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CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-21
MULTI-CONCEPT PROBLEMS
LO 4,5,6 PROBLEM 13-5 BASIC FINANCIAL RATIOS
1. Financial ratios for 2016 for CCB Enterprises (thousands omitted):
a. Times Interest Earned = (Net Income + Income Tax Expense + Interest
Expense)/Interest Expense
= ($72,000 + $48,000 + $20,000)/$20,000
= $140,000/$20,000 = 7 to 1
d. Debt-to-Equity Ratio = Total Liabilities/Total Stockholders’ Equity
= $280,000/$260,000 = 1.08 to 1
e. Current Ratio = Current Assets/Current Liabilities
= $144,000/$120,000 = 1.2 to 1
f. Quick (acid-test) Ratio = (Cash + Marketable Securities + Short-Term
Receivables)/Current Liabilities
13-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 13-5 (Concluded)
j. Number of Days’ Sales in Inventory = Number of Days in Period/Inventory Turnover
2. Comments on the overall financial health of CCB Enterprises:
The current ratio indicates a fairly strong liquidity position, although the significantly
smaller quick ratio may signal a problem with excess inventory. Whether or not the
quick ratio is indicative of a liquidity problem could be determined more accurately
by comparing this ratio with prior years, as well as with an industry average.
Inventory turnover of 8.5 times may not be a problem area (see discussion of
quick ratio above), but it should be compared with those of prior years and with an
industry average—turning over inventory every 42 days may be normal for the
industry.
CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-23
LO 5,6 PROBLEM 13-6 PROJECTED RESULTS TO MEET CORPORATE OBJECTIVES
1. Projected results for the four objectives for Tablon Inc. (in thousands of dollars):
• Sales growth of 20% will be achieved:
Sales Increase for the Year
Sales for 2016 = $30,000 $25,000
$25,000 = 20%
• A cash dividend of 50% of net income, with a minimum payment of at least
$400,000 will be met:
50% × 2017 net income = 0.50 × $1,200 = $600
($600 is the forecasted dividend payment)
2. Contributing factors to Tablon’s failure to meet all its objectives include the following:
• Each of the three expenses, cost of goods sold, selling expenses, and adminis-
trative expenses and interest, as a percentage of sales, are expected to increase
in 2017 from 2016:
13-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 13-6 (Concluded)
3. Possible actions that the controller could recommend to the president in response to
the problems cited above include the following:
• Review the accounts receivable collection process to determine ways to speed
up collection and to determine whether credit is being extended to high-risk cus-
tomers.
LO 4,5,6 PROBLEM 13-7 COMPARISON WITH INDUSTRY AVERAGES
1. Industry
Ratio Average Heartland Inc.
Current ratio 1.23 0.92
Acid-test (quick) ratio 0.75 0.53
Accounts receivable turnover 33 times 39 times
CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-25
PROBLEM 13-7 (Concluded)
Times Interest Earned = (Net Income + Interest Expense + Income Tax
Expense)/Interest Expense
($19,095 + $9,275 + $12,730)/$9,275 = $41,100/$9,275 = 4.43 times
2. Heartland is not as liquid as the average company in the industry, as is evidenced by
its lower current and quick ratios. The inventory turnover ratio is very close to the in-
dustry average, whereas the accounts receivable turnover is significantly better.
Note, however, that the industry has a very high turnover—in fact, the average num-
3. If the bank’s primary consideration in making the loan decision is the company’s rel-
ative performance compared with that of the competition, it probably will not approve
the loan. Heartland is already more highly leveraged than the average company in
13-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
LO 5 PROBLEM 13-1A EFFECT OF TRANSACTIONS ON DEBT-TO-EQUITY RATIO
2. Effect of transactions on debt-to-equity ratio:
Debt-to-Equity Effect of
Transaction Ratio Transaction
a. Purchased inventory on
account, $20,000 1.363 increase
b. Purchased inventory for
cash, $15,000 1.313 none
c. Paid suppliers on
account, $30,000 1.238 decrease
d. Received cash on
account, $40,000 1.313 none
e. Paid insurance for next
year, $20,000 1.313 none
CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-27
LO 5 PROBLEM 13-2A EFFECT OF TRANSACTIONS ON DEBT-TO-EQUITY RATIO
1. Calculation of debt-to-equity ratio (thousands omitted):
($25 + $125)/$400 = $150/$400 = 0.375 to 1
2. Effect of transactions on debt-to-equity ratio:
Debt-to-Equity Effect of
Transaction Ratio Transaction
a. Purchased inventory on
account, $20,000 0.425 increase
e. Paid insurance for next
year, $20,000 0.375 none
f. Made sales on account,
$60,000 0.326 decrease
g. Repaid short-term loans
at bank, $25,000 0.313 decrease
13-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6 PROBLEM 13-3A GOALS FOR SALES AND RETURN ON ASSETS
1. a. Return on Sales = Net Income (after adding back interest expense, net of tax)/
Net Sales
15.0%)
3. If average total assets are $440,000 and the goal is a 20% return on assets, net in-
come will need to be 20% of $440,000, or $88,000.
