CHAPTER 15 Financial Statement Analysis
P 15-59 (Continued)
This Yea
r
Last Yea
r
Sales………………………………………
…
$ 950,000 $ 900,000 5.6%
Less: Cost of goods sold………………
…
(500,000) (490,000) 2.0
Gross margin…………………………
…
$ 450,000 $ 410,000 9.8
Less: Selling and admin. expense…… (275,000) (260,000) 5.8
Operating income……………………
…
$ 175,000 $ 150,000 16.7
2. Cash has decreased by 50%, accounts receivable has doubled, and inventor
y
has increased by 50%. At the same time, liabilities have increased by 40%, mostly
due to increases in short-term liabilities. Management may want to know why
Change
Kepler Company
Comparative Income Statements
Percent
CHAPTER 15 Financial Statement Analysis
P 15-60
1. Assets
Current assets:
Cash………………………………… $ 50,000 4.5% $100,000 12.0%
Accounts receivable, net………
…
300,000 27.3 150,000 18.1
Inventory…………………………… 600,000 54.5 400,000 48.2
2. Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable………………… $ 400,000 36.4% $290,000 34.9%
Short-term notes payable………
…
200,000 18.2 60,000 7.2
Total current liabilities………………
…
$ 600,000 54.5 $350,000 42.2
Long-term bonds payable, 12%……
…
100,000 9.1 150,000 18.1
Total liabilities……………………
…
$ 700,000 63.6 $500,000 60.2
…
3. Sales……………………………………
…
$ 950,000 100.0% $ 900,000 100.0%
Less: Cost of goods sold…………… (500,000) 52.6 (490,000) 54.4
Gross margin……………………… $ 450,000 47.4 $ 410,000 45.6
Less: Selling and admin. exp. ……
…
(275,000) 28.9 (260,000) 28.9
Operating income………………… $ 175,000 18.4 $ 150,000 16.7
Less: Interest expense………………
…
(12,000) 1.3 (18,000) 2.0
Income before taxes……………
…
$ 163,000 17.2 $ 132,000 14.7
…
This Yea
r
This Yea
r
Last Yea
r
Last Yea
r
Last Yea
r
This Yea
r
*
…
CHAPTER 15 Financial Statement Analysis
P 15-61
$975,000 $680,000
$600,000 $350,000
c. Receivables
Turnove
r
Receivables $950,000 $900,000
Turnove
r
$225,000 $150,000*
Turnover in 365 days 365 days
Days 4.22 times 6.00 times
*Since the beginning balance is not known for receivables, the average is assumed to be the
ending balance.
r
r
r
r
2. The liquidity of Kepler has declined over the past year as measured by the turnove
r
ratios and the current and quick ratios. Industrial liquidity performance would allow
us to assess what is normal for the industry and thus better assess what is a
reasonable liquidity level for Kepler.
86.49 days
=
==
=
Current Ratio ==
6.00 times
60.83 days
4.22 times=
=
=
=
Last Yea
r
Net Sales
Average Receivables
1.63 1.94=
=
Last Yea
r
a.
1.
This Yea
r
Current Assets
This Yea
r
=
Current Ratio = Current Liabilities
r
r
CHAPTER 15 Financial Statement Analysis
P 15-62
1. a. Times-Interest-Earned
Ratio
Times-Interest-Earned
Ratio
= = 8.33 times
2. There appears to be good income coverage of interest. The debt ratio is over 50%,
but whether this is good or bad depends to some extent on what is normal for the
Last Year
$175,000
$12,000
This Year
14.58 times
Interest Expense
$132,000 + $18,000
$18,000
=
=
=
Income Before Taxes + Interest Expense
$18,000
$12,000
$150,000
=
=
$163,000 + $12,000
CHAPTER 15 Financial Statement Analysis
P 15-63
$105,000 $90,000
$965,000 $830,000
a
$97,800 + [$12,000(1 – 0.40)] = $105,000
b
$79,200 + [$18,000(1 – 0.40)] = $90,000
= = $0.79 per share
$0.278 $0.192
$2.98 $2.98
= = 0.0644, or 6.44%
2. The return on assets has remained roughly the same, while return on equity, EPS,
dividend yield, and dividend payout measures have increased. However, the PE
ratio decreased. Thus, the profitability measures are providing mixed signals. More
information is needed before an investment decision is made. For example, how
do these returns compare to other firms in the same industry? Will the dividend
payout and/or net income performance continue? What is the historical
performance of this firm?
1.
0.11Return on Assets
Return on Assetsa. =
=0.11===
e.
Yield
Dividend Yield =
==
EPS
Earnings per Sharec.
