Financial Accounting, 10/e 13–17
Req. 1
.
Component Percentages Year 2
Income statement:
Sales revenue (the base amount)
100.00
Cost of goods sold
58.95
Gross profit on sales
41.05
Operating expenses
29.47
Pretax income
11.58
Income taxes
Net income
7.37
Balance sheet:
Cash
3.88
Accounts receivable (net)
13.59
Inventory
38.83
Operational assets (net)
43.69
Total assets (the base amount)
100.00
Current liabilities
15.53
43.69
Retained earnings
11.65
Total liabilities and stockholders’ equity
100.00
Req. 2
Return on assets
Total asset turnover
$14,000 ÷ $100,000*
14.00%
P13–7.
Earnings per share
$14,000 ÷ 6,000* shares
*$30,000 ÷ $5 par value
$2.33
Cash ratio
Price/earnings ratio
$28 ÷ $2.33
12.02
Dividend yield ratio
$3.50 ÷ $28
Financial Accounting, 10/e 13–19
P13–8.
For two companies that are exactly alike, in times of rising prices and increasing
inventory levels, choosing different inventory costing methods will result in:
• Inventory: LIFO results in lower inventory on the balance sheet. FIFO
results in higher inventory on the balance sheet.
The effects on the ratios are:
1. Net profit margin—LIFO results in lower net income (with no effect on
revenues), so Company B’s net profit margin will be lower than Company
A’s net profit margin.
4. Current ratio— LIFO results in lower inventory (with no effect on current
liabilities) so Company B’s current ratio will be lower than Company A’s
current ratio.
P13–9.
Req. 1
Return on equity
$(406) ÷ $191,831*
*($194,411 +$189,250) ÷ 2
(0.21)%
Net profit margin
$(406) ÷ $642,231
(0.06)%
Inventory turnover
Current ratio
Quick ratio
Req. 2
Yes, the inventory turnover ratio appears reasonable. The inventory turnover
Financial Accounting, 10/e 13–21
P13–10.
American Airlines
C. 10
Facebook
A. 77
Starbucks
B. 29
Yahoo
E. 5
Patriot Coal
ALTERNATE PROBLEMS
AP13–1.
Many of the ratios between the two companies are quite similar. However,
on the ones that differ, Coca-Cola appears to dominate. The biggest
AP13–2.
Company B is slightly better than Company A on several measures (inventory
AP13–3.
Net profit margin
$8,630 ÷ $100,904
8.55%
Quality of income
$12,031 ÷ $8,630
1.39
Cash ratio
$3,595 ÷ $16,194
P/E ratio
Financial Accounting, 10/e 13–23
AP13–4.
Req. 1
Total asset turnover
$110,000 ÷ $199,750*
*($206,500 + $193,000) ÷ 2
0.55
Fixed asset turnover
Inventory turnover
1.65
$110,000 ÷ $100,000*
1.10
Quick ratio
$86,500* ÷ $43,000
*$49,500 + $37,000
2.01
Cash ratio
$49,500 ÷ $43,000
1.15
Times interest earned
5.50
Cash coverage ratio
3.84
Req. 2
The average collection period is very long. On average, it takes Tabor 229.56
days (365 days ÷ 1.59) to collect its receivable. In addition, the average days to
sell inventory is long. On average, it takes Tabor 221.21 days (365 days ÷ 1.65)
to sell its inventory. Both of these numbers are troubling and require additional
inquiry.
AP13–5.
