(20-30 min.) P 13-51A
Chattanooga Flight’s statement of cash flows reveals only one strong
point, a continuing purchase of plant assets. The company’s
weaknesses include:
1. Net income and net cash provided by operations are down
significantly, with the company incurring a net loss during 2017.
2. Operating activities provided a much smaller proportion of cash in
2017 than in 2016. In both years, borrowing — not operations — was
the primary source of cash inflows, which is an unfavorable signal
about the company.
3. The large payments on notes payable suggest that the company has a
lot of debt. Coupled with the loss during 2017 and the decrease in net
(continued) P 13-51A
Eastern Airlines’ statement of cash flows reveals the following strengths
(no significant weaknesses):
1. During both years, operating activities were the major source of cash.
2. The company’s heavy investments in plant assets suggest expansion.
The use of cash, coupled with increasing income and net cash
provided by operations, suggests successful operations.
Student wording may vary.
(30-40 min.) P 13-52A
Req. 1 (ratios before the transactions)
(Dollar Amounts and Stock Quantities in Thousands)
Current Ratio
Debt Ratio
Earnings per
Share
$300
$380
= 0.56
$186
____
*Not in thousands.
Req. 2 (ratios after the transactions)
(Dollar Amounts and Stock Quantities in Thousands)
Trans-
action
Current Ratio
Debt Ratio
Earnings per
Share
a.
$300 + $160
=
2.47
$380 + $160
=
0.65
No effect
$186
$673 + $160
$300 + $308
50 + 18
$1.34*
c.
=
1.73
=
0.54
d.
$300 + $8
=
1.59
$380 + $8
=
0.57
No effect
$186 + $8
$673 + $8
e.
No effect
No effect
No effect
*Not in thousands.
(40-50 min.) P 13-53A
Req. 1 (Dollar amounts and stock quantities in thousands)
2016
2015
Current ratio
$563
=
1.98
$562
=
1.92
$285
$292
Inventory
$680
=
2.30
$581
=
2.11
turnover
($297 + $294) / 2
($294 + $258) / 2
Days’ inventory
365
=
159
365
=
173
outstanding
2.30
2.11
Accounts
$680
=
5.33
$581
=
5.35
payable
($150 + $105) / 2
($105 + $112) / 2
turnover
Days’ payables
365
=
68
365
=
68
outstanding
5.33
5.35
(continued) P13-53A
h.
Return on
$108
=
0.110
$72
=
0.081
sales
$986
$892
Asset
$986
=
1.189
$892
=
1.171
turnover
($836 + $823) / 2
($823 + $701) / 2
Return on
11.0% x 1.189
=
13.08%
8.1% x 1.171
=
9.49%
assets
i.
Leverage
($836 + $823) / 2
=
2.724
($823 + $701) / 2
=
3.066
($311 + $298) / 2
($298 + $199) / 2
Return on
=
35.63%
9.49% x 3.066
=
29.1%
equity
k.
Price/earnings
$89.38*
=
12.4
$85.67*
=
11.9
ratio
$7.20*
(continued) P 13-53A
Req. 2
Decisions:
a. The company’s financial position improved during 2016 as shown by
increases in the current ratio, the quick ratio, the receivables
turnover, the inventory turnover, the cash conversion cycle, and the
times-interest-earned ratio. Return on assets and return on equity
also increased in 2016.
Req. 3
This problem gives you practice in computing and evaluating several of
the ratios used in investment analysis. By analyzing the two-year trends
in the ratios, you can see whether the company’s abilities to pay its
(45-60 min.) P 13–54A
Req. 1
(Dollar Amounts and Stock Quantities in Thousands)
Star.com
Westlake Shops
a.
Quick (acid-test)
$22 + $5 + $183
=
0.57
$36 + $15 + $165
=
0.64
ratio:
$371
$335
b.
Inventory
$460
=
2.16
$386
=
2.03
turnover:
($218 + $208) / 2
($184 + $196) / 2
c.
($183 + $144) / 2
($165 + $195) / 2
average
receivables:
Debt ratio:
e.
