Chapter 12 – Financial Statement Analysis
Problem 12-6B (LO12-3, 12-4)
Requirement 1
Risk Ratios
Calculations
Receivables turnover ratio
$8,900,000
Inventory turnover ratio
2021
$5,450,000
($1,075,000 + $1,405,000) / 2
= 4.4 times
2022
$6,800,000
($1,405,000 + $1,725,000) / 2
= 4.3 times
Current ratio
2021
= 15.9 to 1
2022
$3,070,000
= 14.0 to 1
Debt to equity ratio
2021
= 30.9%
2022
= 25.2%
Chapter 12 – Financial Statement Analysis
12–40 Financial Accounting, 5e
Requirement 2
Profitability Ratios
Calculations
Gross profit ratio
2022
= 34.6%
Return on assets
2021
$1,230,000
($3,124,000 + $3,199,000) / 2
= 38.9%
2022
$1,360,000
($3,199,000 + $3,570,000) / 2
= 40.2%
Profit margin
2021
$1,230,000
= 13.8%
2022
$1,360,000
= 13.1%
Asset turnover
2021
= 2.8 times
Requirement 3
Regarding risk, the receivables turnover slightly improved and the debt to equity ratio
declined, which are both positive signs. However, the inventory turnover ratio and
Chapter 12 – Financial Statement Analysis
ADDITIONAL PERSPECTIVES
Continuing Problem: Great Adventures
AP12-1
Requirement 1
Note: Assume all sales and services are on credit.
Risk Ratios
Calculations
a. Receivables turnover ratio
$164,150
($47,600 + $0) / 2
= 6.9 times
b. Average collection period
= 52.9 days
c. Inventory turnover ratio
= 11.0 times
d. Average days in inventory
= 33.2 days
e. Current ratio
= 2.2 to 1
f. Acid-test ratio
= 2.2 to 1
h. Times interest earned ratio
= 8.4 times
Chapter 12 – Financial Statement Analysis
12–42 Financial Accounting, 5e
Requirement 2
Profitability Ratios
Calculations
a. Gross profit ratio
$164,150 − $38,500
$164,150
= 76.5%
b. Return on assets
= 4.3%
c. Profit margin
$164,150
= 21.8%
d. Asset turnover
= 0.2 times
Chapter 12 – Financial Statement Analysis
Financial Analysis: American Eagle
AP12-2
($ in thousands)
Requirement 1
Risk Ratios
Calculations
a. Receivable turnover ratio
= 46.0 times
e. Current ratio
= 2.0
Chapter 12 – Financial Statement Analysis
12–44 Financial Accounting, 5e
Requirement 2
Profitability Ratios
Calculations
a. Gross profit ratio
$1,370,505
$3,795,549
= 36.1%
b. Return on assets
= 11.3%
c. Profit margin
$3,795,549
= 5.4%
d. Asset turnover
= 2.1 times
Chapter 12 – Financial Statement Analysis
Financial Analysis: The Buckle
AP12-3
($ in thousands)
Requirement 1
Risk Ratios
Calculations
a. Receivable turnover ratio
= 108.7 times
b. Average collection period
= 3.4 days
d. Average days in inventory
= 83.0 days
e. Current ratio
= 3.7
f. Acid-test ratio
= 2.3
g. Debt to equity ratio
= 37.5%
Chapter 12 – Financial Statement Analysis
12–46 Financial Accounting, 5e
Requirement 2
Profitability Ratios
Calculations
a. Gross profit ratio
$380,023
$913,380
= 41.6%
b. Return on assets
$89,707
($538,116 + $579,847) / 2
= 16.0%
c. Profit margin
$913,380
= 9.8%
d. Asset turnover
= 1.6 times
Chapter 12 – Financial Statement Analysis
Comparative Analysis: American Eagle vs. The Buckle
AP12-4
($ in thousands)
Requirement 1
American Eagle
Risk Ratios
Calculations
a. Receivable turnover ratio
= 46.0 times
c. Inventory turnover ratio
= 6.4 times
d. Average days in inventory
= 57.0 days
e. Current ratio
= 2.0
f. Acid-test ratio
= 1.0
Chapter 12 – Financial Statement Analysis
12–48 Financial Accounting, 5e
The Buckle
Risk Ratios
Calculations
a. Receivable turnover ratio
$913,380
($8,588 + $8,210) / 2
= 108.7 times
b. Average collection period
= 3.4 days
$533,357
d. Average days in inventory
= 83.0 days
e. Current ratio
$360,584
$97,906
= 3.7
f. Acid-test ratio
$165,086 + $50,833 +$8,588
$97,906
= 2.3
g. Debt to equity ratio
= 37.5%
Chapter 12 – Financial Statement Analysis
Requirement 2
American Eagle
Profitability Ratios
Calculations
a. Gross profit ratio
$1,370,505
$3,795,549
= 36.1%
b. Return on assets
($1,816,313 + 1,782,660) / 2
= 11.3%
c. Profit margin
= 5.4%
d. Asset turnover
$3,795,549
($1,816,313 + 1,782,660) / 2
= 2.1 times
e. Return on equity
= 16.7%
Chapter 12 – Financial Statement Analysis
12–50 Financial Accounting, 5e
The Buckle
Profitability Ratios
Calculations
a. Gross profit ratio
$380,023
$913,380
= 41.6%
b. Return on assets
= 16.0%
c. Profit margin
$913,380
= 9.8%
d. Asset turnover
$913,380
($538,116 + $579,847) / 2
= 1.6 times
Chapter 12 – Financial Statement Analysis
Ethics
AP12-5
1. The debt to equity ratio would be lower.
The debt to equity ratio is the ratio of total liabilities to total equity. The warranty
adjustment causes liabilities to increase and expenses to increase (and therefore equity
to decrease). By not making the adjustment, the numerator (total liabilities) is lower,
and the denominator (total equity) is higher. The result is the debt to equity ratio
would be lower if the adjustment is not made.
2. The company will appear riskier and less profitable if the adjustments are kept.
The warranty adjustment increases the debt to equity ratio, indicating greater risk. The
inventory adjustment decreases the gross profit ratio, and the shorter useful life used
for the depreciable asset decreases the profit margin. Both of these lower ratios
indicate lower profitability.
3. Yes.
4. No.
Chapter 12 – Financial Statement Analysis
12–52 Financial Accounting, 5e
Chapter 12 – Financial Statement Analysis
Internet Research
AP12-6
This case provides an opportunity for students to examine ratios calculated for a
Chapter 12 – Financial Statement Analysis
12–54 Financial Accounting, 5e
Written Communication
AP12-7
Roseburg Corporation sells timber tracts for $30 million in 2021 that were purchased
for $20 million in 2017. The $10 million gain on sale is recorded as:
Debit
Credit
Cash
30,000,000
The issue is whether to record the $10 million gain on sale in the income statement
as part of operating income, “other revenues and expenses,” or discontinued
operations. Roseburg might prefer to report the large gain as part of operating income
as it would make their operations appear more profitable. However, the sale of the
timber tracts is not part of their ordinary operations of manufacturing cardboard
Chapter 12 – Financial Statement Analysis
Earnings Management
AP 12-8
Requirement 1
(a) Aggressive
(b) Aggressive
(c) Aggressive
(d) Aggressive
Requirement 2
Decrease.
All four adjustments decrease expenses in the current year which, in turn, increases
net income.
Requirement 3
None.
Requirement 4
Yes.
All four of the year-end adjustments increase income. It may be that all four