=
==
$97,800
Last Yea
r
This Yea
r
Net Income + [Interest Expense(1 – Tax Rate)]
Average Total Assets
0.0933, or 9.33%
$79,200
100,000 shares
Dividends per Common Share
Market Price per Share
100,000 shares
$0.98 per share
Net Income
Average Common Shares
ab
CHAPTER 15 Financial Statement Analysis
P 15-64
1.
c. Return on Stockholders’
Equity
=
0.105, or 10.5%
= 35,000
==
=
Earning per Share
30,000 + 40,000
2
Market Price per Share
=
==
$10,500 – $300
g.
=
Income – Preferred Dividends
Common Dividends
==
*=
a.
0.7843
Return on Sales
Average Total Assets
$8,000
$10,500 – $300
$120,000 + $126,000
2
e.
*
Price-Earnings Ratio
Average Common Shares
Dividend Payout Ratio
$0.29
41.38
==
=
=
$12.00
$10,200
Net Income – Preferred Dividends
Net Income
Sales
$10,500
$100,000
0.185, or 18.5%
= $123,000
$55,000
Average Stockholders’ Equity
$55,000
CHAPTER 15 Financial Statement Analysis
P 15-64 (Concluded)
2. Since all the ratios are profitability ratios, they should all be of interest to investors.
P 15-65
*
*Average Receivables
=3.06 times
=
=
Days
1.
Average Receivables = $110,000
=
*=
Accounts Receivable Turnover
20X2 Accounts Receivable Turnover
Net Sales
Average Receivables
$100,000
5.00 times
$500,000
=
20X4 Accounts Receivable Turnover
Days
= $170,000Average Receivables
20X6 Accounts Receivable Turnover
$100,000 + $150,000
2
119.28 days
= 78.66 days
$510,000
=
= $125,000
=
==
=
3.06 times
365 days
4.64 times
$100,000 + $120,000
2
= 4.64 times
$110,000*
365 days
$150,000 + $190,000
2
$520,000
$170,000* =
CHAPTER 15 Financial Statement Analysis
P 15-65 (Concluded)
2. The new credit policy reduced the accounts receivable turnover because of the
fact that the customer now has 60 days before full payment of the account is
3. If Ted Pendleton had known that the industry had an average receivables turnover
of six times per year, he may not have liberalized the company’s credit policy
CHAPTER 15 Financial Statement Analysis
P 15-66
b. McGregor Dividends per
Common Share
c. McGregor Dividend
Payout Ratio
Fasnacht Dividend
Payout Ratio
e. McGregor Return on
Assets
Fasnacht Return on
Assets
f. McGregor Return on
Common Stockholders’
Equity
2. Fasnacht dominates on every profitability measure except the EPS, dividend
yield ratio, and return on equity. If this pattern is expected to persist in the
future, Fasnacht appears to be the better investment.
1.
Fasnacht EPS
McGregor EPSa.
$2.12 per share
$0.54
=
0.23
0.37
=
=
=
$2.34 per share
$2,640,000 – $300,000
1,000,000 shares
1,000,000 shares
$2,640,000 – $100,000
=
=
=
=
=
=
==
=
$840,000 – $1(300,000)
$2,640,000 – $100,000
1,200,000 shares
$2,640,000 + [$1,000,000(1 – 0.34)]
$20,000,000
$2,640,000 + [$3,000,000(1 – 0.34)]
$22,000,000
$540,000
$10,000,000
$2,640,000 – $300,000
$2,640,000 – $300,000
=
$940,000 =
0.21
0.23
0.17=
CHAPTER 15 Financial Statement Analysis
Case 15-67
1. Pete Donaldson’s behavior is not ethical. Hiding a loan and obsolete safety
equipment is dishonest. The $30,000 cannot be considered to be donated when
he is making interest payments of $3,000 per year and has a requirement to
return the $30,000. (Standard III: 2, 3)
2. a. First, consult with Pete Donaldson and tell him that you cannot prepare the
the statements in the way he has requested and explain why. If he insists on
b. First, Pete Donaldson should be approached. He should be requested to
withdraw the loan request or provide corrected financial statements. Should
he refuse, then the ethical dilemma has been significantly compounded.
Communication of the problem to outside parties is usually not considered
3. One possible solution is to approach the father-in-law who gave the loan originally
and offer part ownership in the company. The loan could then legitimately be
converted to equity in exchange for an ownership share. With the legitimate
reclassification, a loan application could be submitted in good conscience.
Case 15-68
Answers will vary. Note to Instructors: You can easily turn this into a group exercise
CASES