Chapter 17

Financial Statement Analysis

Review Questions

1. Briefly define the basic financial statements.

The basic financial statements are the balance sheet (sometimes referred to as statement of financial
position), the income statement (or statement of operations), the statement of stockholders’ equity,
and the statement of cash flows.

2. List three ways to compare financial performance.

Three ways to analyze financial statements are: horizontal analysis, which provides a year-to-year
comparison of a company’s performance in different periods; vertical analysis, which provides a
way to compare different companies; and ratio analysis, which can be used to provide information
about a company’s performance. It is used most effectively to measure a company against other
companies in the same industry and to denote trends within the company.

3. What is the purpose of the management’s discussion and analysis (MD&A) section of an annual
report?

The Management’s Discussion and Analysis (MD&A) section of the annual report is intended to
help investors understand the results of operations and the financial condition of the company.

4. How do the notes of financial statements help managers?

Immediately following the financial statements are the notes to the financial statements. These notes
include a summary of significant accounting policies and explanations of specific items on the
financial statements. These notes are an important part of the financial statements and are often
referred to by investors to understand the information included in the financial statements.

5. How does trend analysis differ from vertical analysis?

Trend analysis is a form of horizontal analysis in which percentages are computed by selecting a
base period as 100% and expressing amounts for following periods as a percentage of the base
period amount. (Any period amount / Base period amount) × 100, while vertical analysis is an
analysis of a financial statement that reveals the relationship of each statement item to its base
amount, which is the 100% figure. (Specific item / Base amount) × 100.

6. Explain the dollar value bias.

Dollar Value Bias is the bias one sees from comparing numbers in absolute (dollars) rather than
relative (percentage) terms.

© 2016 Pearson Education, Ltd. 17-1

7. What is meant by working capital?

Working Capital is a measure of a business’s ability to meet its short-term obligations with its
current assets.

8. How does current ratio differ from acid-test (or quick) ratio?

Current Ratio measures the company’s ability to pay current liabilities from current assets while
Acid-Test Ratio is the ratio of the sum of cash plus short-term investments plus net current
receivables to total current liabilities. The ratio tells whether a company can pay all its current
liabilities if they came due immediately

9. How is days’ sales in inventory measured?

Another key measure is the number of days’ sales in inventory ratio. This measures the average
number of days merchandise inventory is held by the company. It is calculated by dividing the
number of days in a calendar year by the inventory turnover.

10. How is gross profit percentage measured?

Gross Profit Percentage Measures the profitability of each sales dollar above the cost of goods sold.
Gross profit / Net sales revenue.

11. Define debt ratio. How is it helpful for a company?

The relationship between total liabilities and total assets—called the debt ratio—shows the
proportion of assets financed with debt and is calculated by dividing total liabilities by total assets. If
the debt ratio is 1, then all the assets are financed with debt. A debt ratio of 50% means that half the
assets are financed with debt and the other half are financed by the owners of the business. The
higher the debt ratio, the higher the company’s financial risk. The debt ratio can be used to evaluate
a business’s ability to pay its debts.

12. Explain profit margin ratio.

The profit margin ratio shows the percentage of each net sales dollar earned as net income. In other
words, the profit margin ratio shows how much net income a business earns on every $1.00 of sales.
This ratio focuses on the profitability of a business and is calculated as net income divided by net
sales.

13. Briefly explain the two ways by which a company can finance an asset.

There are two ways that a company can finance its assets:
a. Debt—A company can borrow cash from creditors to purchase assets. Creditors earn interest on
the money that is loaned.
b. Equity—A company receives cash or other assets from stockholders. Stockholders invested in
the company and hope to receive a return on their investment.

© 2016 Pearson Education, Ltd. 17-2

14A. Briefly explain earnings per share.

Earnings Per Share is the amount of a company’s net income (loss) for each share of its
outstanding common stock. (Net income – Preferred dividends) / Weighted average number of
common shares outstanding.

15A. How does trading on the equity affect the business?

Trading on the equity, or using leverage, is directly related to the debt ratio. The higher the debt
ratio, the higher the leverage. Companies that finance operations with debt are said to leverage
their positions. During good times, leverage increases profitability. But leverage can have a
negative impact on profitability as well. Therefore, leverage is a double-edged sword, increasing
profits during good times but compounding losses during bad times.

© 2016 Pearson Education, Ltd. 17-3

Short Exercises

S17-1 Explaining financial statements

Learning Objective 1

Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to
evaluate the company?

SOLUTION

Caleb should complete a review of the company’s performance across several periods of time. The
horizontal analysis, vertical analysis, and standard financial ratios should be completed for the
company. They should be compared from year to year with a competing company and with the same
industry as a whole. He should also review the auditor’s opinion, management’s discussion and
analysis of financial conditions and operations, and notes to financial statements in the annual report.

S17-2 Performing horizontal analysis

Learning Objective 2

McDonald Corp. reported the following on its comparative income statement:

Prepare a horizontal analysis of revenues and gross profit—both in dollar amounts and in percentages—
for 2017 and 2016.

SOLUTION
Increase (Decrease)
(Amounts in millions) 2017 2016
2017 2016 2015 Amount Percent Amount Percent
Revenues $9,910 $9,700 $9,210 $210 2.2% $490 5.3%
Cost of Goods
Sold 7,210 6,900 6,125
Gross profit $2,700 $2,800 $3,0855 $(100) (3.6)% $(285) (9.2)%

© 2016 Pearson Education, Ltd. 17-4

S17-3 Calculating trend analysis
Learning Objective 2

Variline Corp. reported the following revenues and net income amounts:

Requirements
1. Calculate Variline’s trend analysis for revenues and net income. Use 2014 as the base year, and
round to the nearest percent.
2. Which measure increased at a higher rate during 2015–2017?

SOLUTION

Requirement 1

2017 2016 2015 2014

Revenue $ 9,990 $ 9,890 $ 9,290 $ 9,090
Trend Percentages 110% 109% 102% 100%
Net Income $7,750 $7,570 $5,670 $4,990
Trend Percentages 155% 152% 114% 100%

Requirement 2

Net income increased faster than revenue during 2015 – 2017.

S17-4 Performing vertical analysis

Learning Objective 3

Hoosier Optical Company reported the following amounts on its balance sheet at December 31, 2016
and 2015:

Prepare a vertical analysis of Hoosier assets for 2016 and 2015.

© 2016 Pearson Education, Ltd. 17-5

SOLUTION

2016 2015
Amount Percent Amount Percent
Cash and Receivables $ 77,825 28.3% $ 70,200 27.0%
Merchandise Inventory 55,825 20.3 52,780 20.3
Property, Plant and Equipment, Net 141,350 51.4 137,020 52.7
Total Assets $ 275,000 100.0% $260,000 100.0%

S17-5 Preparing common-size income statement

Learning Objective 3

Data for Martinez, Inc. and Rosario Corp. follow:

Requirements
1. Prepare common-size income statements.
2. Which company earns more net income?
3. Which company’s net income is a higher percentage of its net sales?

SOLUTION

Requirement 1

Martinez Rosario
Net Sales 100.0% 100.0%
Cost of Goods Sold 62.1 72.7
Other Expense 31.8 22.5
Net Income 6.1% 4.8%

Requirement 2

Rosario earns more net income.

Requirement 3

Martinez has a higher net income as a percentage of net sales.

© 2016 Pearson Education, Ltd. 17-6

Use the following information for Short Exercises S17-6 through S17-10.

Shine’s Companies, a home improvement store chain, reported the following summarized figures:

Shine’s has 100,000 common shares outstanding during 2016.

© 2016 Pearson Education, Ltd. 17-7

S17-6 Evaluating current ratio
Learning Objective 4

Requirements
1. Compute Shine’s Companies’ current ratio at May 31, 2016 and 2015.
2. Did Shine’s Companies’ current ratio improve, deteriorate, or hold steady during 2016?

