(10-15 min.) E 13-23A
a. Return on net sales:
2016:
($23,000 –
$15,000)
=
0.042
2015:
($34,000 –
$14,000)
=
0.083
$190,000
$240,000
b. Asset turnover:
$190,000
$240,000
0.083 × .923
d. Leverage:
2016:
$285,000
=
2.754
2015:
$260,000
=
2.537
$103,500***
$102,500****
_____ _____
***($104,000 + $103,000) / 2 = $103,500 ****($103,000 + $102,000) / 2 = $102,500
e. Return on common stockholders’ equity:
$106,000
(continued) E 13-23A
g. Operating income percentage:
2016:
$44,000
=
0.23
2015:
$57,000
=
0.24
$190,000
$240,000
h. Earnings per share of common stock:
2016:
2015:
(10-15 min.) E 13-24A
2016
2015
a.
Price/earnings ratio:
b.
Dividend yield:
$11,000 / 43,500
=
0.011
$18,000 / 43,500
=
0.024
$23.50
$17.25
c.
Book value per share of common stock:
The stock’s attractiveness decreased during 2016, as shown by the
decreases in the price/earnings ratio, dividend yield and in book value
per share. Overall, the common stock looks less attractive than it did a
year ago.
(15-20 min.) E 13-25A
Req. 1
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.
Req. 2
(Dollar amounts in millions)
Emerson Company, Inc.
Farmers Bank Limited
=
$81
Based on the EVA® analysis, Emerson Company appears to be the better
investment.
(5-15 min.) E 13-26B
2016
2015
2014
Total current assets
$424,950
$259,800
$260,000
Total current liabilities
410,000
200,000
130,000
Net working capital
$ 14,950
$ 59,800
$130,000
(10-15 min.) E 13-27B
Mitchell Music Co.
Horizontal Analysis of Comparative Income Statements
Years Ended December 31, 2016 and 2015
INCREASE (DECREASE)
2016
2015
AMOUNT
PERCENT
Total revenue ………………
$1,075,000
$915,000
$160,000
17.5%
Expenses:
Cost of goods sold …..
$475,000
$406,250
$ 68,750
16.9
Selling and general
expenses ………………
285,000
261,000
24,000
9.2
Income tax expense ….
22,350
27.2
Total expenses …………
(5-10 min.) E 13-28B
Trend percentages:
Year 4
Year 3
Year 2
Year 1
Year 0
Net income grew by 105% during the period, compared to 40% for total
revenue. Net income grew faster than total revenue.
(10-15 min.) E 13-29B
Fox Den Golf Company
Vertical Analysis of Balance Sheet
December 31, 2016
AMOUNT
PERCENT
ASSETS
Total current assets ……………………………………
$ 45,880
14.80%
Property, plant, and equipment, net ……………..
222,580
71.80
Other assets ………………………………………………
Total assets ……………………………………………….
LIABILITIES
Total current liabilities ………………………………..
$ 50,530
16.30%
Long-term deb ……………………………………………
115,630
37.30
Total liabilities ……………………………………………
166,160
53.60
143,840
46.40
(10-15 min.) E 13-30B
Mitchell Music Co.
Comparative Common-Size Income Statements
Years Ended December 31, 2016 and 2015
2016
2015
Total revenue …………………………………………………..
100.00%
100.00%
Expenses:
Cost of goods sold ………………………………………
44.19
44.40
Selling and general expenses ……………………….
26.51
28.52
Interest expense ………………………………………….
Income tax expense ……………………………………..
9.72
(10-15 min.) E 13-31B
1. Operations provided little cash. The company is selling fixed assets
to generate cash.
2. Selling fixed assets and purchasing no new fixed assets suggests
financial weakness.
5. Overall, cash decreased over the year examined.
(10-15 min.) E 13-32B
Req. 1
Current Year
Prior Year
a.
Current ratio
$271,000
$295,000
$138,000
$96,000
= 1.96
= 3.07
$138,000
$96,000
= 1.24
= 2.23
c.
Inventory
$271,000
$279,000
turnover
($88,000 + $75,000) / 2
($75,000 + $60,000) / 2
= 3.33
= 4.13
Days’ inventory
365
365
outstanding (DIO)
3.33
4.13
= 110 days
= 88 days
($81,000 + $84,000) / 2
($84,000 + $30,000) / 2
= 5.95
= 8.86
e.
Days’ sales
365
365
outstanding (DSO)
5.95
8.86
= 61 days
= 41 days
(continued) E 13-32B
f.
Payables
$271,000
$279,000
turnover
($85,000 + $70,000) / 2
($70,000 + $50,000) / 2
= 3.50
= 4.65
g.
Cash conversion
110 + 61 – 104
88 + 41 – 78
cycle ( DIO + DSO
– DPO)
= 67 days
= 51 days
Req. 2
a. deteriorated
b. deteriorated
Req. 3
The factors that need the most improvement are inventory turnover and
collection of accounts receivable. The company needs to make more
sales and keep less inventory on hand, as well as tighten collection
policies. This will provide more cash that can be used to pay off
payables more quickly.
(15-20 min.) E 13-33B
a. Net working capital (Current assets – Current liabilities)
b. Current ratio (Current assets ÷ Current liabilities)
2016:
$420,000
=
1.94
2015:
$474,000
=
4.19
$217,000
$113,000
c. Quick (acid-test) ratio ([Cash + Short-term investments + Net
receivables] ÷ Current liabilities)
=
2015:
1.76
d. Debt ratio (Total liabilities ÷ Total assets)
2016:
$294,000**
=
0.52
2015:
$416,000**
=
0.78
$570,000
$530,000
e. Times-interest-earned ratio (Income from operations ÷ Interest expense)
2016:
$250,000
=
6.58
2015:
$130,000
=
2.83
$38,000
$46,000
The company’s ability to pay current liabilities deteriorated as evidenced
by the decline in items a. – c. The debt ratio improved as evidenced by
the decrease in item d. The company’s ability to cover interest expense
improved as evidenced by item e.
(10-15 min.) E 13-34B
a. Return on net sales:
2016:
($38,000 –
$2,000)
=
0.144
2015:
($18,000 –
$1,000)
=
0.085
$250,000
$199,000
b. Asset turnover:
2016:
$250,000
2015:
$199,000
0.658
c. Return on assets:
2016:
0.144 × 0.813
=
0.117
2015:
0.085 × 0.658
=
0.056
d. Leverage:
$307,500
$302,500
e. Return on common stockholders’ equity:
f. Gross profit percentage:
2016:
$127,000
=
0.51
2015:
$97,000
=
0.49
$250,000
$199,000
(continued) E 13-34B
g. Operating income percentage:
2016:
0.29
2015:
0.23
h. Earnings per share of common stock:
2016:
$38,000 − $2,000
=
$2.40
2015:
$18,000 − $1,000
=
$1.21
15,000
14,000
(10-15 min.) E 13-35B
2016
2015
a.
Price/earnings ratio:
b.
Dividend yield:
c.
Book value per share of common stock:
$575,000 − $90,000 −
$6,300
=
$4.974
$495,000 − $90,000 −
$6,300
=
$4.142
96,250
96,250
The stock’s attractiveness increased during 2016, as shown by the
increase in each item. Overall, the common stock looks more attractive
than it did a year ago.
(15-20 min.) E 13-36B
Req. 1
Granger Bank Limited appears to represent the better investment.
Req. 2
(Dollar amounts in millions)
Daniels Company, Inc.
Granger Bank Limited
EVA®
=
$195 + $81 − [($1,244 +
$636) × .125]
$999 + $8 − [($13 + $12,091) ×
.125]
$(506)
Quiz
Q13-37
a ($19,186 − $15,144 = $4,042 increase;
$4,042 / $15,144 = 0.267)
Q13–38
b ($10,658 / $11,397 = 0.935 ≈ .94
Q13–39
c [($4,369 + $3,404 + $850) / $11,397 =
0.76]
Q13-40
a
Q13-41
a ($42,041 / $31,191 = 1.35 or 135%)
Q13-42
c ($35,164 / $42,041 = 0.836 or 83.6%)
Q13-43
d
($3,404+ $2,402) / 2
$42,041 / 365
Q13-44
d
$35,164
= 84 times
($433 + $404) / 2
Q13-45
c ($2,545 / (long-term debt of $306 × .11) = 33.66
($2,545 / $33.66) ≈ 75.6
Q13-46
a 2016: $1,593 / $42,041 = 0.038
2015: $1,532 / $35,304 = 0.043
2014: $861 / $31,191 = 0.028
Q13-47
b
EPS
=
Net income $1,593
$1.42
Shares outstanding*
Shares outstanding = 1,122
Q13–48
b
*usually calculated based on weighted average
Problems
(20-30 min.) P 13-49A
Req. 1 Trend percentages
Abacus Shipping, Inc.
Trend Percentages
2016
2015
2014
2013
2012
Net revenues
140%
103%
Net income
126
100
Total assets
148
130
124
111
100
Req. 2 Return on net sales (Dollar amounts in thousands)
2016
2015
2014
$51
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
Net sales
$500
=
1.79
$418
=
1.64
$365
=
1.55
Avg. total
$2801
$255.502
$2363
(continued) P 13-49A
Req. 4 Return on assets (Dollar amounts in thousands)
2016
2015
2014
Req. 5
Abacus Shipping’s rate of return on net sales declined from 2014 to
2015, but increased in 2016. The return is above the industry average of
Req. 6
Abacus Shipping’s return on assets (ROA) compares favorably with the
18% industry benchmark for 2014 and 2016. The ROA decreased in 2015
but increased in 2016.
(20-30 min.) P 13-50A
Req. 1
Bryan Products, Inc.
Common-Size Income Statement Compared to Industry Average
Year Ended December 31, 2016
Bryan
Products
INDUSTRY
AVERAGE
Net sales …………………………………………………
100.0%
100.0%
Cost of goods sold …………………………………..
52.0
57.3
Gross profit …………………………..………………..
48.0
42.7
Operating expenses …………………………………
22.0
29.4
Operating income …………………………………….
26.0
13.3
Other expenses ……………………………………….
Bryan Products, Inc.
Common-Size Balance Sheet Compared to Industry Average
December 31, 2016
Bryan
Products
INDUSTRY
AVERAGE
Current assets ………………………………………….
77.0%
72.1%
Fixed assets, net ………………………………………
18.5
19.0
Intangible assets, net ………………………………..
3.0
4.8
Other assets …………………………………………….
Total assets ……………………………………………..
Current liabilities ………………………………………
47.2%
Long-term liabilities ………………………………….
21.0
21.0
(continued) P 13-50A
Req. 2
Bryan Products’ common-size income statement shows that its ratios of
gross profit to net sales, operating income to net sales, and net income
to net sales are all better than the industry averages. Overall, Bryan
Products’ profit performance is better than average for the industry.
Req. 3