*–*
Mayer Company (9.5 compared to 12.5); thus, an investor in Matthews Company
0.8 times) and a smaller interest coverage ratio (3.4 times versus 4.0 times) than
does Mayer Company. Both of these measures indicate that investments in
Chapter 13, E 12.
Matthews Company
$4,800,000
Matthews Company, either bonds or stocks, may be more risky than similar invest-
ments in Mayer Company. Matthews Company has a lower P/E ratio than does
Mayer Company
Debt to
equity ratio
$1,188,000 =
$2,640,000 1.2 Times
$972,000
Comment: Matthews Company has a greater debt to equity ratio (1.2 times versus
$2,160,000 0.8=
$1,188,000–
$2,160,000
$2,160,000
Times
*
*
=
Chapter 13, E 13.
= 1.3 Times
$456,000
$352,000
$38,000
Cash flow yield
$1,300,000
$947,600
$1,300,000
$947,600
Cost of goods sold
Cost of goods available for sale
Net sales
Cost of goods sold
Cost of goods available for sale
Less ending inventory
Income Statement Using FIFO
and Straight-Line Methods
Net sales
Dot Company
Alternative Income Statements
For the Year Ended December 31, 2012
Income Statement Using LIFO
and Double-Declining-Balance Methods
Chapter 13, P 1.
1. Alternative income statements prepared
User Insight: Inventory turnover computed and discussed
Net income using FIFO and straight-line methods
balance methods
Inventory Turnover LIFO Method
FIFO Method
93,200
3.
$190,800
Dot Company
Schedule of Differences in Net Income
For the Year Ended December 31, 2012
Difference in net income
Chapter 13, P 1. (Continued)
2. Schedule prepared
Net income using LIFO and double-declining-
$80,000 + $208,400 + $900,000 – $90,000
come figure than does the FIFO/straight-line methods because it charges higher
The LIFO and double-declining-balance methods produce a lower return on assets.
This combination of accounting methods produces a more conservative net in-
Net Income
Total Assets
$190,800
FIFO/Straight-Line Methods
=
Return on Assets
4. User Insight: Return on assets computed and discussed
Chapter 13, P 1. (Continued)
2012 2011 Amount Percentage
$3,276,800 $3,146,400 $130,400 4.1
2,088,800 2,008,400 80,400 4.0
$1,188,000 $1,138,000 $ 50,000 4.4
Increase or Decrease
Gross margin
Net sales
Cost of goods sold
Operating expenses
Chapter 13, P 2.
Whale Corporation
1. Schedules showing amount and percentage changes prepared
Comparative Income Statements
For the Years Ended December 31, 2012 and 2011
2012 2011 Amount Percentage
$ 81,200 $ 40,800 $ 40,400 99.0
$ 267,600 $ 477,200 ($209,600) (43.9)
Cash
Notes payable (short-term)
Accounts payable
Whale Corporation
Comparative Balance Sheets
Chapter 13, P 2. (Continued)
December 31, 2012 and 2011
Liabilities and Stockholders’ Equity
Increase or Decrease
Assets
2012 2011
100.0% 100.0%
63.7% 63.8%
36.3% 36.2%
2012 2011
4.9% 2.6%
14.4% 14.5%
16.3% 30.1%
12.2% 25.2%
Cash
Accounts receivable (net)
Accounts payable
Gross margin
Notes payable (short-term)
Cost of goods sold
Net sales
Common-size income statements and balance sheets prepared
Common-Size Income Statements
For the Years Ended December 31, 2012 and 2011
Operating expenses
Whale Corporation
2.
