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© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
Solutions Manual, Chapter 15 1
Chapter 15
Financial Statement Analysis
Solutions to Questions
15-1 Horizontal analysis examines how a
particular item on a financial statement such as
15-2 By looking at trends, an analyst hopes
to get some idea of whether a situation is
15-3 Price-earnings ratios reflect investors’
expectations concerning future earnings. The
higher the price-earnings ratio, the greater the
15-4 A rapidly growing tech company would
probably have many opportunities to make
investments at a rate of return higher than
15-6 Financial leverage results from
borrowing funds at an interest rate that differs
15-7 If the company experiences big
variations in net cash flows from operations,
stockholders might be pleased that the company
15-8 The market value of a share of common
stock often exceeds the book value per share.
15-9 A 2 to 1 current ratio might not be
adequate for several reasons. First, the
© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
2 Managerial Accounting, 15th Edition
1. The earnings per share is computed as follows:
Net income
Earnings per share =
Average number of common
shares outstanding
$92,400
= = $0.77 per share
120,000 shares
2. The price-earnings ratio is computed as follows:
Market price per share
Price-earnings ratio =
Earnings per share
$2.75
= = 3.57 (rounded)
$0.77
3. The dividend payout ratio is computed as follows:
Dividends per share
Dividend payout ratio =
Earnings per share
$0.55
= = 71% (rounded)
$0.77
The dividend yield ratio is computed as follows:
Dividends per share
Dividend yield ratio = Market price per share
$0.55
= = 20%
$2.75
© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
Solutions Manual, Chapter 15 3
The Foundational 15 (continued)
4. The return on total assets is computed as follows:
( )
Net income +
[Interest expense × (1 - Tax rate)]
Return on total assets = Average total assets
$92,400 + [$8,000 × (1 - 0.30)]
= =21.5%
$450,000 + $460,000 /2
5. The return on equity is computed as follows:
Net income
Return on =
equity Average stockholders' equity
$92,400
= = 28%
($320,000 + $340,000)/2
6. The book value per share is computed as follows:
Total stockholders' equity
Book value per share = Number of common shares outstanding
$320,000
= = $2.67 per share (rounded)
120,000 shares
7. The working capital and current ratio are computed as follows:
Working capital = Current assets - Current liabilities
= $150,000 - $60,000 = $90,000
8. The acid-test ratio is computed as follows:
Cash + Marketable securities
+ Accounts receivable + Short-term notes
Acid-test ratio = Current liabilities
$35,000 + $0 + $60,000 + $0
= = 1.58 (rounded)
$60,000
9. The accounts receivable turnover is calculated as follows:
Sales on account
Accounts receivable =
turnover Average accounts receivable balance
$700,000
= = 12.73 (rounded)
($60,000 + $50,000)/2
The average collection period is computed as follows:
365 days
Average collection period = Accounts receivable turnover
365 days
= = 28.67 days (rounded)
12.73
10. The inventory turnover is computed as follows:
Cost of goods sold
Inventory turnover = Average inventory balance
$400,000
= = 6.96 (rounded)
($55,000 + $60,000)/2
The average sale period is computed as follows:
365 days
Average sale period = Inventory turnover
365 days
= = 52.44 days (rounded)
6.96
The Foundational 15 (continued)
12. The total asset turnover is computed as follows:
Sales
Total asset turnover = Average total assets
$700,000
= = 1.54 (rounded)
($450,000 + $460,000)/2
13. The times interest earned ratio is computed as follows:
Earnings before interest
expense and income taxes
Times interest =
earned ratio Interest expense
$140,000
= = 17.5
$8,000
14. The debt-to-equity ratio is computed as follows:
Total liabilities
Debt-to-equity ratio = Stockholders' equity
$130,000
= = 0.41 (rounded)
$320,000
15. The equity multiplier is computed as follows:
Average total assets
Equity multiplier = Average stockholders' equity
($450,000 + $460,000)/2
= = 1.38 (rounded)
($320,000 + $340,000)/2
Exercise 15-2 (10 minutes)
1. Calculation of working capital:
Current assets .................
$25,080
Current liabilities .............
10,400
Working capital ...............
$14,680
2. Calculation of the current ratio:
Current assets
Current ratio = Current liabilities
3. Calculation of the acid-test ratio:
Cash + Marketable securities
+ Accounts receivable
Acid-test ratio = Current liabilities
$1,280 + $0 + $12,300
= = 1.31 (rounded)
$10,400
Exercise 15-3 (continued)
6. The total asset turnover is computed as follows:
Sales
Total asset turnover = Average total assets
$79,000
= = 1.64 (rounded)
($50,280 + $45,960)/2