SOLUTION

Requirement 1

Total current assets

Current ratio =
Total current liabilities

$51,500,000
2016: = 2.15
$24,000,000

$27,200,000
2015: = 2.11
$12,900,000

Requirement 2

Shine’s Companies’ current ratio improved from 2015 to 2016.

© 2016 Pearson Education, Ltd. 17-8

S17-7 Computing inventory, gross profit, and receivables ratios
Learning Objective 4

Requirements
1. Compute the inventory turnover, days’ sales in inventory, and gross profit percentage for Shine’s
Companies for 2016.
2. Compute days’ sales in receivables during 2016. Round dollar amounts to three decimal places.
Assume all sales were on account.
3. What do these ratios say about Shine’s Companies’ ability to sell inventory and collect receivables?

SOLUTION

Requirement 1

Cost of goods sold

Inventory turnover =
Average merchandise inventory

$20,600,000
2016: =
[($8,200,000 + $7,100,000) / 2]

$20,600,000
= 2.69
$7,650,000

365 days
Days’ sales in inventory =
Inventory turnover

365 days
2016: = 136 days
2.69

Gross profit
Gross profit percentage =
Net sales revenue

($50,200,000 – 28,400,000)
2016: =
$50,200,000

$21,800,000
= 0.434 = 43.4%
$50,200,000

© 2016 Pearson Education, Ltd. 17-9

S17-7, cont.
Requirement 2

Accounts receivable turnover Net credit sales

=
ratio Average net accounts receivables

$57,200,000
2015: =
[($5,400,000 + $7,200,000) / 2]

$57,200,000
= 9.08
$6,300,000

365 days
Days’ Sales in Receivables =
Accounts receivable turnover ratio

365 days
2015: = 40 days
9.08

Requirement 3
Shine’s Companies’ have a high amount of inventory on hand and a low inventory turnover ratio. This
could be an area to look at and compare to the prior year and industry average. They have a high gross
profit percentage, which is a good indicator. The amount of time it takes to collect receivables seems
high, but this would depend on the credit terms.

© 2016 Pearson Education, Ltd. 17-10

S17-8 Measuring ability to pay liabilities
Learning Objective 4

Requirements
1. Compute the debt ratio and the debt to equity ratio at May 31, 2016, for Shine’s Companies.
2. Is Shine’s ability to pay its liabilities strong or weak? Explain your reasoning.

SOLUTION

Requirement 1

Total liabilities
Debt ratio =
Total assets

$37,400,000
2016: = 0.448 = 44.8%
$83,500,000

Total liabilities
Debt to equity ratio =
Total equity

$37,400,000
2016: = .81
$46,100,000

Requirement 2

Shine’s debt ratio and debt to equity ratio are not very high, which indicates it’s in a strong position to
pay its liabilities.

S17-9 Measuring profitability

Learning Objective 4

Requirements
1. Compute the profit margin ratio for Shine’s Companies for 2016.
2. Compute the rate of return on total assets for 2016.
3. Compute the asset turnover ratio for 2016.
4. Compute the rate of return on common stockholders’ equity for 2016.
5. Are these rates of return strong or weak? Explain your reasoning.

© 2016 Pearson Education, Ltd. 17-11

SOLUTION

Requirement 1

Net income
Profit margin ratio =
Net sales

$29,000,000
2016: = 0.507 = 50.7%
$57,200,000

Requirement 2

Rate of return on total Net income + Interest expense

=
assets Average total assets

($29,000,000 + $700,000)
2016: =
[($55,200,000 + $83,500,000) / 2]

$29,700,000
= 0.428 = 42.8%
69,350,000

Requirement 3

Asset turnover Net sales

=
ratio Average total assets

$57,200,000
2016: =
[($55,200,000 + $83,500,000) / 2]

$57,200,000
= .825 times
69,350,000

Requirement 4

Rate of return on common Net income – Preferred dividends

=
stockholders’ equity Average common stockholders’ equity

$29,000,000 – $0
2016: =
[($31,500,000 + $46,100,000) / 2]

$29,000,000
= 0.747 = 75.0%
$38,800,000

Requirement 5

The rates of return are strong. The rate of return on total assets is 82.5% and the rate of return on
common stockholder’s equity is 75.0%.

