Chapter 14
Analyzing Financial Statements: A Managerial Perspective
QUESTIONS
2. Horizontal analysis consists of analyzing the dollar value and percentage
changes in financial statement amounts across time (e.g., from year to year or
3. The difference between net income and cash flow from operations is due to
4. The management discussion and analysis section of the annual report, credit
5. Three profitability ratios are the gross margin percentage, return on total assets,
and return on common stockholders’ equity. Gross margin percentage is used to
6. Three turnover ratios are asset turnover, accounts receivable turnover, and
inventory turnover. Asset turnover is used to assess how efficiently a firm uses
7. Three debt-related ratios are the current ratio, the debt-to-equity ratio, and times
interest earned. The current ratio assesses how well a firm is able to meet its
14-2 Jiambalvo Managerial Accounting
8. Davis Company’s current ratio is expected to be highest in October. In this
month, the company has its sales peak for the year which most likely results in a
9. Many of the company’s assets may be inventory. The company may not be able
10. The gross margin percentage is calculated by dividing gross margin by net sales
and provides a rough estimate of the incremental profit generated by each dollar
Chapter 14 Analyzing Financial Statements: A Managerial Perspective 14-3
EXERCISES
E1. [LO 1]
Companies are concerned about the financial viability of suppliers because they
E2. [LO 2]
E3. [LO 3]
Note to instructor: Students’ answer will vary according to date of data used.
E4. [LO 2]
E5. [LO 2]
E6. [LO 1]
Horizontal analysis of Great Oaks Furniture.
Great Oaks Furniture December 31, December 31, Percent
Balance Sheets 2018 2017 Change Change
Assets
Current assets
Cash $ 41,200 $ 53,000 $ (11,800) –22.3%
14-4 Jiambalvo Managerial Accounting
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 604,000 $ 624,000 $ (20,000) -3.2%
Bank loan payable 679,000 625,000 54,000 8.6%
For the balance sheet, changes greater than 10 percent include a decline in cash,
Chapter 14 Analyzing Financial Statements: A Managerial Perspective 14-5
Year Ended Year Ended
Great Oaks Furniture December 31, December 31, Percent
Statements of Earnings 2018 2017 Change Change
Net sales $ 5,568,000 $ 5,253,000 315,000 6.0%
For the income statement, changes greater than 10 percent include a decrease in
14-6 Jiambalvo Managerial Accounting
E7. [LO 1]
Vertical Analysis of Great Oaks December 31, December 31,
Furniture Balance Sheets 2018 2017
Assets
Current assets
Cash $ 41,200 0.6% $ 53,000 0.8%
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 604,000 8.8% $ 624,000 9.6%
Bank loan payable 679,000 9.9% 625,000 9.6%
Chapter 14 Analyzing Financial Statements: A Managerial Perspective 14-7
Year Ended Year Ended
Great Oaks Furniture December 31, December 31,
Statement of Earnings 2018 2017
Net sales $ 5,568,000 100.0% $ 5,253,000 100.0%
Cost of goods sold 2,840,000 51.0% 2,627,000 50.0%
14-8 Jiambalvo Managerial Accounting
E8. [LO 3]
2018 2017
Earnings per share
Price-earnings ratio
Gross margin percentage
Return on total assets
Return on common equity
E9. [LO 3]
2018 2017
Asset turnover
$5,568,000 ÷ $6,862,000 .81
$5,253,000 ÷ $6,510,000 .81
Accounts receivable turnover
E10. [LO 3]
2018 2017
Current ratio
$5,765,000 ÷ $1,496,000 3.85
$5,415,000 ÷ $1,562,000 3.47
Acid-test ratio
E11. [LO 2]
2018 2017
Net income versus cash flow from operations
Net income $814,000 $682,000
Summary of analyses related to exercises E6 – E11.
It is surprising that the company has been able to increase sales and decrease
E12. [LO 3]
2018 2017
Inventory turnover
E13. [LO 1]
a.
Cramer Carpets
Comparative Income Statements
For the Years Ended December 31, 2018 and 2017
2018
2017
Sales
100.0%
$5,050,000
100.0%
Less: cost of goods sold
Gross margin
Selling expenses
Administrative expenses
Total operating expenses
Income from operations
Interest expense
Net income
14–12 Jiambalvo Managerial Accounting
E14. [LO 3]
a.
Current Liabilities
c.
Current Ratio
E15. [LO 3]
a. Gross Margin Percentage
b. Earnings Per Share
c. Price-Earnings Ratio
d. Return on Total Assets
e. Return on Common Stockholders’ Equity
E16. [LO 3]
b. Accounts Receivable Turnover
c. Days’ Sales in Receivables
d. Inventory Turnover
e. Days’ Sales in Inventory
2018 365 ÷ 4.105 = 88.92
14–14 Jiambalvo Managerial Accounting
E17. [LO 3]
a. Current Ratio
b. Acid-Test (Quick Ratio)
d. Times Interest Earned
2018 $4,400 ÷ $1,200 = 3.670
E18. [LO 1]
Bayberry Office Plus
Horizontal Analysis
2018
2017
Change
Percent
Change
Sales
$7,480
$6,820
$ 660
9.7%
Gross profit
Net Income
Current Assets
$ 80
$ 75
6.7%
2.0%
Total current assets
$1,780
$1,675
6.3%
Total assets
$3,080
Current liabilities
3.3%
Total liabilities
Total shareholders’ equity
Chapter 14 Analyzing Financial Statements: A Managerial Perspective 14–15
PROBLEMS
P1. [LO 1, 3]
a. Year Ended Year Ended
HG Lang Designs December 31, December 31,
Income Statements 2018 2017
Net sales $ 20,632,000 100.0% $ 19,282,000 100.0%
P2. [LO 3]
a. 2018 2017
Inventory turnover
P3. [LO 3]
a. 2018 2017
Current ratio
$2,274,000 ÷ $175,000 12.99
P4. [LO 1, 3]
a. With a $1,500,000 loan, the debt to equity ratio would be 0.58: