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CHAPTER 9
METRIC ANALYSIS OF FINANCIAL STATEMENTS
CLASS DISCUSSION QUESTIONS
1. Horizontal analysis is the percentage analy-
2. Comparative statements provide information
4. You should first determine if the expense
amount in the base year (denominator) is
may require further investigation.
5. Generally, the two ratios would be close,
capital, gives a better analysis of the current
exclusively to other businesses, such as
turning 64 times, while Procter & Gamble’s
amount of past-due accounts of doubtful
collectibility may be on the books.
cence and adverse changes in prices
are also kept to a minimum.
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c. No. The inventory turnover ratio and the
days’ sales in inventory ratio are interre-
10. The ratio of fixed assets to long-term liabilities
11. a. The return on total assets adds interest
expense to the net income, which is
divided by average total assets. It
12. a. Due to leverage, the return on stock-
holders’ equity will often be greater than
b. Higher. The concept of leverage applies
to preferred stock as well as debt. The
dends paid to preferred stockholders.
15. The dividend yield on common stock is a
measure of the rate of return to common
stockholders in terms of cash dividend dis-
17. One report is the Report on Internal Control,
257
EXERCISES
E9–1
a.
SEARLE TECHNOLOGIES CO.
Comparative Income Statement
For the Years Ended December 31, 20Y8 and 20Y7
20Y8 20Y7
Amount Percent Amount Percent
Sales ……………………………………. $ 900,000 100.0% $ 725,000 100.0%
b. The vertical analysis indicates the cost of goods sold as a percent of sales
258
E9–2
a.
SPEEDWAY MOTORSPORTS, INC.
Comparative Income Statement (in thousands of dollars)
Year 2 Year 1
Revenues:
Admissions ……………………………….. $100,798 20.8% $106,050 22.1%
Instructor Note: The recording of impairments of goodwill is discussed in Chapter 7.
259
E9–3
a.
LYONS ELECTRONICS COMPANY
Common-Sized Income Statement
Lyons Electronics
Electronics Industry
Company Average
Amount Percent
Sales ………………………………………………………. $ 7,500,000 100.0% 100.0%
b. The cost of goods sold is 6 percentage points (61.0% – 55.0%) lower than the
260
E9–4
20Y2 Percent 20Y1 Percent
Current assets $ 1,500,000 9.4% $ 1,200,000 8.6%
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E9–5
a. YELLOWSTONE IMAGES, INC.
Comparative Income Statement
For the Years Ended December 31, 20Y5 and 20Y4
20Y5 20Y4 Amount Percent
Sales ……………………………………. $ 1,000,000 $ 800,000 $200,000 25.0%
b. The net income for Yellowstone Images increased by 36.4% in 20Y5 compared
262
E9–6
a. (1) Working Capital = Current Assets – Current Liabilities
(3) Quick Ratio = sLiabilitieCurrent
AssetsQuick
E9–7
a. (1) Current Ratio = sLiabilitieCurrent
setsCurrent As
b. The liquidity of PepsiCo has increased some over this time period. Both the
263
E9–8
a. The working capital, current ratio, and quick ratio are calculated incorrectly.
The working capital and current ratio incorrectly include intangible assets
and property, plant, and equipment as a part of current assets. Both are
noncurrent. The quick ratio has an incorrect denominator in that it does not
include accrued liabilities. The denominator of the quick ratio should be total
current liabilities.
The correct calculations are as follows:
b. Unfortunately, the working capital, current ratio, and quick ratio are below