© 2016 Pearson Education, Ltd. 17-12

S17-10 Computing EPS and P/E ratio
Learning Objective 4

Requirements
1. Compute earnings per share (EPS) for 2016 for Shine’s. Round to the nearest cent.
2. Compute Shine’s Companies’ price/earnings ratio for 2016. The market price per share of Shine’s
stock is $65.50.
3. What do these results mean when evaluating Shine’s Companies’ profitability?

SOLUTION

Requirement 1

Net income – Preferred dividends

Earnings per
= Weighted average number of common shares
share
outstanding

$29,000,000 – $0
2016: = $29.00 / share
100,000 shares

Requirement 2

Price/earnings Market price per share of common stock

=
ratio Earnings per share

$65.50 per share

2016: = 2.26
$29.00 per share

Requirement 3

Shine’s Companies’ price /earnings ratio for 2016 of 2.26 means that the company’s stock is selling at
2.26 times one year’s earnings. This is low. The high amount of earnings per share would possibly make
the company a good investment opportunity.

© 2016 Pearson Education, Ltd. 17-13

S17-11 Using ratios to reconstruct an income statement
Learning Objective 4

Vintage Mills’s income statement appears as follows (amounts in thousands):

Use the following ratio data to complete Vintage Mills’s income statement:
1. Inventory turnover is 4.70 (beginning Merchandise Inventory was $750; ending Merchandise
Inventory was $710).
2. Profit margin ratio is 0.16.

SOLUTION

VINTAGE MILLS
Income Statement
Year Ended December 31, 2016
Net Sales $ 7,300
Cost of Goods Sold 3,431 (a)
Selling and Admin Expenses 1,700
Interest Expense 709 (b)
Other Expenses 135
Income before Income
$ 1,325
Taxes
Income Tax Expense 157 (c)
Net Income $ 1,168 (d)

a. = Average merchandise inventory × Inventory turnover $730 × 4.70 = $3,431

b. = Net Sales – COGS − S & A – Other Expenses – Income $7,300 – 3,431 – 1,700 –
before Income Taxes 709 – 135 = $1,325
c. = Income before Income Taxes – Net Income $1,325 − $1,168 = $157
d. = Profit Margin Ratio × Net Sales $7,300 × .16 = $1,168

© 2016 Pearson Education, Ltd. 17-14

S17-12 Using ratios to reconstruct a balance sheet
Learning Objective 4

Walsham Mills’s balance sheet appears as follows (amounts in thousands):

Use the following ratio data to complete Walsham Mills’s balance sheet.
a. Current ratio is 0.86.
b. Acid-test ratio is 0.40.

© 2016 Pearson Education, Ltd. 17-15

SOLUTION

WALSHAM MILLS
Balance Sheet
December 31, 2016
Assets Liabilities
Cash $ 60 Total Current Liabilities $ 1,800
Accounts Receivable (a) 660 Long-term Note Payable (e) 1,255
Merchandise Other Long-term Liabilities
725 770
Inventory
Prepaid Expenses (b) 103 Total Liabilities (f) 3,825
Total Current Assets (c) $1,548
Plant Assets, Net (d) 2,952 Stockholders’ Equity
Other Assets 2,000 Stockholders’ Equity 2,675
Total Assets Total Liabilities and
$ 6,500 (g) $ 6,500
Stockholders’ Equity

a. = (Acid-test Ratio × Total Current Liabilities) − Cash (.40 x $1,800) – 60 = 660

b. = Total Current Assets – Cash – Accounts Receivable – ($1,548 – 60 – 660 – 725) =
Merchandise Inventory 103
c. = Current Ratio × Current Liabilities .86 × 1,800 = 1,548
d. = Total Assets – Total Current Assets – Other Assets $6,500 – 1,548 – 2,000 =
2,952
e. = Total Liabilities – Other Long-Term Liabilities – Total $3,825 – 770 – 1,800 = 1,255
Current Liabilities
f. = Total Liabilities and Stockholder’s Equity – $6,500 – 2,367 = 3,825
Stockholder’s Equity
g. = Total Assets = Total Liabilities and Stockholder’s $6,500
Equity

© 2016 Pearson Education, Ltd. 17-16

S17A-13 Preparing a corporate income statement
Learning Objective 5
Appendix 17A

TST Corporation’s accounting records include the following items, listed in no particular order, at
December 31, 2016:

The income tax rate for TST Corporation is 50%.

