FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-20A
(10-15 min.)
Solution:
1.
Identify any weaknesses revealed by the statement of cash flows of Beckwith
Orchards, Inc.
Operations provided very little cash. The company is selling fixed assets
to generate cash.
Chapter 13: Financial Statement Analysis Page 21 of 94
2.
3.
4.
5.
financial weakness.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-21A
(10-15 min.)
Requirements
Solution:
Req. 1
$194,000 $205,000
$133,000 $95,000
Current ratio
1. Using Exhibit 13-8 as a model, compute the following ratios for 2016 and 2015:
a. Current ratio
b. Quick (acid-test) ratio
c. Inventory turnover and days’ inventory outstanding (DIO)
d. Accounts receivable turnover
e. Days’ sales in average receivables or days’ sales outstanding (DSO)
f. Accounts payable turnover and days’ payable outstanding (DPO). Use cost of
goods sold in the formula for accounts payable turnover
g. Cash conversion cycle (in days)
(When computing days, round your answer to the nearest whole number.)
2. Evaluate the company’s liquidity and current debt-paying ability for 2016. Has it
improved or deteriorated from 2015?
3. As a manager of this company, what would you try to improve next year?
a.
Current Year
Chapter 13: Financial Statement Analysis Page 22 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
$491,000 $506,000
($58,000 + $71,000) / 2 ($71,000 + $40,000) / 2
= 7.61 = 9.12
Req. 2
a.
b.
d.
e.
deteriorated
deteriorated
deteriorated
deteriorated
deteriorated
Receivables
turnover
deteriorated
deteriorated
d.
Chapter 13: Financial Statement Analysis Page 23 of 94
e.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-22A
(15-20 min.)
Solution:
a. Working capital (Current assets – Current liabilities)
2016: $434,000* – $227,000 = $207,000
2015: $485,000* – $272,000 = $213,000
Compute the following ratios for 2016 and 2015:
a. Working capital
b. Current ratio
c. Quick (acid-test) ratio
d. Debt ratio
e. Times-interest-earned ratio
Round your answers to two decimal places. Summarize the results of your analysis
in a short paragraph
Chapter 13: Financial Statement Analysis Page 24 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
* Current assets 2016 = $22,000 + $34,000 + $121,000 + $238,000 + $19,000 =
$434,000
Chapter 13: Financial Statement Analysis Page 25 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-23A
(10-15 min.)
Solution:
a.
Return on net sales:
2016:
($23,000 – $15,000)
= 0.042 2015:
($34,000 – $14,000)
= 0.083
For 2016 and 2015, compute return on sales (ROS), asset turnover (AT), return on assets
(ROA), leverage (L), return on common stockholders’ equity (ROE), gross profit percentage
(GP), operating income percentage (OI), and earnings per share (EPS) to measure the
ability to earn profits for Dominion Decor, Inc., whose comparative income statements
follow. Use DuPont Analysis for ROA and ROE, and round each component ratio to three
decimals; for other ratio computations, round to two decimals.
$190,000
$240,000
Chapter 13: Financial Statement Analysis Page 26 of 94
Asset turnover:
Return on assets:
Return on common stockholders’ equity:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
f.
Gross profit percentage:
2016:
$ 88,000 = 0.46 2015: $ 106,000 = 0.44
$ 190,000 $ 240,000
Chapter 13: Financial Statement Analysis Page 27 of 94
Operating income percentage:
$ 44,000 = 0.23 2015: $ 57,000 = 0.24
$ 190,000 $ 240,000
Earnings per share of common stock:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-24A
(10-15 min.)
Solution:
a.
Price/earnings ratio:
Evaluate the common stock of Monroe Falls Distributing Company as an investment.
Specifically, use the three common stock ratios to determine whether the common
stock increased or decreased in attractiveness during the past year. (The number of
common stock shares was the same in 2015 and 2016.) Round calculations and your
final answer to three decimal places.
2015
2016
Chapter 13: Financial Statement Analysis Page 28 of 94
Book value per share of common stock:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-25A
(15-20 min.)
Requirements
Solution:
Req. 1
1. Before performing any calculations, which company do you think represents the
better investment? Give your reason.
2. Compute the EVA® for each company, and then decide which company’s stock you
would rather hold as an investment. Assume that both companies’ cost of capital is
9.5%.
Farmers Bank Limited appears to represent the better investment. Farmers Bank
earns a greater net profit and has significantly more stockholders’ equity than does
Emerson Company, Inc.
Chapter 13: Financial Statement Analysis Page 29 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-26B
(5-15 min.)
Solution:
2016 2014
424,950$ 260,000$
2015
What were the dollar amount of change and the percentage of each change in
Blueberry Lane Lodge’s net working capital during 2016 and 2015? Is this trend
favorable or unfavorable?
Total current assets
259,800$
Chapter 13: Financial Statement Analysis Page 30 of 94
The decrease in net working capital is unfavorable.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-27B
(10-15 min.)
Solution:
PERCENT
Total revenue 1,075,000$ 915,000$ 160,000$ 17.5%
Prepare a horizontal analysis of the comparative income statements of Mitchell
Music Co. Round percentage changes to the nearest one-tenth percent (three
decimal places).
Mitchell Music Co.
Horizontal Analysis of Comparative Income Statements
Years Ended December 31, 2016 and 2015
2016
2015
INCREASE (DECREASE)
AMOUNT
Chapter 13: Financial Statement Analysis Page 31 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-28B
(5-10 min.)
Solution:
Trend percentages:
Year 4 Year 3 Year 2 Year 1 Year 0
Total revenue 140% 124% 108% 100% 100%
Compute trend percentages for 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 32 of 94
Net income 205 135 122 116 100
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-29B
(10-15 min.)
Solution:
AMOUNT PERCENT
Total current assets 45,880$ 14.80%
Property, plant, and equipment, net 222,580 71.80
Fox Den 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.
Fox Den Golf Company
Vertical Analysis of Balance Sheet
December 31, 2016
ASSETS
Chapter 13: Financial Statement Analysis Page 33 of 94
Total current liabilities 50,530$ 16.30%
Total liabilities 166,160 53.60
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-30B
(10-15 min.)
Solution:
2016 2015
Total revenue 100.00% 100.00%
Expenses:
Cost of goods sold 44.19 44.40
Prepare a comparative common-size income statement for Mitchell Music Co.
using the 2016 and 2015 data of E13-27B and rounding to four decimal places.
Mitchell Music Co.
Comparative Common-Size Income Statements
Years Ended December 31, 2014 and 2013
Chapter 13: Financial Statement Analysis Page 34 of 94
Selling and general expenses 26.51 28.52
Interest expense 2.09 1.37
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-31B
(10-15 min.)
Solution:
1.
2.
Identify any weaknesses revealed by the statement of cash flows of Sunshine
Fruit, Inc.
Operations provided little cash. The company is selling fixed assets to
generate cash.
Selling fixed assets and purchasing no new fixed assets suggests
financial weakness.
Chapter 13: Financial Statement Analysis Page 35 of 94
3.
5.
Sunshine Fruit, Inc. paid a large amount of dividends during the year.
Overall, cash decreased over the year examined.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-32B
(10-15 min.)
Requirements
Solution:
Req. 1
$271,000 $295,000
$138,000 $96,000
1. Using Exhibit 13-8 as a model, compute the following ratios for 2016 and 2015:
a. Current ratio
b. Quick (acid-test) ratio
c. Inventory turnover and days’ inventory outstanding (DIO)
d. Accounts receivable turnover
e. Days’ sales in average receivables or days’ sales outstanding (DSO)
f. Accounts payable turnover and days’ payable outstanding (DPO). Use cost of
goods sold in the formula for accounts payable turnover
g. Cash conversion cycle (in days)
When computing days, round your answer to the nearest whole number.
2. Evaluate the company’s liquidity and current debt-paying ability for 2016. Has it
improved or deteriorated from 2015?
3. As a manager of this company, what would you try to improve next year?
a.
Current ratio
Prior Year
Current Year
Chapter 13: Financial Statement Analysis Page 36 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
$491,000 $505,000
($81,000 + $84,000) / 2 ($84,000 + $30,000) / 2
= 5.95 = 8.86
365 365
5.95 8.86
d.
Receivables
turnover
e.
Days’ sales
outstanding (DSO)
Chapter 13: Financial Statement Analysis Page 37 of 94
3.50 4.65
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-33B
(15-20 min.)
Solution:
a.
Working capital (Current assets – Current liabilities)
2016: $420,000* – $217,000 = $203,000
2015: $474,000* – $113,000 = $361,000
Compute the following ratios for 2016 and 2015. Round your answers to two
decimal Places.
a. Working capital
b. Current ratio
c. Quick (acid-test) ratio
d. Debt ratio
e. Times-interest-earned ratio
Summarize the results of your analysis in a short paragraph.
Chapter 13: Financial Statement Analysis Page 38 of 94
Quick (acid-test) ratio ([Cash + Short-term investments + Net
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Chapter 13: Financial Statement Analysis Page 39 of 94
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E13-34B
(10-15 min.)
Solution:
a.
Return on net sales:
2016: = 0.144 2015:
= 0.085
b.
Asset turnover:
For 2016 and 2015, compute return on sales (ROS), asset turnover (AT), return on
assets (ROA), leverage (L), return on common stockholders’ equity (ROE), gross profit
percentage (GP), operating income percentage (OI), and earnings per share (EPS) to
measure the ability to earn profits of Harmony Decor, Inc., whose comparative income
statements follow. Use DuPont Analysis for ROA and ROE, and round each component
ratio to three decimals; for other ratio computations, round to two decimals.
($38,000 – $2,000)
($18,000 – $1,000)
$250,000
$199,000
Chapter 13: Financial Statement Analysis Page 40 of 94
Return on assets:
Return on common stockholders’ equity: