Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13
Chapter 13
Analysis of Financial Statements
QUESTIONS
1. Financial reporting includes the entire process of preparing and issuing financial
information about a company. Financial statements are an important part of financial
reporting but they are less than the whole.
2. With comparative statements, financial statement items for two or more successive
accounting periods are placed side by side on a single statement, with the change in
3. Total assets (or equivalently, the total of liabilities plus equity) are assigned a value of
4. The nature of a company’s business, the composition of its current assets, and the
turnover of its current assets are three important factors that should be considered in
deciding whether a current ratio is good or bad.
5. A 2-to-1 current ratio may not be adequate if the company’s current assets consist of
6. Adequate working capital enables a company to carry sufficient inventories, meet
7. When evaluated in light of a company’s credit terms, the number of days‘ sales
8. A high accounts receivable turnover implies that accounts are collected quickly,
thereby providing cash that can be used to meet obligations. A high turnover also
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13
9. Users are interested in the capital structure of a company, as measured by debt and
equity ratios, for at least two reasons. First, as a company includes more debt in its
10. Inventory turnover reflects on the efficiency of inventory management. That is, a
high inventory turnover means that a given sales volume can be supported with a
11. Since management is responsible for a company’s performance, all ratios that are
useful in evaluating a company are of some usefulness in assessing management
12. Almost all companies have some liabilities. Since total assets equals total liabilities
plus equity, total assets are almost always higher than common stockholders’
13. This gain is considered to be unusual but not infrequent. It would be included in the
calculation of income from continuing operations, with other unusual or infrequent
gains and losses—in a category often labeled Other Gains and Losses.
14. Profit margin: Net Income / Sales ($ millions)
15. Equity ratio: Total Equity / Total Assets ($ in millions)
16. Debt ratio: Total Liabilities / Total Assets (₩ in millions)
17. Return on total assets: Net Income / Average Total Assets (₩ in millions)
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QUICK STUDY
Quick Study 13-1 (5 minutes)
a. Income statement
Quick Study 13-2 (10 minutes)
1. (b) competitor
Quick Study 13-3 (15 minutes)
Current
Year
Prior
Year
Dollar
Change
Percent
Change
Short-term investments ………….
$374,634
$234,000
$140,634
60.1%
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Quick Study 13-4 (5 minutes)
Trend percents
Quick Study 13-5 (5 minutes)
Common-size percents
Quick Study 13-6 (15 minutes)
a.
Current Ratio: = 2.7 to 1
a.
Accounts Receivable Turnover: = 6.0 times
b.
a.
Inventory Turnover: = 8.0 times
$15,000 + $5,000 + $8,000 + $20,000 + $6,000
$20,000
$40,000
($2,000 + $8,000)/2
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Quick Study 13-9 (10 minutes)
Quick Study 13-10 (15 minutes)
a.
Debt–to-equity Ratio: = 0.4
$30,000
Quick Study 13-11 (15 minutes)
a.
Profit Margin: = 20%
Quick Study 13-12 (15 minutes)
a.
Price-earnings ratio: = 15
$20,000
$50,000
$16,000
$80,000
$150
$10
770
Quick Study 13–13 (10 minutes)
Ratio
Current
Year
Prior
Year
Change
1. Profit Margin Ratio …………………………..
9%
8%
Favorable
2. Debt Ratio ……………………………………….
47%
42%
Unfavorable
4. Acid-test Ratio…………………………………
1.15
Unfavorable
6. Basic Earnings Per Share ………………..
Favorable
7. Inventory Turnover ………………………….
Favorable
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Quick-Study 13–14 (30 minutes)
Parker has a greater amount of working capital. This by itself does not
indicate whether the company is more capable of meeting its current
obligations. However, support is provided by the current ratio and acid-
test ratio, which show Parker is in a more liquid position than Morgan.
This evidence does not mean that Morgan’s liquidity is inadequate. Such
The accounts receivable turnover and inventory turnover indicate that
Morgan is more efficient in collecting its accounts receivable and in
generating sales from available inventory. However, these statistics also
may suggest that Morgan is too conservative in granting credit and
Quick Study 13–15A (10 minutes)
a. Unusual and/or Infrequent. The destruction of rainwater tanks is an
unusual and/or infrequent loss because a hurricane is considered an
unusual and infrequent calamity (“act of God”).
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EXERCISES
Exercise 13-1 (10 minutes)
1.
B
6.
A
3.
D
8.
B
5.
A
A
Exercise 13-2 (5 minutes)
1. Profit Margin (f); Total Asset Turnover (e) —in either order
Exercise 13-3 (20 minutes)
2019
2018
2017
2016
2015
Sales ………………………………….
189
181
168
156
100
Accounts receivable …………..
201
192
182
169
100
Analysis:
Sales trend is favorable. Further analysis can consider economic conditions in
which this trend occurred such as competitor performance and inflation rates.
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Exercise 13-4 (25 minutes)
Current Yr
Prior Yr
Sales …………………………………………….
100.0%
100.0%
Net income ……………………………………
7.0%
18.5%
Analysis:
Cost of goods sold increase is most responsible for the income decline.
There is substantial decline in net income as a percent of sales for the current
Exercise 13-5 (25 minutes)
Answer: Net income decreased.
Supporting calculations: When the sum of each year’s common-size cost of
goods sold and total expenses is subtracted from the common-size sales
percent, the net income percent is as follows:
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13
Exercise 13-6 (20 minutes)
1.
Simon Company
Common-Size Comparative Balance Sheets
At December 31
Current
Year
1 Year
Ago*
2 Years
Ago
Assets
Cash …………………………..……………………………..
6.1%
8.0%
10.0%
Accounts receivable, net …………………………….