Prepare TST’s income statement for the year ended December 31, 2016. Omit earnings per share. Use
the multi-step format.

SOLUTION

TST CORPORATION
Income Statement
Year Ended December 31, 2016

Net Sales $ 266,000

Cost of Goods Sold 79,000
Gross Profit 187,000
Operating Expenses 65,000
Operating Income 122,000
Other Revenues and (Expenses): (10,000)
Income Before Income Taxes 112,000
Income Tax Expense 56,000
Income from Continuing Operations 56,000
Discontinued Operations (less applicable tax of $17,250) 17,250
Income before Extraordinary Items 38,750
Extraordinary Item (less applicable tax saving of $8,250) (8,250)
Net Income $ 65,000

© 2016 Pearson Education, Ltd. 17-17

S17A-14 Reporting earnings per share
Learning Objective 5
Appendix 17A

Return to the TST data in Short Exercise S17A-13. TST had 8,000 shares of common stock outstanding
during 2016. TST declared and paid preferred dividends of $4,000 during 2016.
Show how TST reports EPS data on its 2016 income statement.

SOLUTION

TST CORPORATION
Income Statement
Year Ended December 31, 2016

Earnings per Share of Common Stock (8,000 shares outstanding)

Income from Continuing Operations ($112,000 − $56,000) / 8,000 $ 7.00
Discontinued Operations 2.16
Income before Extraordinary Items ($56,000 − $17,250) / 8,000 4.84
Extraordinary Item (1.03)
Net Income ($38,750 − $8,250) / 8,000 $3.81

© 2016 Pearson Education, Ltd. 17-18

Exercises
E17-15 Performing horizontal analysis—income statement
Learning Objective 2
Net Income 25%

Data for Faroun Company follow:

Requirements
Prepare a horizontal analysis of the comparative income statement of Faroun Company. Round
percentage changes to one decimal place

SOLUTION
2014 2013 Amount Percentage

Net sales $350,000 $320,000 $30,000* 9.4%**

Cost of goods sold 240,000 180,000 60,000 33.3
Operating expenses 80,000 100,000 (20,000) (20)
Net income 30,000 40,000 (10,000) (25)

350,000 – 320,000 = 30,000*

30,000 / 320,000 = 0.094 = 9.4%**

E17-16 Computing trend analysis

Learning Objective 2
Year 4 Gross Margin 115.8%

The following selected amounts were extracted from the financial statements of Maram Corporation:

Prepare a trend analysis for net sales, cost of goods sold and gross margin. Round answers to one
decimal place. Use Year 1 as the base year.

© 2016 Pearson Education, Ltd. 17-19

SOLUTION

Year 4 Year 3 Year 2 Year 1

(In percentages)
Net sales* 116.7 113.3 110.0 100.0
Cost of goods sold** 117.2 112.4 108.1 100.0
Gross margin*** 115.8 114.9 113.2 100.0

Year 1: 100  ($150,000 ÷ $150,000)

*

Year 2: 100  ($165,000 ÷ $150,000)

Year 3: 100  ($170,000 ÷ $150,000)
Year 4: 100  ($175,000 ÷ $150,000)
**
Year 1: 100  ($93,000 ÷ $93,000)
Year 2: 100  ($100,500 ÷ $93,000)
Year 3: 100  ($104,500 ÷ $93,000)
Year 4: 100  ($109,000 ÷ $93,000)
***
Year 1: 100  ($57,000 ÷ $57,000)
Year 2: 100  ($64,500 ÷ $57,000)
Year 3: 100  ($65,500 ÷ $57,000)
Year 4: 100  ($66,000 ÷ $57,000)

E17-17 Performing vertical analysis of a balance sheet

Learning Objective 3
Current Assets 35.4%

The comparative condensed balance sheets of Faten Corporation are presented below.

