Chapter 12 – Financial Statement Analysis
Exercise 12-12 (LO12-5)
LeBron’s Bookstores
Income Statement
For the Year Ended December 31, 2021
Net sales
$ 11,000,000
Cost of goods sold
6,500,000
Gross profit
4,500,000
Operating expenses
Income before tax
Income tax expense
Income from continuing operations
1,125,000
Net income
12–22 Financial Accounting, 5e
Exercise 12-13 (LO12-5)
Shaquille Corporation
Income Statement
For the Year Ended December 31, 2021
Operating income
$ 1,700,000
Inventory write-down
200,000
Income tax expense
425,000
Net income
Chapter 12 – Financial Statement Analysis
Exercise 12-14 (LO12-6)
Chapter 12 – Financial Statement Analysis
12–24 Financial Accounting, 5e
Exercise 12-15 (LO12-6)
Requirement 1
(a) Aggressive
(b) Conservative
(c) Aggressive
(d) Aggressive
(e) Aggressive
Requirement 2
The total effect is neutral because net income is the same before and after the
Chapter 12 – Financial Statement Analysis
PROBLEMS: SET A
Problem 12-1A (LO12-1)
Requirement 1
Sports Emporium
Income Statements
For the Year Ended December 31, 2021
Sporting Goods
Sports Apparel
Amount
%
Amount
%
Net sales
$1,800,000
100.0
$970,000
100.0
Cost of goods sold
1,040,000
57.8
440,000
45.4
Gross profit
42.2
54.6
Operating expenses
25.0
340,000
35.1
Operating income
17.2
19.5
Income before tax
18.3
175,000
18.0
Income tax expense
Net income
10.8
Requirement 2
The sporting goods segment has a higher net income ($250,000) than the sports
apparel segment ($105,000). Vertical analysis further indicates the sporting goods
Chapter 12 – Financial Statement Analysis
Problem 12-2A (LO12-2)
Requirement 1
Anything Tennis
Income Statements
For the Years Ended December 31
Increase (Decrease)
2021
2020
Amount
%
Net sales
$ 3,500,000
$ 2,620,000
$ 880,000
33.6
Cost of goods sold
2,150,000
1,380,000
770,000
55.8
Operating expenses
Operating income
(70,000)
66.7
Income before tax
Income tax expense
Net income
Requirement 2
Sales increased $880,000 (33.6%), but cost of goods sold increased $770,000 (55.8%),
Chapter 12 – Financial Statement Analysis
Problem 12-3A (LO12-1, 12-2)
Requirement 1
Sports Unlimited
Balance Sheet
December 31, 2021
2021
2020
Assets
Amount
%
Amount
%
Current assets:
Cash
$ 103,500
23.0
$ 70,400
17.6
Accounts receivable
46,800
10.4
32,000
8.0
Inventory
9.9
Prepaid rent
7,200
1.6
0.9
Investment in bonds
Land
Equipment
23.6
25.5
Accumulated depreciation
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$ 30,150
6.7
$ 46,800
11.7
Interest payable
7,200
1.6
3,600
0.9
Income tax payable
Notes payable
30.7
127,600
Common stock
32.0
36.0
Retained earnings
26.3
Total liabilities and equity
12–28 Financial Accounting, 5e
Requirement 2
Sports Unlimited
Balance Sheet
December 31, 2021
Year
Increase (Decrease)
Assets
2021
2020
Amount
%
Current assets:
Cash
$ 103,500
$ 70,400
$ 33,100
47.0
Accounts receivable
46,800
32,000
14,800
46.3
Inventory
Prepaid rent
Long-term assets:
Investment in bonds
54,900
54,900
Land
Equipment
Accumulated depreciation
(47.1)
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$ 30,150
$ 46,800
$(16,650)
(35.6)
Interest payable
7,200
3,600
3,600
100.0
Income tax payable
21.5
Long-term liabilities:
Notes payable
Common stock
Retained earnings
68,000
74.0
Total liabilities and equity
$450,000
Chapter 12 – Financial Statement Analysis
Problem 12-4A (LO12-3)
Risk Ratios
Calculations
1. Receivables turnover ratio
$3,086,000
($70,000 + $91,000) / 2
= 38.3 times
2. Average collection period
365
38.3
= 9.5 days
4. Average days in inventory
15.1
= 24.2 days
5. Current ratio
= 4.0 to 1
6. Acid-test ratio
= 2.8 to 1
7. Debt to equity ratio
= 72.9%
8. Times interest earned ratio
= 10.9 times
Chapter 12 – Financial Statement Analysis
Problem 12-5A (LO12-4)
Profitability Ratios
Calculations
1. Gross profit ratio
$1,126,000
$3,086,000
= 36.5%
2. Return on assets
= 16.0%
$3,086,000
4. Asset turnover
= 3.5 times
5. Return on equity
= 27.9%
= 20.2
Chapter 12 – Financial Statement Analysis
Problem 12-6A (LO12-3, 12-4)
Requirement 1
Risk Ratios
Calculations
Receivables turnover ratio
Inventory turnover ratio
2021
$1,960,000
($145,000 + $115,000) / 2
= 15.1 times
Current ratio
2021
$415,000
$104,000
= 4.0 to 1
$186,000
Debt to equity ratio
2021
$399,000
= 72.9%
$436,000
Chapter 12 – Financial Statement Analysis
12–32 Financial Accounting, 5e
Requirement 2
Profitability Ratios
Calculations
Gross profit ratio
$3,086,000
2022
= 30.1%
$3,560,000
Return on assets
2021
$139,000
($794,200 + $946,000) / 2
= 16.0%
2022
$33,000
($946,000 + $1,072,000) / 2
= 3.3%
Profit margin
2021
$139,000
$3,086,000
= 4.5%
2022
$33,000
$3,560,000
= 0.9%
Asset turnover
2021
$3,086,000
($794,200 + $946,000) / 2
= 3.5 times
$3,560,000
Requirement 3
The risk ratios are mixed. The receivables and inventory turnover ratios improved in
2022, while the current ratio and debt to equity ratio indicate greater risk in 2022.
