CHAPTER 14 Financial Statement Analysis
14–21
Ex. 14–18
a.
$21,000 + $396,400
AssetsTotal Average
ExpenseInterest + IncomeNet
AssetsTotal on Return
=
CHAPTER 14 Financial Statement Analysis
Ex. 14–19
a.
1.6
$2,000,000
$3,200,000
sLiabilitie Term–Long
(net) AssetsFixed
sLiabilitie Term–Long
to AssetsFixed of Ratio
=
=
b.
$5,000,000
Equity rs’Stockholde Total
sLiabilitie Total
Equity rs’Stockholde
to sLiabilitie of Ratio
=
c.
s)investmentterm–long (excluding
AssetsTotalAverage
Sales
TurnoverAsset
=
d.
AssetsTotal Average
ExpenseInterest + IncomeNet
AssetsTotal on on Return
=
CHAPTER 14 Financial Statement Analysis
Ex. 14–20
ExpenseInterest
ExpenseInterest Expense Tax Income Before Income
EarnedInterest Times a.
+
=
gOutstandin Stock Common
Dividends Preferred – IncomeNet
Stock Common on
Share per Earnings b. =
$3.20
*shares 500,000
$200,000 – $1,800,000 =
* Shares of common stock outstanding = $5,000,000 ÷ $10 par value per share
Share per Earnings
Stock Common of Share per PriceMarket
Ratio Earnings–Price c.
=
CHAPTER 14 Financial Statement Analysis
14–24
Ex. 14–21
gOutstandin Stock Common of Shares
Dividends Preferred – IncomeNet
Share per Earnings a.
=
15.0
$3.00
$45.00
Stock Common of Share per Earnings
Stock Common of Share per PriceMarket
Ratio Earnings–Priceb.
=
=
$2.25
shares 500,000
$1,125,000
gOutstandin Stock Common of Shares
Dividends Common
Share per Dividends c.
=
=
5.0%
$45.00
$2.25
Stock Common of Share per PriceMarket
Stock Common of Share per Dividends
Yield Dividendd.
=
=
CHAPTER 14 Financial Statement Analysis
14–25
Ex. 14–22
a.
$1.40
0.0%
$792.45
$0.00
:Alphabet
2.3%
$103.04
$2.40
:Company & Deere
Stock Common of Share per PriceMarket
Stock Common of Share per Dividends
Yield Dividend
118.4
$1.51
$178.85
:Company Cola–Coca The
37.9
$20.91
$792.45
:Alphabet
21.3
$4.83
$103.04
:Company & Deere
Share per Earnings
Stock Common of Share per PriceMarket
Ratio Earnings–Price
=
=
=
=
=
=
=
b. Coca-Cola has a small dividend yield and the highest price-earnings ratio of the three
companies. Stock market participants value Coca-Cola common stock on the basis of
CHAPTER 14 Financial Statement Analysis
14–26
Appendix 1 Ex. 14–23
a. Earnings per share on income before discontinued operations:
Net income …………………………………………………………………………… $4,000,000
b.
gOutstandin Stock Common of Shares
Dividends Preferred – IncomeNet
Stock Common
on Share per Earnings
=
CHAPTER 14 Financial Statement Analysis
14–27
Appendix 1 Ex. 14–24
a.
Apex Inc.
Partial Income Statement
For the Year Ended December 31
Income from continuing operations before income tax expense
$1,000,000
Income tax expense*
(400,000)
Income from continuing operations
$ 600,000
Loss on discontinued operations
(240,000)
Net income
$ 360,000
* Income tax expense = $1,000,000 40%
b.
Apex Inc.
Partial Income Statement
For the Year Ended December 31
Earnings per common share:
Income from continuing operations
$ 30.001
Loss from discontinued operations
(12.00)2
Net income
$ 18.00
1EPS on Income from continuing operations = $30.00 = $600,000 ÷ 20,000
2EPS on Loss from discontinued operations = –$12.00 = –$240,000 ÷ 20,000
Appendix 1 Ex. 14–25
a. Colston Company reported this item correctly in the financial statements. This item is an
CHAPTER 14 Financial Statement Analysis
14–28
Appendix 2 Ex. 14–26
a.
Anson Industries, Inc.
Income Statement
For the Year Ended December 31, 20Y1
Sales
$ 4,000,000
Cost of goods sold
(2,300,000)
Gross profit
$ 1,700,000
Operating expenses
(1,000,000)
Operating income
$ 700,000
Income tax expense
(280,000)
Net income
$ 420,000
Other comprehensive income
450,000
Comprehensive income
$ 870,000
b.