Requirements
Prepare a vertical analysis of the balance sheet data for Faten Corporation in columnar form for 2014.

© 2016 Pearson Education, Ltd. 17-20

SOLUTION

FATEN CORPORATION
Condensed Balance Sheets
December 31, 2014
————————————————————————————————————————
Amount Percent
Assets
Current assets $ 70,000 35.4%
Property, plant, and equipment (net) 94,500 47.7%
Intangibles 33,500 16.9%
Total assets $198,000 100.0%

Liabilities and stockholders' equity

Current liabilities $ 40,800 20.6%
Long-term liabilities 141,000 71.2%
Stockholders' equity 16,200 8.2%
Total liabilities and stockholders' equity $198,000 100.0%

E17-18 Preparing common-size income statements

Learning Objective 3
2014 Net Income 8.57%

Refer to the data presented for Faroun Company in Exercise E17-15.

Requirements
1. Prepare a comparative common-size income statement for Faroun Company using the 2014 and
2013 data. Round percentages to two decimal places.
2. To an investor, how does 2014 compare with 2013? Explain your reasoning.

SOLUTION

2014 2013 2014 2013

Net sales $350,000 $320,000 100% 100%
Cost of goods sold 240,000 180,000 68.57 56.25
Operating expenses 80,000 100,000 22.86 31.25
Net income 30,000 40,000 8.57 12.5

© 2016 Pearson Education, Ltd. 17-21

E17-19 Computing working capital changes
Learning Objective 4
2014 Working Capital $460,000

Data for Nariman Corporation follows:

Compute the dollar amount of change and the percentage of change in Nariman Corporation’s working
capital each year during 2014 and 2013. What do the calculated changes indicate?

SOLUTION

Working capital in $ (2014) = 980,000 – 520,000 = 460,000

Working capital in $ (2013) = 800,000 – 440,000 = 360,000

Working capital in $ (2012) = 660,000 – 350,000 = 310,000

Percentage change (2014) = (460,000 – 360,000) / 360,000 = 0.278

Percentage change (2013) = (360,000 – 310,000) / 310,000 = 0.161

© 2016 Pearson Education, Ltd. 17-22

E17-20 Computing key ratios
Learning Objective 4
g. 36.5 days

Dory Corporation had the following comparative current assets and current liabilities:

During 2014, credit sales and cost of goods sold were $750,000 and $400,000, respectively.

Requirements
Compute the following liquidity measures for 2014:
a. Current ratio.
b. Working capital.
c. Acid-test ratio.
d. Accounts receivable turnover ratio
e. Inventory turnover.
f. Cash ratio
g. Days’ sales in receivables
h. Gross profit percentage

SOLUTION
1. Current ratio = 300,000 / 200,000 = 1.5
2. Working capital = 300,000 – 200,000 = 100,000
3. Acid-test ratio = (60,000 + 40,000 + 55,000) / 200,000 = 0.775
4. Accounts receivable turnover ratio = 750,000 / [(55,000 + 95,000)/2] = 10
5. Inventory turnover = 400,000 / [(110,000 + 90,000)/2] = 4
6. Cash ratio = 60,000 / 200,000 = 0.3
7. Days’ sales in receivables = 365 / 10 = 36.5 days
8. Gross profit margin = (750,000 – 400,000) / 750,000 = 0.4667 = 46.67%

© 2016 Pearson Education, Ltd. 17-23

E17-21 Analyzing the ability to pay liabilities
Learning Objective 4
d. 2014 0.25

Data for Dabbani Company follows:

Compute the following ratios for 2014 and 2013:

a. Current ratio
b. Cash ratio
c. Acid-test ratio
d. Debt ratio
e. Debt to equity ratio

