(Instructor: Consider having each team do a brief presentation discussing
the findings in their memorandum to engage in a classroom discussion of
the findings.)
Fundamental Accounting Principles, 21st Edition
1020
Taking It to the Net — BTN 17-5
($ thousands)
As of 12/31/2010
As of 12/31/2011
1. Profit margin ratio .................
$509,799/$5,671,009 = 9.0%
$628,962/$6,080,788 = 10.3%
2. Gross profit ratio ..................
$2,415,208/ $5,671,009 = 42.6%
$2,531,892/$6,080,788 = 41.6%
3. Return on total
assets ................................
$509,799 / ([$4,272,732 +
$3,675,031]/2) = 12.8%
$628,962/ ([$4,412,199 +
$4,272,732]/2) = 14.5%
4. Return on common
stockholders’ equity* ............
$509,799 / ([$937,601 +
$760,339]/2) = 60.0%
$628,962/ ([$872,648 +
$937,601]/2) = 69.5%
5. Basic net income per
common share** ...................
$ 2.29
$ 2.85
*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.
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
Example: Assume that prior year sales equal $240,000, and current year
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
called the base period. Each subsequent period’s amount is compared to
the base period. The change is expressed as a percent of the base period.
This is commonly referred to as trend analysis.
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.
d. Market analysis measures the company’s returns (for example, EPS and
dividend) relative to its market price.
Part 3
Each team member presents results to the entire team.
Fundamental Accounting Principles, 21st Edition
1022
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
inventory turned more slowly. These conditions indicate that an
4. Yes. To illustrate, if sales are assumed to equal $100 in 2010, the sales
trend shows that they would equal $125 in 2011 and $137 in 2012. Then,
5. No. The percent of return on equity declines from 12.25% in 2010 to
9.75% in 2012.
6. The dollar amount of selling expenses increased in 2011 and decreased
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.
Also, assume that the level of investment will be at 8% of your salary (or
Global Decision — BTN 17-9
Key figures (Euro in thousands)
KTM
Cash and equivalents .........................................
3.1%
$ 14,962
Accounts receivable, net ................................
11.0%
53,594
Inventories ...........................................................
23.5%
113,979
Retained earnings ...............................................
43.0%
208,987
Cost of sales ........................................................
70.6%
371,752
Revenues .............................................................
100.0%
526,801
Total assets .........................................................
100.0%
485,775
Comparisons and comments:
• KTM’s cash and equivalents is less than that of Polaris and Arctic Cat as
a percent of assets.