Times-interest-
Ratio is not meaningful
because Star.com
$69
=
6.27
earned ratio:
$11
has no interest expense.
f.
Return on
common
$68
0.236
$35 − ($30 × .10)
=
0.157
stockholders’
($312 + $265) / 2
[($247 − $30) +
equity:
($221 − $30)] / 2
Earnings per
share
$35 − ($30 × .10)
of common
h.
Price/earnings
ratio:
(continued) P 13-54A
Decision:
Star.com’s common stock seems to fit the investment strategy better. Its
price/earnings ratio is lower than that of Westlake Shops, and Star.com
Req. 2
Star.com
Westlake Shops
EVA®
$68,000 − [($0 + $265,000) × .10]
$35,000 + $11,000 −
[($310,000 + $221,000) × .10]
The EVA® analysis confirms the conclusion from the ratio analysis, that
Star.com appears to be the better investment.
(20-30 min.) P 13-55B
Req. 1
Urbana Shipping, Inc.
Trend Percentages
2016
2015
2014
2013
2012
Net sales
172%
135%
122%
106%
100%
Net income
221
196
208
Total assets
142
129
118
Req. 2 Return on net sales Dollar amounts in thousands
2016
2015
2014
Return on sales measures the amount of net income for each dollar of
net sales.
Req. 3 Asset turnover Dollar amounts in thousands
2016
2015
2014
Asset turnover means the amount of net sales per dollar invested in
assets. High ratios mean high efficiency (low cost).
(continued) P 13-55B
Req. 4 Return on assets Dollar amounts in thousands
2016
2015
2014
Req. 5
Urbana Shipping’s rate of return on net sales has declined from 2014 to
2016. However, the return compares favorably with the industry average
Req. 6
Urbana Shipping’s return on assets (ROA) for 2016 compares favorably
(20-30 min.) P 13-56B
Req. 1
Gordon Products, Inc.
Common-Size Income Statement Compared
to Industry Average
Year Ended December 31, 2016
Gordon
Products
INDUSTRY
AVERAGE
Net sales ……………………………………………………
100.0%
100.0%
Cost of goods sold ……………………………………..
68.0
57.3
Gross profit ……………………………………………….
32.0
42.7
Operating income……………………………………….
10.0
13.3
Other expenses ………………………………………….
0.5
2.5
Net income…………………………………………………
9.5%
10.8%
Gordon Products, Inc.
Common-Size Balance Sheet Compared to Industry Average
December 31, 2016
Gordon
Products
INDUSTRY
AVERAGE
Current assets …………………………………………….
77.0%
72.1%
Fixed assets, net …………………………………………
18.8
19.0
Intangible assets, net ………………………………….
4.0
4.8
Other assets ……………………………………………….
.2
4.1
Total assets ………………………………………………..
100.0%
100.0%
Current liabilities …………………………………………
39.4%
47.2%
Long-term liabilities …………………………………….
21.2
21.0
31.8
100.0%
100.0%
(continued) P 13-56B
Req. 2
Gordon Product’s common-size income statement shows that its ratios
of (a) gross profit to net sales, (b) operating income to net sales, and (c)
Req. 3
Gordon Product’s common-size balance sheet shows that its (a) ratio of
current assets to total assets is better than the industry average. The
ratio of current liabilities to total assets is slightly better than the
(20-30 min.) P 13-57B
Western Air’s statement of cash flows reveals few strengths. The
company’s weaknesses include:
1. Net income and net cash provided by operations are down
significantly. There was a net loss in 2017.
2. Operating activities provided a much smaller proportion of cash in
2017 than in 2016. For both years, borrowing was the primary source
of cash inflow.
4. The company reduced the dividends from the previous year but still
paid dividends that were many times larger than the net cash flow
from operating activities in 2017.
6. Overall, cash decreased in 2016 and 2017. We would expect cash to
increase.
(continued) P 13-57B
Tech Flight’s statement of cash flows reveals the following strengths (no
significant weaknesses):
1. During both years, operating activities generated the bulk of the
company’s cash. Furthermore, the trend of net income is up, a
favorable sign.