SOLUTION
1. Current ratio = 300,000 / 200,000 = 1.5
2. Working capital = 300,000 – 200,000 = 100,000
3. Acid-test ratio = (60,000 + 40,000 + 55,000) / 200,000 = 0.775
4. Accounts receivable turnover ratio = 750,000 / [(55,000 + 95,000)/2] = 10
5. Inventory turnover = 400,000 / [(110,000 + 90,000)/2] = 4
6. Cash ratio = 60,000 / 200,000 = 0.3
7. Days’ sales in receivables = 365 / 10 = 36.5 days
8. Gross profit margin = (750,000 – 400,000) / 750,000 = 0.4667 = 46.67%

© 2016 Pearson Education, Ltd. 17-24

E17-22 Analyzing profitability
Learning Objective 4
1. 2017 11.6%

Varsity, Inc.’s comparative income statement follows. The 2015 data are given as needed.

Requirements
1. Calculate the profit margin ratio for 2017 and 2016.
2. Calculate the rate of return on total assets for 2017 and 2016.
3. Calculate the asset turnover ratio for 2017 and 2016.
4. Calculate the rate of return on common stockholders’ equity for 2017 and 2016.
5. Calculate the earnings per share for 2017 and 2016.
6. Calculate the 2017 dividend payout on common stock. Assume dividends per share for common
stock are equal to $0.75 per share.
7. Did the company’s operating performance improve or deteriorate during 2017?

© 2016 Pearson Education, Ltd. 17-25

SOLUTION
Requirement 1

Net income
Profit margin ratio =
Net sales

$21,500
2017: = 0.116 = 11.6%
$185,000

$7,000
2016: = 0.046 = 4.6%
$153,000

Requirement 2

Rate of return on total Net income + Interest expense

=
assets Average total assets

($21,500 + $9,500)
2017: = 0.16 = 16.0%
[($188,000 +200,000) / 2]

($7,000 + $10,500)
2016: = 0.098 = 9.8%
[($169,000 + 188,000) / 2]

Requirement 3

Asset turnover Net sales

=
ratio Average total assets

$185,000
2017: = .95 times
[($188,000 + $200,000) / 2]

$153,000
2016: = .86 times
[($169,000 + $188,000) / 2]

Requirement 4

Rate of return on common Net income – Preferred dividends

=
stockholders’ equity Average common stockholders’ equity

$21,500 – $2,000
2017: = 0.217 = 21.7%
[($87,500 + $92,000) / 2]

$7,000 - $2,000
2016: = 0.0597 = 5.9%
[($80,000 + $87,500) / 2]

© 2016 Pearson Education, Ltd. 17-26

E17-22, cont.
Requirement 5

Net income – Preferred dividends

Earnings per
= Weighted average number of common shares
share
outstanding

$21,500 – $2,000
2017: = $0.98 / share
20,000 shares

$7,000 – $2,000
2016: = $0.33 / share
[(20,000 shares + 10,000 shares) / 2]

Requirement 6

Annual dividend per share

Dividend payout =
Earnings per share

$0.75 per share

2016: = 0.765 = 76.5%
$0.98 per share

Requirement 7

The company’s performance improved during 2017 based on an improvement in all ratios evaluated.

© 2016 Pearson Education, Ltd. 17-27

E17-23 Evaluating a stock as an investment
Learning Objective 4
Dividend Yield 2016 1.2%

Data for Regal State Bank follow:

Evaluate the common stock of Regal State Bank as an investment. Specifically, use the three stock ratios
to determine whether the common stock has increased or decreased in attractiveness during the past
year.