Chapter 12 – Financial Statement Analysis
PROBLEMS: SET B
Problem 12-1B (LO12-1)
Requirement 1
Game-On Sports
Income Statements
For the Year Ended December 31, 2021
Athletic Equipment
Accessories
Amount
%
Amount
%
Net sales
$3,050,000
100.0
$3,500,000
100.0
Requirement 2
The athletic equipment segment is more profitable. Net income is 26.0% of sales in
Problem 12-2B (LO12-2)
Requirement 1
Galaxy Tennis
Income Statements
For the Years Ended December 31
Increase (Decrease)
2021
2020
Amount
%
Net sales
$ 6,150,000
$ 6,250,000
$ (100,000)
(1.6)
Operating expenses
Operating income
(7.7)
Income before tax
Income tax expense
Net income
$ 1,460,000
$ 1,590,000
(8.2)
Requirement 2
Sales and gross profit decreased 1.6% and 0.9% respectively. However, even though
Chapter 12 – Financial Statement Analysis
Problem 12-3B (LO12-1, 12-2)
Requirement 1
Fantasy Football
Balance Sheet
December 31
Assets
2021
2020
Amount
%
Amount
%
Current assets:
Cash
$ 208,000
5.2
$ 262,200
6.9
Accounts receivable
Inventory
Supplies
3.1
Equipment
Accumulated depreciation
Total assets
$4,000,000
$3,800,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$ 168,000
4.2
$ 129,200
3.4
Interest payable
0
0.0
3,800
0.1
Income tax payable
1.9
Notes payable
Common stock
Retained earnings
Total liabilities and equity
$4,000,000
$3,800,000
Chapter 12 – Financial Statement Analysis
12–36 Financial Accounting, 5e
Requirement 2
Fantasy Football
Balance Sheet
December 31
Year
Increase (Decrease)
Assets
2021
2020
Amount
%
Current assets:
Cash
$ 208,000
$ 262,200
$ (54,200)
(20.7)
Accounts receivable
Supplies
41.9
Long-term assets:
Equipment
Accumulated depreciation
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$ 168,000
$ 129,200
$ 38,800
30.0
Interest payable
0
3,800
(3,800)
(100.0)
Income tax payable
Long-term liabilities:
Notes payable
760,000
Common stock
Retained earnings
Total liabilities and equity
$3,800,000
Chapter 12 – Financial Statement Analysis
Problem 12-4B
Risk Ratios
Calculations
1. Receivables turnover ratio
$8,900,000
($810,000 + $790,000) / 2
= 11.1 times
2. Average collection period
= 32.9 days
4. Average days in inventory
= 83.0 days
5. Current ratio
$2,469,000
$155,000
= 15.9 to 1
6. Acid-test ratio
$164,000 + $790,000
$155,000
= 6.2 to 1
7. Debt to equity ratio
= 30.9%
Chapter 12 – Financial Statement Analysis
Problem 12-5B (LO12-4)
Profitability Ratios
Calculations
1. Gross profit ratio
$3,450,000
$8,900,000
= 38.8%
2. Return on assets
$1,230,000
($3,124,000 + $3,199,000) / 2
= 38.9%
$1,230,000
$8,900,000
4. Asset turnover
= 2.8 times
5. Return on equity
$1,230,000
= 50.8%
6. Price-earnings ratio
= 16.5 times