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Financial Accounting, Fifth Canadian Edition

CHAPTER 14
Performance Measurement
EXERCISE 14-2
(a) Homburgs sustainable income is the profit from continuing operations of $18,323 thousand. This is the loss of $88,054 thousand plus the loss from its discontinued operations of $106,377 thousand. The loss of $106,377 thousand from Homburgs discontinued operations would be reported in its income statement, after profit from continuing operations. The current assets held for sale of $144,247 thousand would be reported in the current asset section of the statement of financial position, and the current liabilities associated with the assets held for sale would be classified in the current liabilities section.

(b)

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Financial Accounting, Fifth Canadian Edition

EXERCISE 14-4
(a) DRESSAIRE INC. Horizontal Analysis of Statement of Financial Position (% of base-year amount) 2012 Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings 120.0 133.3 107.7 110.0 150.0 158.8 2011 80.0 116.7 138.5 70.0 115.0 141.2 2010 100.0 100.0 100.0 100.0 100.0 100.0

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Financial Accounting, Fourth Canadian Edition

EXERCISE 14-4 (Continued) (b)

DRESSAIRE INC. Horizontal Analysis of Statement of Financial Position (% change between periods) 2012 Assets Current assets Non-current assets Total assets Liabilities and Shareholders Equity Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders equity Common shares Retained earnings Total shareholders equity Total liabilities and shareholders equity $520,000 $90,000 20.9% $430,000 ($30,000) 7.5% $400,000 150,000 135,000 285,000 35,000 15,000 50,000 30.4% 12.5% 21.3% 115,000 120,000 235,000 15,000 35,000 50,000 15.0% 41.2% 27.0% 100,000 85,000 185,000 $ 70,000 165,000 235,000 $(20,000) 60,000 40,000 (22.2)% 57.1% 20.5% $ 90,000 105,000 195,000 $ 25,000 (45,000) (20,000) 38.5% (30.0%) (9.3%) $ 65,000 150,000 215,000 $120,000 400,000 $520,000 $ 40,000 50,000 $90,000 50.0% 14.3% 20.9% $ 80,000 350,000 $430,000 $(20,000)) 50,000) $ 30,000) (20.0)% 16.7 % 7.5 % $100,000 300,000 $400,000 Increase (Decrease) Amount % 2011 Increase (Decrease) Amount % 2010

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Chapter 14

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Financial Accounting, Fifth Canadian Edition

EXERCISE 14-5
FLEETWOOD CORPORATION Vertical Analysis of Income Statement 2012 Amount Net sales Cost of goods sold Gross profit Operating expenses Profit before income tax Income tax expense Profit $800,000 550,000 250,000 175,000 75,000 15,000 $ 60,000 Percent 100.0% 68.7% 31.3% 21.9% 9.4% 1.9% 7.5% Amount $600,000 375,000 225,000 125,000 100,000 20,000 $ 80,000 2011 Percent 100.0% 62.5% 37.5% 20.8% 16.7% 3.3% 13.4%

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Financial Accounting, Fifth Canadian Edition

SOLUTIONS TO PROBLEMS
PROBLEM 14-5A
($ in millions) (a) Before Discontinued Operations
Ratio Return on common shareholders equity Return on assets 2010 $572 $8,218 70 $572 $22,404 26 $572 $5,411 10 6 2009 $512 $7,418 69 $512 $22,528 23 $512 $4,203 12 2 2008 $1,715 $6,374 26 9 $1,715 $20,115 85 $1,715 $7,424 23 1 2007 $1,086 $5,123 21 2 $1,086 $17,616 62 $1,086 $5,583 19 5 2006 $601 $4,316 13 9 $601 $15,873 38 $601 $3,936 15 3

Profit margin

After Discontinued Operations

Ratio Return on common shareholders equity Return on assets 2010 $1,197 $8,218 14 6 $1,197 $22,404 53 $1,197 $5,411 22 1 2009 $536 $7,418 72 $536 $22,528 24 $536 $4,203 12 8 2008 $1,715 $6,374 26 9 $1,715 $20,115 85 $1,715 $7,424 23 1 2007 $1,086 $5,123 21 2 $1,086 $17,616 62 $1,086 $5,583 19 5 2006 $601 $4,316 13 9 $601 $15,873 38 $601 $3,936 15 3

Profit margin

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Financial Accounting, Fifth Canadian Edition