Anson Industries, Inc.
Income Statement
For the Year Ended December 31, 20Y1
Sales
$ 4,000,000
Cost of goods sold
(2,300,000)
Gross profit
$ 1,700,000
Operating expenses
(1,000,000)
Operating income
$ 700,000
Income tax expense
(280,000)
Net income
$ 420,000
Anson Industries, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 20Y1
Net income
$420,000
Other comprehensive income
450,000
Comprehensive income
$870,000
CHAPTER 14 Financial Statement Analysis
14–29
PROBLEMS
Prob. 14–1A
1.
McDade Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2
20Y1
Increase/(Decrease)
Amount
Percent
Sales
$ 16,800,000
$ 15,000,000
$1,800,000
12.0%
Cost of goods sold
(11,500,000)
(10,000,000)
1,500,000
15.0%
Gross profit
$ 5,300,000
$ 5,000,000
$ 300,000
6.0%
Selling expenses
$ (1,770,000)
$ (1,500,000)
$ 270,000
18.0%
Administrative expenses
(1,220,000)
(1,000,000)
220,000
22.0%
Total operating expenses
$ (2,990,000)
$ (2,500,000)
$ 490,000
19.6%
Operating income
$ 2,310,000
$ 2,500,000
$ (190,000)
(7.6)%
Other revenue
256,950
225,000
31,950
14.2%
Income before income
tax expense
$ 2,566,950
$ 2,725,000
$ (158,050)
(5.8)%
Income tax expense
(1,413,000)
(1,500,000)
(87,000)
(5.8)%
Net income
$ 1,153,950
$ 1,225,000
$ (71,050)
(5.8)%
2. Net income has declined from 20Y1 to 20Y2. Sales have increased by 12.0%; however, the
CHAPTER 14 Financial Statement Analysis
14–30
Prob. 14–2A
1.
Tri-Comic Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2
20Y1
Amount
Percent
Amount
Percent
Sales
$1,500,000
100.0%
$1,250,000
100.0%
Cost of goods sold
(510,000)
(34.0)%
(475,000)
(38.0)%
Gross profit
$ 990,000
66.0%
$ 775,000
62.0%
Selling expenses
$ (270,000)
(18.0)%
$ (200,000)
(16.0)%
Administrative expenses
(180,000)
(12.0)%
(156,250)
(12.5)%
Total operating expenses
$ (450,000)
(30.0)%
$ (356,250)
(28.5)%
Operating income
$ 540,000
36.0%
$ 418,750
33.5%
Other revenue
60,000
4.0%
50,000
4.0%
Income before income
tax expense
$ 600,000
40.0%
$ 468,750
37.5%
Income tax expense
(450,000)
(30.0)%
(375,000)
(30.0)%
Net income
$ 150,000
10.0%
$ 93,750
7.5%
2. The vertical analysis indicates that the costs other than selling expenses (cost of goods
sold and administrative expenses) improved as a percentage of sales. As a result, net
CHAPTER 14 Financial Statement Analysis
14–31
Prob. 14–3A
1. a. Working Capital = Current Assets – Current Liabilities
$1,650,000 – $750,000 = $900,000
b.
sLiabilitieCurrent
setsCurrent As
RatioCurrent
=
2. Supporting Data
Transaction
Working
Capital
Current
Ratio
Quick
Ratio
Current
Assets
Quick
Assets
Current
Liabilities
a.
$ 900,000
2.2
1.2
$1,650,000
$ 900,000
$750,000
b.
900,000
2.4
1.2
1,525,000
775,000
625,000
c.
900,000
2.0
1.0
1,760,000
900,000
860,000
d.
900,000
2.4
1.2
1,550,000
800,000
650,000
e.
750,000
1.8
1.0
1,650,000
900,000
900,000
f.
900,000
2.2
1.2
1,650,000
900,000
750,000
g.
1,125,000
2.5
1.5
1,875,000
1,125,000
750,000
h.
900,000
2.2
1.2
1,650,000
900,000
750,000
i.
1,500,000
3.0
2.0
2,250,000
1,500,000
750,000
j.
900,000
2.2
1.2
1,650,000
890,000
750,000
CHAPTER 14 Financial Statement Analysis
14–32
Prob.14–4A
1. Working Capital: $2,464,000 – $880,000 = $1,584,000
Ratio
Numerator
Denominator
Calculated
Value
2.
Current ratio
$2,464,000
$880,000
2.8
3.
Quick ratio
$1,936,000
$880,000
2.2
4.
Accounts receivable turnover
$10,850,000
($585,000 + $500,000) ÷ 2
20.0
5.
