1316 Solutions Manual
P136.
Req. 1
.
Component Percentages 2015
Income statement:
Sales revenue (the base amount)
100.00
Cost of goods sold
58.95
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
(rounded)
Current liabilities
15.53
43.69
Retained earnings
11.65
Total liabilities and owners’ equity (the base amount)
100.00
Req. 2
Return on equity
$14,000 ÷ $38,500*
*[($30,000 + $12,000) ÷ 2] +
[($30,000 + $5,000) ÷ 2] / 2
36.36%
Gross profit on sales
41.05
Operating expenses
29.47
Pretax income
11.58
Income taxes
Net income
7.37
Financial Accounting, 9/e 1317
Total asset turnover
$190,000 ÷ $100,000*
*($103,000 + $97,000) ÷ 2
1.90
P137.
Earnings per share
$14,000 ÷ 6,000* shares
*$30,000 ÷ $5 par value
2.33
Current ratio
$58,000* ÷ $16,000
*$4,000 + $14,000 + $40,000
3.63
1.13
P138.
For two companies that are exactly alike, in times of rising prices and 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 marginLIFO results in lower net income (with no effect on
revenues) so Company’s B’s net profit margin will be lower than Company
A’s net profit margin.
2. Earnings per shareLIFO results in lower net income (with no effect on
shares outstanding) so Company’s B’s EPS will be lower than Company A’s
EPS.
5. Quick ratio Since the quick ratio excludes inventory, the choice of LIFO
versus FIFO does not affect the quick ratio.
Financial Accounting, 9/e 1319
P139.
Req. 1
Return on equity
$(406) ÷ $191,831*
*($194,411 +$189,250) ÷ 2
(2.12)%
Net profit margin
$(406) ÷ $642,231
(0.06)%
*$21,230 + $11,594
Debt-to-equity ratio
$136,533* ÷ $194,411
*$93,151 + $9,886 + $33,177 + $319
7.02
P/E ratio
$1.12 ÷ $(0.02)
*$(0.02) is taken from the bottom of the Income
Statement
(56.00)
Req. 2
The inventory turnover ratio is high (92.81), but given that California Pizza
P1310.
American Airlines
C. 10
Facebook
A. 77
Starbucks
B. 29
Yahoo
E. 5
Patriot Coal
Inventory turnover
=
=
=
ALTERNATE PROBLEMS
AP131.
Many of the ratios between the two companies are quite similar. However,
on the ones that differ, Coca-Cola appears to dominate. The biggest
AP132.
Company B is slightly better than Company A on several measures (inventory
AP133.
Net profit margin
$6,345 ÷ $83,176
7.63%
Earnings quality
$8,242 ÷ $6,345
1.30
0.15
Financial Accounting, 9/e 1321
AP134.
Req. 1
Total asset turnover
$110,000 ÷ $199,750*
*($206,500 + $193,000) ÷ 2
0.55
Fixed asset turnover
$110,000 ÷ $100,000*
*($95,000 + $105,000) ÷ 2
1.10
*($25,000 + $38,000) ÷ 2
Current ratio
$111,500 ÷ $43,000**
*$49,500 + $37,000 + $25,000
**$42,000 + $1,000
2.59
Quick ratio
$86,500 ÷ $43,000
*$49,500 + $37,000
2.01
5.50
0.67
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
Inventory turnover
=
1.65
1322 Solutions Manual
AP135.
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
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
Property & equipment (net)
130,000
120,000
10,000
8.33
Total assets
204,000
171,000
$ 33,000
19.30
Accounts payable
$17,000
$18,000
$ -1,000
-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
Total liabilities & equity
204,000
171,000
$ 33,000
19.30
Year 2 current ratio: ($6,800 + $42,000 + $25,000 + $200) ÷ ($17,000 + $1,000)
= 4.11
Year 1 current ratio: ($3,900 + $29,000 + $18,000 + $100) ÷ ($18,000 + $1,000)
= 2.68
Change from Year 1 to Year 2: 4.11 2.68 = 1.43 increase
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
25,200
26,600
$- 1,400
-5.26
Financial Accounting, 9/e 1323
AP136.
Income Statement
Component
Percentages
Sales revenue (base amount)
100.00
Cost of goods sold
55.19
Income tax
Net income
5.56
Balance Sheet
Cash
3.33
Accounts receivable (net)
20.59
Merchandise inventory
Prepaid expenses
0.10
Property & equipment (net)
63.73
Total assets (base amount)
100.00
Accounts payable
8.33
Income taxes payable
0.49
Common stock ($10 par value)
49.02
Retained earnings
7.84
Total liabilities & equity
100.00
Gross profit
44.81
Operating expenses (including
Pretax income
7.95
2.38
AP136 (continued).
Req. 2
Return on equity
$25,200 ÷ $109,000*
*[($100,000 + $16,000) ÷ 2] +
[($100,000 + $2,000) ÷ 2] / 2
23.12%
Return on assets
$25,200 ÷ $187,500*
*($204,000 + $171,000) ÷ 2
13.44%
Financial Accounting, 9/e 1325
CASES AND PROJECTS
CONTINUING PROBLEM
CON131.
This case is designed to give students experience in looking up financial
FINANCIAL REPORTING AND ANALYSIS CASES
CP131.
American Eagle
Return on equity:
$80,322
=
6.97%
($1,139,746 + $1,166,178) ÷ 2
=
2.45%
Inventory turnover:
$2,128,193
=
7.46
($278,972 + $291,541) 2
Current ratio:
$890,513
=
1.94
$459,093
1326 Solutions Manual
CP131 (continued).
Price earnings:
$16
=
38.10
$0.42
CP132.
Urban Outfitters
Return on equity:
$232,428
=
15.38%
($1,327,969 + $1,694,170) 2
Inventory turnover:
$2,148,147
=
6.42
($358,237 + $311,207) 2
Current ratio:
$40
$0.50
=
3.13%
$16
Financial Accounting, 9/e 1327
CP133.
For calculations, see CP131, CP132, and Appendix D.
Urban Outfitters
American Eagle
Industry Average
Return on equity
15.38%
6.97%
11.34%
Earnings per share
$1.70
$0.42
N/A
Net profit margin
7.00%
2.47%
3.75%
In general, the ratios indicate that Urban Outfitters is outperforming the industry
and American Eagle is underperforming the industry. The one noticeable ratio
where this is not the case is the price/earnings ratios. American Eagle has a high
CP134.
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
higher net profit margin and a lower total asset turnover ratio. We would expect
Inventory turnover
Current ratio
Price earnings
Dividend yield
3.13%
1.41%
1328 Solutions Manual
CP135.
Case 1:
ROE
=
Net Income
Average Stockholders’ Equity
Case 2:
Total Asset Turnover
=
Net Sales
Average Total Assets
Average Total Assets
Case 3:
Total asset Turnover
=
Net Sales
Average Total Assets
=
Net Sales
Net Profit Margin
=
Net Income
10%
=
Net Income
$5,000,000
Net Income = $500,000
ROE
=
Financial Accounting, 9/e 1329
Case 4:
Total asset Turnover
=
Net Sales
Average Total Assets
CRITICAL THINKING CASES
CP136.
The controller’s actions will increase the current ratio:
Current assets
$1,900,000
$1,480,000
$ 825,000
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
above 2:1. It is quite possible that Barton will have cash flow issues in the short
term given the actions taken by the controller.
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP137.
The response to this question will depend on the companies selected by the
students.