PROBLEM 14-5A (Continued) (b) Nexens profitability after discontinued operations improved substantially in 2007 and 2008, dropped significantly in 2009 and improved again in 2010. For all three ratios, the 2010 profitability showed an increase over the 2006 levels. We get a difference picture of profitability using profits from continuing operations. Profitability increased substantially in 2007 and 2008 for all three ratios. This is due to the fact that the company did not have discontinued operations in those years and the company experienced growth in profit. In 2009, profitability from continuing operations fell sharply for all three ratios and remained at essentially the same level in 2010. Return on equity and return on assets showed a slight increase in 2010, but the profit margin showed a decrease in 2010. (c) An analysis on profitability before discontinued operations is more relevant to investors as it provides a better indication as to how the company will perform in future periods.

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Financial Accounting, Fifth Canadian Edition

PROBLEM 14-6A
(a)
2012 1. Current ratio $180,000 $240,000 0 8 :1 $150,000 $165,000 12 8 times 2011 0 9 :1

2. Receivables turnover

$700,000 $60,000 $49,500 [ ] 2 $450,000 $100,000 $85,000 ( ) 2 $240,000 $735,000 $100,000 $10,000

$450,000 $49,500 $52,800 [ ] 2 $300,000 $85,000 $64,000 ( ) 2 $165,000 $590,000 $66,000 $4,000

8 8 times

3. Inventory turnover

4 9 times

4 0 times

4. Debt to total assets 5. Times interest earned

32 7

28 0

10 0 times

16 5 times

$102,600 6. Cash total debt coverage ($240,000 $165,000) 2 7.Return on assets $72,000 $735,000 $590,000 ( ) 2 $72,000 $700,000 10 3

0 5 times

$119,600 $165,000 $50,000 ( ) 2 $49,600 $590,000 $433,000 ( ) 2 $49,600 $450,000 11 0

1 1 times

10 9

97

8. Profit margin

* 2. Receivables turnoverGross accounts receivable: 2012: $55,000 + $5,000 2011: $45,000 + $4,500 2010: $48,000 + $4,800

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Financial Accounting, Fifth Canadian Edition

PROBLEM 14-6A (Continued) (a) (Continued)

2012 9. Asset turnover $700,000 $735,000 $590,000 ( ) 2 $250,000 $700,000 35 7 1 1 times 2011 $450,000 0 9 times $590,000 $433,000 ( ) 2 $150,000 $450,000 33 3

10. Gross profit margin

(b) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Current ratio Receivables turnover Inventory turnover Debt to total assets Times interest earned Cash total debt coverage Return on assets Profit margin Asset turnover Gross profit margin

Unfavourable Favourable Favourable Unfavourable Unfavourable Unfavourable Favourable Unfavourable Favourable Favourable

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Financial Accounting, Fifth Canadian Edition

PROBLEM 14-9A
(a) McDonalds is more liquid given its high current ratio and higher receivables turnover. McDonalds has a current ratio that is higher than Burger Kings and higher than the industry average Its receivables turnover is higher than Burger Kings but is significantly lower than the industry average. However, its inventory turnover is significantly higher than the industry average. McDonalds appears to be more solvent than Burger King. Its debt to total assets ratio indicates more of its assets are financed by debt than Burger Kings, although both companies are better than the industry average. McDonalds times interest earned is better than Burger Kings and is also better than the industry average Burger Kings times interest earned ratio is significantly lower than the industry average. This indicates that McDonalds has a higher capacity to service its debt McDonalds appears to be the more profitable of the two companies McDonalds has a significantly higher gross profit margin and profit margin than Burger Kings McDonalds is better than industry average while Burger Kings is below industry average for the gross profit margin. McDonalds also has a better return on common shareholders equity and a higher return on assets. While Burger King has a slightly higher asset turnover and a higher price-earnings ratio than McDonalds, all other profitability ratios indicate that McDonalds is more profitable than Burger King and the industry. Investors seem to favour Burger King as it has a slightly higher priceearnings ratio. Burger Kings price-earnings ratio is lower than the industry average, showing that investors on average favour other restaurants in the industry. This is not consistent with (c), as you would expect investors to favour the more profitable company, and the company whose profitability ratios exceed the industry average. Investors must anticipate that Burger King and other companies in the industry will have better profitability in the future than McDonalds

(b)

(c)

(d)

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