2. The company’s heavy investments in property, plant, and equipment
3. The ending cash balance is higher than that of the other company,
and cash increased during the current year 2017. It is interesting to
note that Tech Flights did not pay a dividend in either year. Rapidly
growing companies often reinvest operating cash flow into the
business.
4. Net cash provided by operating activities exceeds net income in 2016
Student wording may vary.
(30-40 min.) P 13-58B
Req. 1 (ratios before the transactions)
(Dollar Amounts and Stock Quantities in Thousands)
Current Ratio
Debt Ratio
Earnings per
Share
$298
$371
$178
Req. 2 (ratios after the transactions)
(Dollar Amounts and Stock Quantities in Thousands)
Trans-
action
Current Ratio
Debt Ratio
Earnings per Share
a.
$298 + $100
=
2.24
$371 + $100
=
0.61
No effect
$178
$677 + $100
b.
$298 + $362
=
3.71
$371
=
0.36
$94
$178
$677 + $362
46 + 20
=
$1.42*
c.
=
1.54
=
0.58
No effect
e.
No effect
No effect
No effect
*Not in thousands.
(40-50 min.) P 13-59B
Req. 1
(Dollar Amounts and Stock Quantities in Thousands)
2016
2015
Current ratio
$568
=
1.93
$522
=
1.75
$295
$298
Quick (acid-
$45 + $217
=
0.89
$49 + $158
=
0.69
test) ratio
$295
$298
Inventory
$675
=
2.30
$576
=
2.47
turnover
($302 + $286) / 2
($286 + $181) / 2
Days’ inventory
365
=
159
365
=
148
outstanding
2.30
2.47
Cash
conversion
cycle
159 + 72 – 73
=
158
148 + 75 – 70
=
153
(continued) P13-59B
h.
Return on
$76
=
0.079
$73
=
0.083
sales
$957
$875
Asset
=
1.159
=
1.167
turnover
($853 + $799) / 2
($799 + $700) / 2
Return on
7.9% x 1.159
=
9.2%
8.3% x 1.167
=
9.7%
assets
i.
Leverage
($853 + $799) / 2
=
2.824
($799 + $700) / 2
=
3.196
($315 + $270) / 2
($270 + $199) / 2
Return on
9.2% x 2.824
=
26.0%
9.7% x 3.196
=
31.0%
equity
k.
Price/earnings
$88.17*
=
20.9
$77.01*
=
18.8
ratio
$4.22*
(continued) P 13-59B
Req. 2
Decisions:
a. The company’s financial position improved slightly during 2016 as
shown by increases in the current ratio, the quick ratio, the
receivables turnover, earnings per share, and the times-interest-
earned ratio. However, it is not a favorable trend that the inventory
turnover and accounts payable turnover both decreased, causing the
cash conversion cycle to increase. Inventory is moving very slowly.
Req. 3
This problem gives you practice in computing and evaluating many of
the ratios used in investment analysis. By analyzing the two-year trends
in the ratios, you can see whether the company’s abilities to pay its
(45-60 min.) P 13-60B
Req. 1
(Dollar Amounts and Stock Quantities in Thousands)
Disc.com
Holiday Shops
a.
Quick (acid-test)
$26 + $7 + $184
0.59
$42 + $12 + $162
=
0.64
ratio:
$365
$335
b.
Inventory
=
=
2.05
turnover:
c.
=
100
=
125
outstanding:
d.
Debt ratio:
$670
0.68
$713
=
0.77
$982
$932
e.
Times-interest-
Ratio is not meaningful
$79
=
4.94
earned ratio:
because Disc.com has
$16
no interest expense.
Return on
stockholders’
Earnings per
of common
=
10
=
18
ratio:
(continued) P 13-60B
Decision:
The common stock of Disc.com seems to fit the investment strategy
better. Its price/earnings ratio is lower than that of Holiday Shops, and
Disc.com appears to be in slightly better shape financially than Holiday
Req. 2
Disc.com
Holiday Shops
EVA®
$64,000 − ($260,000 × .10)
$39,000 + $16,000 − [($309,000
+ $219,000) × .10]
$2,200