PROBLEM 13-5A
(a)
Ratio
Target
Wal-Mart
(All Dollars Are in Millions)
(1) Current ratio
(2) Accounts receivable
(3) Average collection
period (in days)
(5) Days in inventory
(7) Asset turnover
(9) Return on common
stockholders’ equity
(11) Times interest earned
1.63:1 ($18,424 ÷ $11,327)
42.0 (365 ÷ 8.7)
55.3 (365 ÷ 6.6)
1.5 ($65,357 ÷ $44,319.5a)
17.1 % ($2,488 ÷ $14,529.5b)
6.5 ($4,579c ÷ $707)
.87:1 ($48,331 ÷ $55,561)
3.6 (365 ÷ 101.4)
40.6 (365 ÷ 9.0)
2.4 ($408,214 ÷ $167,067.5d)
21.0% ($14,335 ÷ $68,369e)
11.4 ($23,539f ÷ $2,065)
(b) The comparison of the two companies shows the following:
Liquidity—Target’s current ratio of 1.63:1 is better than Wal–Mart’s .87:1.
However, Wal-Mart has a better inventory turnover than Target and its
CT 13-1 FINANCIAL REPORTING PROBLEM
(a) APPLE INC .
Trend Analysis of Net Sales and Net Earnings
For the Five Years Ended 2014
Base Period 2010—($ in millions)
2014
2013
2012
2011
2010
(1)
Net sales
$182,795
$170,910
$156,508
$108,249
$65,225
(2)
Net
income
$ 39,510
$ 37,037
$ 41,733
$ 25,922
$ 14,013
(b) (in millions)
1. Debt to Assets Ratio
2. Times Interest Earned
2014: ($39,510 + $13,973 + $384) ÷ $384 = 140.3 times
2013: ($37,037 + $13,118 + $136) ÷ $136 = 369.8 times
CT 13-1 (Continued)
(c) ($ in millions)
1. Profit Margin
2. Asset Turnover
3. Return on Assets
4. Return on Common Stockholders’ Equity
2014: $39,510 ÷ [($111,547 + $123,549) ÷ 2] = 33.6%
(d) Substantial amounts of important information about a company are not
in its financial statements. Events involving such things as industry
changes, management changes, competitors’ actions, technological
CT 13-2 COMPARATIVE ANALYSIS PROBLEM
(a)
Columbia Sportswear
VF Corporation
1.
(i)
Percentage increase
(decrease) in net
sales
$2,100,590 – $1,684,996
$1,684,996
= 24.7%
$12,154,784–$11,302,350
$11,302,350
= 7.5%
equity
(b) Columbia’s increases in net sales, net income, total assets, and total
stockholders’ equity were all significantly larger than VFC’s. However,
CT 13-3 COMPARATIVE ANALYSIS PROBLEM
(a)
Amazon.com
Wal-Mart Stores
1.
(i)
Percentage increase
(decrease) in net
sales
$88,988 – $74,452
$74,452
= 19.5%
$482,229 – $473,076
$473,076
= 1.9%
= 2.1%
2.
(i)
Percentage increase
(decrease) in total
assets
$54,505–$40,159
$40,159
= 35.7%
$203,706 – $204,751
$204,751
= (0.5)%
equity
3.
Basic earnings per
share
$(0.52)*
$5.07*
(b) Amazon’s increases in net sales, total assets, and total stockholders’
CT 13-4 INTERPRETING FINANCIAL STATEMENTS
(a)
Liquidity Ratios
Coca-Cola
PepsiCo
(1)
Current ratio
1.28:1
($17,551 ÷ $13,721)
1.44:1
($12,571 ÷ $8,756)
($30,990 ÷ $3,424)
($43,232 ÷ $4,654)
(b)
Solvency Ratios
Coca-Cola
PepsiCo
(1)
Debt to assets ratio
$23,872
$48,671
= 49%
$23,044
$39,848
= 58%
CT 13-4 (Continued)
(c)
Profitability Ratios
Coca-Cola
PepsiCo
(1)
Profit margin
22.0%
($6,824 ÷ $30,990)
13.8%
($5,946 ÷ $43,232)
(2)
Asset turnover
Return on common
30.1%
($6,824 ÷ $22,636)
40.8%
($5,946 ÷ $14,556)
CT 13-5 REAL-WORLD FOCUS
CT 13-6 RESEARCH CASE
(a) As discussed in Chapter 11, when a company does a stock split, its
share price drops accordingly. If Amazon had not engaged in past stock
splits its stock price at the time of the article would have been $1,166.
(b) Amazon dramatically increased its capacity to handle customer orders
through its spending on fulfillment centers. However, until its sales
(c) At the time of the article, Amazon’s P/E ratio was 76. Apple had a P/E
ratio of 11.4, Netflix was 38 and the article says that Amazon’s was 3 1/2
times that of Wal-Mart, making it approximately 21.7. Amazon’s high
CT 13-7 DECISION MAKING ACROSS THE ORGANIZATION
(a) Lenders prefer that financial statements are audited because an audit
gives independent assurance that the financial statements give a
(b) The current ratio increase is a favorable indication as to liquidity, but
alone tells little about the going-concern prospects of the client. From
this ratio change alone, it is impossible to know the amount and direction
of the changes in individual accounts, total current assets, and total
current liabilities. Also unknown are the reasons for the changes.
The change in asset turnover cannot alone tell anything about either
solvency or going-concern prospects. There is no way to know the
amount and the direction of the changes in the two items. An increase
in sales would be favorable for going-concern prospects, while a
decrease in assets could represent a number of possible scenarios
and would need to be investigated further.
CT 13-7 (Continued)
Although a quick evaluation of a reporting entity can be made using only
a few ratios and comparing these with past ratios and industry statistics,
the creditors should realize the limitations of such analysis even from
the best prepared statements carrying a CPA’s unqualified opinion.
(c) 1. Accounts receivable turnover—indicates liquidity.
3. Times interest earned—indicates ability to repay interest when
due.
To: Larry Dundee
From: Accounting Student
Re: Financial Statement Analysis
There are two fundamental considerations in financial statement analysis:
(1) the bases of comparison and (2) the limitations of financial statement
analysis. Each of these considerations is explained below.
1. Bases of comparison. The bases of comparison are:
a. Intracompany—This basis compares an item or financial relationship
within a company in the current year with the same item or rela–
2. Three factors that affect quality of earnings are:
a. Alternative accounting methods—Variations among companies in
the application of generally accepted accounting principles (GAAP)
can cause variation in earnings quality across companies.
CT 13-9 ETHICS CASE
(a) The stakeholders in this case are:
René Kelly, president of RL Industries.
Erin Lourdes, public relations director.
(b) The president’s press release is deceptive and incomplete and to that
extent her actions are unethical.
(c) As controller you should at least inform Erin, the public relations
director, about the biased content of the release. She should be aware
CT 13–10 ALL ABOUT YOU
Student responses will vary. We suggest that in class you ask for a few
CT 13-11 FASB CODIFICATION ACTIVITY
(a) Discontinued Operations
205–20–45-1 The results of operations of a component of an entity that
either has been disposed of or is classified as held for sale under the
requirements of paragraph 360–10–45-9, shall be reported in
(b) Comprehensive Income
The change in equity (net assets) of a business entity during a period
IFRS 13-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) The company’s profit margin for 2014 was 18.4% (€5,648 ÷ €30,638) up
from 11.8% (€3,436 ÷ €29,016) in 2013.