Whale Corporation
Common-Size Balance Sheets
December 31, 2012 and 2011
Assets
Liabilities and Stockholders’ Equity
3. User Insight: Results commented on
The major changes in the income statements of Whale Corporation occurred in the
Chapter 13, P 2. (Continued)
expense categories. Interest expense increased 67.3 percent, or $26.4 thousand;
administrative expenses increased 5.7 percent, or $24 thousand; and income taxes
expense increased 9.9 percent, or $5.6 thousand. The increase in administrative ex-
penses was partially offset by a significant decrease of 8.0 percent ($41.2 thousand)
Ratio Increase Decrease None
a. Sold merchandise on account. Current ratio x
b. Sold merchandise on account. Inventory turnover x*
c. Collected on accounts
receivable. Quick ratio x
d. Wrote off an uncollectible
account. Receivable turnover x**
e. Paid on accounts payable. Current ratio x***
f. Declared cash dividend. Return on equity x
Transaction
Chapter 13, P 3.
Effect
6. Favorable (F) or
Unfavorable (U)
ChangeRatio Name 2012 2011
$136,000
Profit
margin
$3,276,800
=
$3,146,400
1.
F3.2%=4.2%
Chapter 13, P 4.
=$100,800
a. =
$3,276,800
$3,146,400
Profitability and
total asset
management
anal
y
sis
=
-1.4 Times
Ratio Name
$144,000
6. Favorable (F) or
Unfavorable (U)
Change20112012
($196,000)
$136,000
Times1.4
Chapter 13, P 4. (Continued)
U
=
$100,800
2.
Liquidity analysis
Cash flow yield
a.
++ +
++
Debt to equity
ratio
$400,000
$307,600
=
Times
$877,200
$707,600
6. Favorable (F) or
Unfavorable (U)
Change20112012
$400,000
$267,600
$374,000
$400,000$200,000
1.1
==
Chapter 13, P 4. (Continued)
$477,200
3.
a. Neutral
= 1.2
$400,000
Financial risk
analysis
Ratio Name
Times
$774,000
$867,600
4.
( + ) ÷ 2 ( + ) ÷ 2
$2,008,400
Ratio Name
=
$2,088,800
$574,800 $594,800
6. Favorable (F) or
Unfavorable (U)
Change20112012
3.6 $2,008,400
Inventory
turnover
Operating asset
management
analysis
Neutral
=
a.
=
$571,000
Chapter 13, P 4. (Continued)
=
$594,800 $547,200
3.5 Times
Times
$2,088,800
$584,800
( + ) ÷ 2 ( + ) ÷ 2
++ ++
e. Payables
Ratio Name 2012
$267,600
6. Favorable (F) or
Unfavorable (U)
Change2011
+ $47,600$2,008,400
$477,200
Chapter 13, P 4. (Continued)
$384,600
$235,600
$81,200
$267,600
+ $200,000
$574,800
$2,088,800 – $20,000
$477,200
$477,200 + $400,000
$40,800 $229,200 $594,800
6. Favorable (F) or
Unfavorable (U)
Change
$60.00 23.8
$2.52 Times=
Market
strength
analysis
Chapter 13, P 4. (Continued)
$36.00
U
a.
Ratio Name
Price/
earnings
2011
$3.40
5.
Times10.6=
2012
$25,210,000
a.
$12,560,000
Profit
margin
Ratio Name
Roma
Chapter 13, P 5.
Roma Lima
6. Company
with More
Favorable
Ratio
Profitability and
total asset
management
analysis
$305,800 1.2%
=
$215,400 =
1.
1.7%
==
Liquidity
analysis
Chapter 13, P 5. (Continued)
Ratio Name Roma Lima
6. Company
with More
Favorable
Ratio
2.
a. Cash flow
yield
$271,500
$215,400 1.3
$492,500
Times
LimaTimes1.6
$305,800
++ + +
$2,112,000
$1,000,000 $609,800 $833,200 $600,000 $3,568,600
Lima
$572,600
$305,800
6. Company
with More
Favorable
Ratio
+
Ratio Name
Financial risk
analysis
3.
Chapter 13, P 5. (Continued)
Roma
b. Return on
$215,400
+
$344,000
4.
Ratio Name Roma Lima
6. Company with
More Favorable
Ratio
Inventory
turnover
$6,142,000 $14,834,000 =
Chapter 13, P 5. (Continued)
a.
=
Operating asset
management
analysis
$1,253,400
Times
11.8 Times= 9.8
Lima=
$629,800