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PROBLEM 18-6 (Continued)
(i) Earnings per share =
$36,400
30,000 (1)
= $1.21.
(j) Price-earnings ratio =
$19.50
$1.21
= 16.1 times.
(l) Debt to assets =
$265,000
$638,000
= 41.5%.
PROBLEM 18-7
Accounts receivable turnover = 10 =
$11,000,000
Average accounts receivable
Averages accounts receivable =
$11,000,000
10
= $1,100,000
Net accounts receivables12/31/17 + $950,000
2
= $1,100,000
Profit margin = 14.5% = .145 =
Net income
$11,000,000
Net income = $11,000,000 X .145 = $1,595,000
Assets (12/31/17) = $7,500,000
Total current assets = $7,500,000 – $4,620,000 = $2,880,000
Inventory = $2,880,000 – $1,250,000 – $450,000 = $1,180,000
PROBLEM 18-7 (Continued)
Current ratio = 3.0 =
$2,880,000
Current liabilities
Inventory turnover = 4.8 =
Cost of goods sold
$1,720,000 + $1,180,000
2
PROBLEM 18-8
TERWILLIGER CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Operating revenues
($12,850,000 – $1,500,000) ........................ $11,350,000
Operating expenses
($8,700,000 – $2,400,000) .......................... 6,300,000
Income from operations ............................... 5,050,000
Other revenues and gains ............................ 100,000
Discontinued operations
Loss from operations of discontinued division*,
net of $270,000 income
tax saving ........................................... $630,000
Gain from disposal of discontinued
division, net of $60,000 income tax .. 140,000 490,000
PROBLEM 18-9
JAIME CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Net sales ............................................................. $1,700,000
Cost of goods sold ............................................ 1,100,000
Gross profit ........................................................ 600,000
Discontinued operations
Income from operations of discontinued
division, net of $5,000 income tax ........... 15,000
BYP 18-1 FINANCIAL REPORTING PROBLEM
(a) APPLE, INC.
Trend Analysis of Net Sales and Net Income
For the Three Years Ended 2013
Base Period 2011—(in millions)
2013
2012
2011
(1)
Net sales
Trend
$170,910
158%
$156,508
145%
$108,249
100%
(b) (dollar amounts in millions)
(1) Profit Margin
2013: $37,037 ÷ $170,910 = 21.7%
2012: $41,733 ÷ $156,508 = 26.7%
(2) Asset Turnover
BYP 18-1 (Continued)
(4) Return on Common Stockholders’ Equity
(c) (dollar amounts in millions)
(1) Debt to Assets ratio
2013: $83,451 ÷ $207,000 = 40.3%
2012: $57,854 ÷ $176,064 = 32.9%
Since creditors are providing only 40% of Apple’s total assets, its long-
term solvency is not in jeopardy.
(2) Times Interest Earned
(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
BYP 18-2 COMPARATIVE ANALYSIS PROBLEM
(a)
PepsiCo
Coca-Cola Company
(1)
(i)
Percentage increase
in net sales
$66,415 − $65,492
= 1.4%
$46,854 − $48,017
= –2.4%
$65,492
$48,017
(ii)
Percentage increase
(decrease) in net
income
$6,740 − $6,178
= 9.1%
$8,584 − $9,019
= −4.8%
$6,178
$9,019
(b) PepsiCo’s net sales increased 1.4% while Coca-Cola’s decreased over
2.4%. PepsiCo’s net income increased 9.1% while Coca-Cola’s net
income decreased 4.8% from 2012 to 2013. PepsiCo’s total assets
increased 3.8% while Coca-Cola increased its assets 4.5%.
BYP 18-3 COMPARATIVE ANALYSIS PROBLEM
(a)
Amazon
Wal-Mart
(1)
(i)
Percentage increase
in net sales
$60,903 − $51,733
= 17.7%
$473,076 − $465,604
= 1.6%
$51,733
$465,604
(ii)
Percentage increase
(decrease) in net
income
$274 − (39)
= 802.6%
$16,022 − $16,999
= (5.7)%
(39)
$16,999
(b) Amazon’s net sales increased 17.7% while Wal-Mart’s increased 1.6%.
Amazon’s net income increased 802.6% while Wal-Mart’s net income
decreased 5.7% from 2012 to 2013. Amazon’s total assets increased 23.4%
while Wal-Mart increased its assets 0.8%.
BYP 18-4 DECISION MAKING ACROSS THE ORGANIZATION
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 acid-test ratio decrease is an unfavorable indication as to liquidity,
especially when the current-ratio increase is also considered. This decline
is also unfavorable as to the going-concern prospects of the client because
it reflects a declining cash position and raises questions as to reasons
for the increases in other current assets, such as inventories.
The increase in net income is a favorable indicator for both solvency
and going-concern prospects, although much depends on the quality of
receivables generated from sales and how quickly they can be converted
into cash. If there has been a decline in sales, a significant factor is that
management has been able to reduce costs to produce an increase in
earnings. Indirectly, the improved income picture may have a favorable
impact on solvency and going-concern potential by enabling the client
to borrow currently (if it needs to do so) to meet cash requirements.
BYP 18-4 (Continued)
The collective implications of these data alone are that the client entity
is about as solvent and as viable a going concern at the end of the current
year as it was at the beginning although there may be a need for short-term
operating cash.
BYP 18-5 REAL-WORLD FOCUS
(a) Optional elements include:
Financial highlights
Letter to stockholders
Corporate message
(b) SEC-required elements include:
Auditors’ report
Management discussion
Financial statements and notes
Selected financial data
(c) Management discussion. This series of short, detailed reports discusses and
the adequacy of liquid and capital resources to fund operations.
(d) Auditors’ report. This summary of the findings of an independent firm
of certified public accountants shows whether the financial statements
are complete, reasonable, and prepared consistent with generally accepted
accounting principles (GAAP) at a set time.
BYP 18-6 COMMUNICATION ACTIVITY
To: Abby Landis
From: Accounting Major
Subject: Financial Statement Analysis
The bases for comparison in analyzing financial statement are:
a. Intracompany—This basis compares an item or financial relationship
within a company in the current year with the same item or relation-
ship in one or more prior years.
BYP 18-7 ETHICS CASE
(a) The stakeholders in this case are:
Dave Schonhardt, president of Schonhardt Industries.
Steven Verlin, public relations director.
You, as controller of Schonhardt Industries.
(b) The president’s press release is deceptive and incomplete and to that
extent his actions are unethical.
(c) As controller you should at least inform Steven, the public relations
director, about the biased content of the release. He should be aware
BYP 18-8 ALL ABOUT YOU
Student responses will vary. We suggest that in class you ask for a few stu-
dents to share their responses in order to increase students understanding
of the various reasons why different people will choose different investment
vehicles.
BYP 18-9 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 discontinued
operations in accordance with paragraph 205-20-45-3 if both of the
following conditions are met:
a. The operations and cash flows of the component has been (or will be)
eliminated from the ongoing operations of the entity as a result of
(b) Comprehensive Income
The change in equity (net assets) of a business entity during a period
from transactions and other events and circumstances from nonowner
IFRS 18-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) The company’s profit margin was 11.8% for 2013 (€3,436 €29,149).
Profit margin decreased from 13% in 2011 (€3,065 €23,659).
(b) Operating profit for 2013 was €5,894.
