FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-1
(5-10 min.)
Solution:
2016 2016 2014
Amount
Percent Amount Percent
(Dollars in thousands)
Increase (Decrease)
2013
2016
Perform a horizontal analysis of revenues and net income—both in dollar amounts
and in percentages—for 2016 and 2015.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Trend percentages:
Breen, Inc., reported the following sales and net income amounts:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-3
(5-10 min.)
Solution:
Amount Percent Amount Percent Amount Percent
14,750$ 2.5% 7,920$ 1.5% 7,245$ 1.5%
29,500 5.0 15,840 3.0 19,320 4.0
Perform a vertical analysis of Crafton Software’s assets at the end of years 2016, 2015,
and 2014. Use the analysis to explain the reason for the cash shortage.
2016
Receivables, net
Cash
2014
2015
Chapter 13: Financial Statement Analysis Page 3 of 94
35,400 6.0 42,240 8.0 33,810 7.0
Total assets
Prepaid expenses
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-4
(10 min.)
Solution:
Amount Percent Amount Percent
16,000$ 100.0% 7,000$ 100.0%
9,536 59.6 4,648 66.4
Carlton
Selling and administrative
Cost of goods sold
Net sales
Lofton
Which company earned more net income? Which company’s net income was a
higher percentage of its net sales? Explain your answer.
(Amounts in millions)
Chapter 13: Financial Statement Analysis Page 4 of 94
4,448 27.8 1,414 20.2
Net income
Income tax expense
Other expense
Interest expense
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-5
(5-10 min.)
Solution:
2016 2015 2014
646$ 596$ 434$
Show how to compute Peterson’s current ratio for each year 2014 through
2016. Is the company’s ability to pay its current liabilities improving or
deteriorating?
Total current assets
Chapter 13: Financial Statement Analysis Page 5 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-6
(5-10 min.)
Solution:
1.
2016 2015
1,202$ 902$
+8 +84
+246 +256
Cash +
Short-term investments +
Receivables, net
=
1. Compute Gagnon, Inc.’s, quick (acid-test) ratio at December 31, 2016, and 2015.
2. Use the comparative information from the table given for Horner, Inc., Isaacson
Company, and Jona Companies Limited. Is Gagnon, Inc.’s, quick (acid-test) ratio for
2016 and 2015 strong, average, or weak in comparison?
(Dollar amounts in millions)
Chapter 13: Financial Statement Analysis Page 6 of 94
1,212$ 1,144$
2.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-7
(10-15 min.)
Solution:
a.
(Dollar amounts in millions)
a. Gagnon, Inc.’s, rate of inventory turnover and days’ inventory outstanding for 2016.
b. Days’ sales in average receivables (days’ sales outstanding) during 2016 (round dollar
amounts to one decimal place). Assume all sales are made on account.
c. Accounts payable turnover and days’ payables outstanding for 2016. For this purpose,
assume that the impact of inventories on cost of goods sold is immaterial, allowing you
to use cost of goods sold rather than purchases in your computations.
d. Length of cash conversion cycle in days for 2016.
Do these measures look strong or weak? Give the reason for your answer.
=
$ 86
$ 2,519
=
29.3 times
Inventory turnover
=
Cost of goods sold
Average inventory
=
$ 2,519
($90 + $82) / 2
Chapter 13: Financial Statement Analysis Page 7 of 94
$ 2,519
$ 26.0
=
=
=
=
Average net receivables
=
=
=
=
=
Inventory turnover
=
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
135 days
d.
Cash conversion cycle (in days):
2.7
Days’ payables
outstanding (DPO)
=
365
=
365
=
Accounts payable
turnover
Chapter 13: Financial Statement Analysis Page 8 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-8
(5-10 min.)
Solution:
1. = $ 5,894 0.812
7,260$
(Dollar amounts in millions)
=
=
Debt ratio
Total liabilities
Total assets
1. Compute the company’s debt ratio at December 31, 2016.
2. Compute the company’s times-interest-earned ratio for 2016. For operating
income, use income before both interest expense and income taxes. You can
simply add interest expense back to income before taxes.
3. Is Gagnon’s ability to pay liabilities and interest expense strong or weak?
Comment on the value of each ratio computed for questions 1 and 2.
Gagnon, Inc.’s debt ratio is 81.2%.
Chapter 13: Financial Statement Analysis Page 9 of 94
$952 + $194
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-9
(10 min.)
Solution:
a.
Rate of return on sales
= = $ 565
$ 9,505
b. Asset turnover = =
(Dollar amounts in millions)
1.375
times
5.94%
=
Compute:
a. Rate of return on sales
b. Asset turnover ratio
c. Rate of return on total assets
d. Leverage (equity multiplier) ratio
e. Rate of return on common stockholders’ equity
f. Is Gagnon, Inc.’s profitability strong, medium, or weak?