Req. 1
Increase (Decrease)
from Year 1 to Year 2
Income Statement
Year 2
Year 1
Amount
Percent
Sales revenue
$453,000
$447,000
$ 6,000
1.34
Cost of goods sold
250,000
241,000
9,000
3.73
Gross profit
203,000
206,000
-1.46
Operating expenses (including interest)
167,000
168,000
-0.60
Pretax income
36,000
38,000
-5.26
Income tax
10,800
11,400
-5.26
Net income
$- 1,400
-5.26
Balance Sheet
Cash
$ 6,800
$ 3,900
$ 2,900
74.36
Accounts receivable (net)
42,000
29,000
13,000
44.83
Merchandise inventory
25,000
18,000
7,000
38.89
Prepaid expenses
Total assets
19.30
Accounts payable
-5.56
Income taxes payable
1,000
1,000
0
0.00
Bonds payable (interest rate: 10%)
70,000
50,000
20,000
40.00
Common stock ($10 par value)
100,000
100,000
0
0.00
Retained earnings
16,000
2,000
14,000
700.00
Total liabilities and stockholders’ equity
$204,000
$171,000
Year 2 current ratio: ($6,800 + $42,000 + $25,000 + $200) ÷ ($17,000 + $1,000)
= 4.11
Financial Accounting, 10/e 13–25
AP13–6.
Req. 1
Income Statement
Component
Percentages
Sales revenue (base amount)
100.00
Cost of goods sold
Gross profit
Operating expenses (including
36.87
Pretax income
7.94
Income tax
2.38
Net income
5.56
Balance Sheet
Cash
3.33
Accounts receivable (net)
Merchandise inventory
Prepaid expenses
0.10
Property & equipment (net)
Total assets (base amount)
100.00
Accounts payable
8.33
Income taxes payable
0.49
Bonds payable (interest rate:
10%)
34.32
Common stock ($10 par value)
Retained earnings
7.84
Total liabilities & equity
100.00
Req. 2
Return on assets
$25,200 ÷ $187,500*
*($204,000 + $171,000) ÷ 2
13.44%
CONTINUING PROBLEM
CON13–1.
This case is designed to give students experience in looking up financial
Financial Accounting, 10/e 13–27
CASES AND PROJECTS
ANNUAL REPORT CASES
CP13–1. (Dollar amounts in thousands)
American Eagle Outfitters
Return on equity:
=
16.66%
Return on assets:
$204,163
=
11.35%
($1,782,660 + $1,816,313) ÷ 2
Net profit margin:
=
5.38%
Inventory turnover:
$2,425,044
=
6.41
($358,446 + $398,213) 2
Current ratio:
Debt-to-equity ratio:
0.46
CP13–2. (Dollar amounts in thousands)
Express
Return on equity:
1.63%
Net profit margin:
$19,366
=
0.91%
$2,138,030
Inventory turnover:
Current ratio:
1.94
Debt-to-equity ratio:
Financial Accounting, 10/e 13–29
CP13–3.
For calculations see CP13–1 and CP13–2.
For industry averages see Appendix D.
American Eagle
Outfitters
Express
Industry Average
Return on equity
16.66%
3.00%
12.57%
Return on assets
11.35%
1.63%
7.44%
Net profit margin
0.91%
Inventory turnover
Current ratio
FINANCIAL REPORTING AND ANALYSIS CASES
CP13–4.
The two areas where we would expect the largest difference are profit margin
and total asset turnover. We would expect the high-end company to have a
High-end company:
ROA = 20.00%
(10% profit margin x 2.0 total asset turnover)
CP13–5.
Case 1:
ROA
=
Net Income
Average Total Assets
=
Case 2:
Total Asset Turnover
=
Net Sales
Average Total Assets
Average Total Assets
Case 3:
Total Asset Turnover
=
Net Sales
Average Total Assets
=
Case 4:
ROA = Net profit margin x Total asset turnover
ROA = Net profit margin x 5
Financial Accounting, 10/e 13–31
CRITICAL THINKING CASE
CP13–6.
The controller’s actions will increase the current ratio:
Before
After
The current ratio has increased to an amount that is considered to be acceptable
by First Federal Bank, but it appears that the increase is mere “window dressing.”
Total working capital (current assets less current liabilities) was unaffected by the
transaction. In the process of improving the current ratio, Barton Company
created a potential cash crisis. The cash balance was reduced to $10,000
($430,000 – $420,000) compared with current liabilities of $655,000. First
Federal should not automatically grant the loan now that Barton’s current ratio is
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP13–7.
The response to this case will depend on the companies selected by the
students.