Number of days’ sales in receivables
($585,000 + $500,000) ÷ 2
$10,850,000 ÷ 365
18.3
6.
Inventory turnover
$6,000,000
($420,000 + $380,000) ÷ 2
15.0
7.
Number of days’ sales in inventory
($420,000 + $380,000) ÷ 2
$6,000,000 ÷ 365
24.3
8.
Ratio of fixed assets to long-term liabilities
$5,760,000
$3,200,000
1.8
9.
Ratio of liabilities to stockholders’ equity
$4,080,000
$4,944,000
0.8
10.
Times interest earned
$1,020,000 + $132,000
$132,000
8.7
11.
Asset turnover
$10,850,000
($8,224,000 + $7,454,000) ÷ 2
1.4
12.
Return on total assets
$600,000 + $132,000
($9,024,000 + $8,254,000) ÷ 2
8.5%
13.
Return on stockholders’ equity
$600,000
($4,944,000 + $4,454,000) ÷ 2
12.8%
14.
Return on common stockholders’ equity
$600,000 – $10,000
($4,694,000 + $4,204,000) ÷ 2
13.3%
15.
Earnings per share on common stock
$600,000 – $10,000
100,000
$5.90
16.
Price-earnings ratio
$82.60
$5.90
14.0
17.
Dividends per share of common stock
$100,000
100,000
$1.00
18.
Dividend yield
$1.00
$82.60
1.2%
CHAPTER 14 Financial Statement Analysis
14–33
Prob. 14–5A
1.
a.
AssetsTotal Average
ExpenseInterest IncomeNet
AssetsTotal on Return +
=
45.3%
$3,044,250
$1,379,000
:20Y520.8%
$4,270,764
$889,453
:20Y8
==
CHAPTER 14 Financial Statement Analysis
14–34
Prob. 14–5A (Continued)
1.
b.
Equity rs’Stockholde Total Average
IncomeNet
Equity rs’Stockholde on Return =
23.0%
$2,749,588
$631,176
:20Y6
69.6%
$1,150,000
:20Y411.3%
$3,249,164
:20Y7
44.4%
$1,992,000
$884,000
:20Y57.7%
$3,569,855
$273,406
:20Y8
=
==
==
CHAPTER 14 Financial Statement Analysis
14–35
Prob. 14–5A (Continued)
1.
c.
ExpenseInterest
ExpenseInterest Expense Tax Income IncomeNet
EarnedInterest Times ++
=
2.4
$528,165
$1,266,061
:20Y6
3.3
$440,000
:20Y41.7
$572,003
:20Y7
3.1
$495,000
$1,539,000
:20Y51.5
$616,047
$921,202
:20Y8
=
==
==
CHAPTER 14 Financial Statement Analysis
14–36
Prob. 14–5A (Continued)
1.
d.
Equity rs’Stockholde Total
sLiabilitie Total
Equity rs’Stockholde
to sLiabilitie of Ratio =
0.2
$3,065,176
$667,267
:20Y6
0.8
$1,550,000
$1,200,000
:20Y40.2
$3,433,152
$691,198
:20Y7
0.4
$2,434,000
$904,500
:20Y50.2
$3,706,557
$710,621
:20Y8
=
==
==
CHAPTER 14 Financial Statement Analysis
14–37
Prob. 14–5A (Concluded)
2. Both the return on total assets and the return on stockholders’ equity have been moving
in a negative direction in the last five years. Both measures have moved below the
industry average over the last two years. The cause of this decline is driven by a rapid
CHAPTER 14 Financial Statement Analysis
14–38
Prob. 14–1B
1.
Macklin Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
Increase/(Decrease)
20Y2
20Y1
Amount
Percent
Sales
$ 910,000
$ 700,000
$210,000
30.0%
Cost of goods sold
(441,000)
(350,000)
91,000
26.0%
Gross profit
$ 469,000
$ 350,000
$119,000
34.0%
Selling expenses
$(139,150)
$ (115,000)
$ 24,150
21.0%
Administrative expenses
(99,450)
(85,000)
14,450
17.0%
Total operating expenses
$(238,600)
$ (200,000)
$ 38,600
19.3%
Operating income
$ 230,400
$ 150,000
$ 80,400
53.6%
Other revenue
65,000
50,000
15,000
30.0%
Income before income
tax expense
$ 295,400
$ 200,000
$ 95,400
47.7%
Income tax expense
(65,000)
(50,000)
15,000
30.0%
Net income
$ 230,400
$ 150,000
$ 80,400
53.6%
2. The profitability has significantly improved from 20Y1 to 20Y2. Sales have increased by