Net income
Net sales
Net sales
Average total
assets
=
$ 9,505
($7,260 + $6,564) / 2
Chapter 13: Financial Statement Analysis Page 10 of 94
($7,260 + $6,564) / 2
($1,366 + $1,500) / 2
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-10
(5-10 min.)
Solution:
1.
EPS
=
1. Compute earnings per share (EPS) and the price-earnings ratio for Ferguson
Cars’ stock. Round to the nearest cent. The price of a share of Ferguson Cars’
stock is $19.98.
2. How much does the stock market say $1 of Ferguson Cars’ net income is
worth?
Net income − Preferred dividends
Number of shares of common stock
=
$1,200 − $10*
700
(Amounts, except per-share amounts, in millions)
Chapter 13: Financial Statement Analysis Page 11 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-11
(10 min.)
Solution:
Net sales 7,200$
Cost of goods sold 3,060 (a)
Complete Pine Florals’ income statement:
Income Statement
Thousands
Chapter 13: Financial Statement Analysis Page 12 of 94
$7,200 − $3,060 − $1,516 − $1,334 − $153 − $1,045 = $92
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-12
(15-20 min.)
Solution:
Cash 260$ Total current liabilities 2,250$
Receivables 190 (a) Long-term debt 540 (e)
Inventories 750 Other long-term
Complete Pine Florals’ balance sheet:
(Dollars in thousands)
Balance Sheet
Chapter 13: Financial Statement Analysis Page 13 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-13
(15-20 min.)
Solution:
TO:
FROM:
SUBJECT:
I recommend that we invest in Tower.org for the following reasons:
1. Tower.org’s. return on equity (ROE) is 5% higher than Graphics Imaging’s. An
investment in Tower.org should therefore produce a higher return than an
investment in Graphics Imaging’s stock.
Write a report to the Cole Binder investment committee. Recommend one company’s
stock over the other. State the reasons for your recommendation.
Cole Binder Investment Committee
Student Name
Investment Recommendation
Chapter 13: Financial Statement Analysis Page 14 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S13-14
(10 min.)
Solution:
(Dollars in thousands)
EVA®=
Compute economic value added (EVA®) for Beecher Software. Round all amounts
to the nearest thousand dollars. Should the company’s stockholders be happy
with the EVA®?
Net
income
Interest
expense
Capital
charge
−
+
Chapter 13: Financial Statement Analysis Page 15 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-15A
(5-15 min.)
Solution:
2016 2014
643,260$ 300,000$
What were the dollar amounts of change and the percentage of each change in
Majestic Mountain Lodge’s net working capital during 2016 and 2015? Is this trend
favorable or unfavorable?
Total current assets
299,000$
2015
Chapter 13: Financial Statement Analysis Page 16 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-16A
(10-15 min.)
Solution:
PERCENT
Total revenue 836,000$ 938,000$ (102,000)$ -10.9%
Connor Music Co.
Horizontal Analysis of Comparative Income Statements
Years Ended December 31, 2016 and 2015
Prepare a horizontal analysis of the comparative income statements of Connor
Music Co. Round percentage changes to the nearest one-tenth percent (three
decimal places).
INCREASE (DECREASE)
2015
2016
AMOUNT
Chapter 13: Financial Statement Analysis Page 17 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-17A
(5-10 min.)
Solution:
Trend percentages:
Year 4 Year 3 Year 2 Year 1 Year 0
Total revenue 140% 122% 107% 100% 100%
Compute trend percentages for Sagamore Valley Sales & Service’s total revenue
and net income for the following five-year period, using year 0 as the base year.
Round to the nearest full percent. Which grew faster during the period, total
revenue or net income?
Chapter 13: Financial Statement Analysis Page 18 of 94
Net income 123 110 95 80 100
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-18A
(10-15 min.)
Solution:
AMOUNT PERCENT
Total current assets 41,440$ 14.80%
Property, plant, and equipment, net 199,640 71.30
December 31, 2016
ASSETS
Curtis Golf Company has requested that you perform a vertical analysis of its
balance sheet to determine the component percentages of its assets, liabilities,
and stockholders’ equity.
Curtis Golf Company
Vertical Analysis of Balance Sheet
Chapter 13: Financial Statement Analysis Page 19 of 94
Total current liabilities 47,320$ 16.90%
Total liabilities 153,440 54.80
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-19A
(10-15 min.)
Solution:
2016 2015
Total revenue 100.00% 100.00%
Expenses:
Cost of goods sold 48.80 43.64
Prepare a comparative common-size income statement for Connor Music Co.,
using the 2016 and 2015 data of E13-16A and rounding to four decimal places.
Connor Music Co.
Comparative Common-Size Income Statements
Years Ended December 31, 2016 and 2015
Chapter 13: Financial Statement Analysis Page 20 of 94
Selling and general expenses 28.47 28.04
Interest expense 1.14 1.49