17.1
14.0
13.3
21.5
18.5
14.3
24.8%
13.6%
2. Unfavorable.
The increase in accounts receivable as a percentage of total assets is an
3. Unfavorable.
The increase in merchandise inventory as a percentage of total assets is an
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Exercise 13-7 (25 minutes)
1. Current ratio
Analysis: Worsened.
Simon’s current ratio has worsened over this three-year period. The
current ratio shifts from ‘2.87 to 1’ down to ‘1.88 to 1’ over the three-
year period. Simon’s short-term liquidity position has deteriorated.
2. Acid-test ratio
Current Yr: = 0.93 to 1
$35,625 + $62,500
$31,800 + $89,500
$129,900
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Exercise 13-8 (25 minutes)
1. Days’ sales uncollected
$673,500
$532,000
2. Accounts receivable turnover
Current Yr: = 8.9 times
$532,000
($62,500 + $50,200)/2
3. Inventory turnover
Current Yr: = 4.2 times
$345,500
($82,500 + $54,000)/2
4. Days’ sales in inventory
Current Yr: x 365 = 99.9 days
$345,500
$673,500
($89,500 + $62,500)/2
$411,225
($112,500 + $82,500)/2
$112,500
$411,225
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Exercise 13-9 (25 minutes)
1. Debt and equity ratios
Current Year
1 Year Ago
Total liabilities and debt ratio
$129,900 + $98,500 …………………..
$228,400
43.7%
$75,250 + $101,500 …………………..
$176,750
Total equity and equity ratio
$163,500 + $131,100 …………………
$163,500 + $104,750 …………………
2. Debt–to-equity ratio
Current Year: $228,400 / $294,600 = 0.78 to 1
3. Times interest earned
Analysis: Less risky.
Based on times interest earned, the company is less risky for creditors
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Exercise 13-10 (30 minutes)
1. Profit margin
2. Total asset turnover
3. Return on total assets
Analysis: Worsened.
Simon’s operating efficiency appears to have worsened because the
return on total assets decreased from 7.1% to 6.4%.
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Exercise 13-11 (20 minutes)
1. Return on common stockholders’ equity
2. Dividend yield
3. Price-earnings ratio
Analysis: Simon has higher market expectations for future growth
This conclusion is evident from Simon’s superior 15.8 price-earnings
ratio versus its competitor’s price–earnings ratio of 10.
Exercise 13-12 (15 minutes)
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Exercise 13–13 (15 minutes)
1. Profit margin
2. BioBeans
Explanation: BioBeans has a profit margin of 20%, which is greater than
Exercise 13–14 (20 minutes)
a.
Accounts Receivable Turnover: = 8
? = $6,250 x 8
? = $50,000 Net Sales
?
$6,250
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Exercise 13-15 (30 minutes)
COMPARATIVE ANALYSIS REPORT
Clay’s profit margins are higher than Roak’s. However, Roak has
significantly higher total asset turnover ratios. As a result, Roak generates
a substantially higher return on total assets.
The trends of both companies include evidence of growth in sales, total
asset turnover, and return on total assets. However, Clay’s rates of
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13
Exercise 13–16 (25 minutes)
1. a. Clay. Clay’s profit margins are better than Roak’s.
b. Roak. Roak has markedly better total asset turnover ratios.
Exercise 13-17A (10 minutes)
1. A Net sales less operating expense section
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Exercise 13-18A (20 minutes)
RANDA MERCHANDISING, INC.
Income Statement
For Year Ended December 31
Net sales ………………………………………………………………..
$2,900,000
Expenses
Cost of goods sold ………………………………………………
$1,480,000
Depreciation expense ………………………………………….
232,000
Total operating expenses …………………………………….
1,712,000
Income from continuing operations before taxes …….
778,000
Income tax expense ……………………………………………….
217,000
Income from continuing operations ………………………..
561,000
Discontinued segment
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PROBLEM SET A
Problem 13-1A (120 minutes)
Part 1
HAROUN COMPANY
Income Statement Trends
For Years Ended December 31
2019
2018
2017
2016
2015
2014
2013
Sales ……………………………….
182.5%
161.2%
147.6%
136.2%
127.8%
119.6%
100.0%
Cost of goods sold …………..
212.6
176.1
153.9
136.9
128.3
121.2
100.0
Gross profit ……………………..
131.0
135.7
136.8
135.1
126.9
117.0
100.0
Operating expenses …………
279.7
216.9
198.3
144.1
123.7
122.0
100.0
HAROUN COMPANY
Balance Sheet Trends
At December 31
2019
2018
2017
2016
2015
2014
2013
Cash ………………………………..
65.2%
87.6%
92.1%
94.4%
98.9%
96.6%
100.0%
Accounts recble., net ……….
226.9
238.0
215.7
166.7
147.2
139.8
100.0
Merchandise inventory ……..
298.9
221.8
195.8
167.8
152.2
131.7
100.0
Other current assets …………
400.0
355.6
155.6
377.8
311.1
311.1
100.0
100.0
100.0
100.0
100.0
Plant assets, net ………………
278.6
277.8
241.7
130.2
134.9
118.6
100.0
Total assets ……………………..
246.8
222.3
195.4
144.4
138.6
124.0
100.0
Current liabilities ……………..
432.6
369.5
254.6
217.7
193.6
185.1
100.0
Long-term liabilities ………….
323.5
285.0
278.0
142.5
145.0
155.0
100.0
Common stock …………………
153.8
153.8
153.8
130.8
130.8
100.0
100.0
Other paid-in capital …………
166.7
166.7
166.7
113.3
113.3
100.0
100.0
Retained earnings…………….
213.2
179.2
137.7
124.5
109.4
100.0
Total liabilities & equity …….
246.8
222.3
195.4
144.4
138.6
124.0
100.0