4. Income will have to increase by 47%, ($88,000 – $60,000)/$60,000, to achieve the
goal of a 20% return on assets. The president has set a goal for an increase in sales
LO 6 PROBLEM 13-4A GOALS FOR SALES AND INCOME GROWTH
1. Selected financial data (in millions of dollars):
2019 2018 2017
1. Sales* 133.1000 121.000 110.0
2. Net income (sales × 3%)* 3.9930 3.630 3.3
CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-29
PROBLEM 13-4A (Concluded)
Selected ratios:
2019 2018 2017
6. Return on stockholders’ equity
(Item 2/Item 4) 9.0% 8.5% 8.0%
Note: The return on stockholders’ equity ratios in the problem for 2014–2016 are
based on year-end stockholders’ equity rather than the average for each year.
Therefore, to be consistent, year-end balances are used for 2017–2019.
2. No, the CEO will not be able to meet all his requirements if a 10% per-year growth in
income and sales is achieved. Under the stated assumptions that the net income to
sales ratio be maintained at 3% with annual sales growth of 10%, and the asset
turnover ratio be maintained at 2, the goal of holding debt to 25% of total assets will
3. Alternative actions to be considered to improve the return on equity and support the
increased dividend payments:
a. Improve the return on assets by
13-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE MULTI-CONCEPT PROBLEMS
LO 4,5,6 PROBLEM 13-5A BASIC FINANCIAL RATIOS
1. Financial ratios for 2016 for SST Enterprises (thousands omitted):
a. Times Interest Earned = (Net Income + Income Tax Expense + Interest
Expense)/Interest Expense
= ($60,000 + $27,000 + $15,000)/$15,000
= $102,000/$15,000 = 6.8 times
d. Debt-to-Equity Ratio = Total Liabilities/Total Stockholders’ Equity
= $120,000/$180,000 = 0.67 to 1
e. Current Ratio = Current Assets/Current Liabilities
= $100,000/$105,000 = 0.95 to 1
f. Quick (acid-test) Ratio = (Cash + Marketable Securities + Short-Term
Receivables)/Current Liabilities
CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-31
PROBLEM 13-5A (Concluded)
j. Number of Days’ Sales in Inventory = Number of Days in Period/
2. Comments on the overall financial health of SST Enterprises:
The current ratio is slightly less than 1 to 1, and the significantly smaller quick ratio
may signal a problem with excess inventory. Whether or not the quick ratio is indica-
tive of a liquidity problem could be determined more accurately by comparing this
34.78%. Further evidence of the company’s use of leverage could be found by ex-
amining the exact cost of each individual source of capital. For example, what are
the terms of the instruments that make up long-term debt and what is the effective
interest cost of each?
The times interest earned ratio indicates that earnings are nearly seven times the
amount of interest expense—that would appear to be excellent coverage. However,
how much cash is generated from operations? Is this cash sufficient to cover not
only interest payments but also maturing principal amounts? Calculation of the debt
13-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5,6 PROBLEM 13-6A PROJECTED RESULTS TO MEET CORPORATE OBJECTIVES
1. Projected results for the four objectives for Grout Inc. (in thousands of dollars):
• Sales growth of 10% will be exceeded:
Sales Increase for the Year
−
$12,000 $10,000
2. Contributing factors to Grout’s failure to meet all its objectives include the following:
• Cost of goods sold, as a percentage of sales, is expected to increase in 2017
from 2016, and the other two operating expenses are expected to remain the
same:
2016 2017
Cost of goods sold 60% 66.67%
Selling expenses 15% 15.00%
Administrative expenses and interest 10% 10.00%
CHAPTER 13 • FINANCIAL STATEMENT ANALYSIS 13-33
PROBLEM 13-6A (Concluded)
3. Possible actions that the controller could recommend to the president in response to
the problems cited include the following:
• Review the accounts receivable collection process to determine ways to speed
LO 4,5,6 PROBLEM 13-7A COMPARISON WITH INDUSTRY AVERAGES
1. Industry
Ratio Average Midwest Inc.
Current ratio 1.20 1.26
Acid-test (quick) ratio 0.50 0.34
Inventory turnover 35 times 37.27 times
Calculations for Midwest’s ratios (thousands omitted):
Current Ratio = Current Assets/Current Liabilities
$12,440/$9,900 = 1.26 to 1
Acid-Test Ratio = (Cash + Marketable Securities + Accounts Receivable)/
Current Liabilities
($1,790 + $1,200 + $400)/$9,900 = $3,390/$9,900 = 0.34 to 1
13-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 13-7A (Concluded)
Asset Turnover = Net Sales/Average Total Assets
2. Midwest is not quite as liquid as the average company in the industry, as is evi-
denced by its lower quick ratio. The inventory turnover ratio is very similar to the
3. Midwest is already more highly leveraged than the average company in the industry,
but as was indicated earlier, has used borrowed money effectively. However, the