© 2016 Pearson Education, Ltd. 17-28

SOLUTION

Net income – Preferred dividends

Earnings per
= Weighted average number of common shares
share
outstanding

$56,000 – $16,000
2016: = $0.50 / share
80,000 shares

$47,200 – $16,000
2015: = $0.39 / share
80,000 shares

Market price per share of common stock

Price/earnings ratio =
Earnings per share

$16.50 per share

2016: = 33.00
$0.50 per share

$11.00 per share

2015: = 28.21
$0.39 per share

Annual dividend per share

Dividend yield =
Market price per share

($16,000 / 80,000 shares) =

$.20 per share
2016: = 0.012 = 1.2%
$16.50 per share

($16,000 / 80,000 shares) =

$.20 per share
2015: = 0.018 = 1.8%
$11.00 per share

Annual dividend per share

Dividend payout =
Earnings per share

$.20 per share

2016: = 0.40 = 40%
$.50 per share

© 2016 Pearson Education, Ltd. 17-29

 $.20 per share
2015: = 0.513 = 51.3%
$.39 per share

The stock’s attractiveness increased during 2016, as shown by the increase in the price/earnings ratio. If
an investor is looking at the stock for dividend potential, then the stock is less attractive than last year;
both the dividend yield and dividend payout decreased.

© 2016 Pearson Education, Ltd. 17-30

E17-24 Using ratios to reconstruct a balance sheet
Learning Objective 4
Total Assets $2,000,000

The following data are adapted from the financial statements of Jim’s Shops, Inc.:

Prepare Jim’s condensed balance sheet as of December 31, 2016.

SOLUTION

JIM’S SHOPS INC.

Balance Sheet
December 31, 2016
Assets Liabilities
Total Current Assets $1,054,000 Total Current Liabilities $ 680,000
Plant Assets $2,546,00 Long-term Liabilities
800,000
0
Less: Accumulated
Depreciation 1,600,000 Total Liabilities 1,480,000
Plant Assets, Net 946,000 Stockholders’ Equity 520,000
Total Liabilities and
Total Assets $ 2,000,000 Stockholder’s Equity $2,000,00

Current Liabilities = Current Assets / Current Ratio $1,054,000 / 1.55 = $680,000

Long-term = Total Liabilities – Current $1,480,000 – 680,000 = $800,000
Liabilities Liabilities
Total Assets = Total Liabilities / Debt Ratio $1,480,000 / .74 = $2,00,000
Plant Assets, Net = Total Assets – Total Current $2,00,000 – 1,054,000 = 946,000
Assets
Plant Assets = Plant Assets, Net + $946,000 + 1,600,000 = 2,546,000
Accumulated Depreciation

© 2016 Pearson Education, Ltd. 17-31

E17A-25 Preparing a multi-step income statement
Learning Objective 5
Appendix 17A
Net Income $155,400

Cloud Photographic Supplies, Inc.’s accounting records include the following for 2016:

Prepare Cloud’s multi-step income statement for 2016. Omit earnings per share.

SOLUTION

CLOUD PHOTOGRAPHIC SUPPLIES, INC.

Income Statement
Year Ended December 31, 2016

Sales $ 575,000
Cost of Goods Sold 255,000
Gross Profit 320,000
Operating Expenses (Including Income Tax) 140,000
Income from Continuing Operations 180,000
Discontinued Operations (less applicable tax of $6,000) (9,000)
Income before Extraordinary Items 171,000
Extraordinary Item (less applicable tax saving of $10,400) (15,600)
Net Income $ 155,400

© 2016 Pearson Education, Ltd. 17-32

E17A-26 Computing earnings per share
Learning Objective 5
Appendix 17A
Net Income $1,800

Rafael Corporation had $5,000 of retained earnings on its balance sheet at the end of 2013. One year
later, Rafael had $6,000 of retained earnings on its balance sheet. Rafael has 1000 shares of common
stock outstanding, and it paid a dividend of $0.80 per share in 2014.

Compute Rafael’s earnings per share for 2014.

SOLUTION

The company paid a dividend of $0.80 per share. The total amount paid was:

$0.80 per share  1,000 shares = $800

The change in retained earnings (the amount of money the company reinvests) is equal to NI – Div.
($6,000 – $5,000) = NI – $800
$1,000 + $800 = NI
$1,800 = NI.

EPS = NI/Shares
= $1,800/1,000
= $1.80.

Problems (Group A)
P17-27A Computing trend analysis and return on common equity
Learning Objectives 2, 4
2. 2017 15.9%

Net sales revenue, net income, and common stockholders’ equity for Shawnee Mission Corporation, a
manufacturer of contact lenses, follow for a four-year period.

Requirements
1. Compute trend analyses for each item for 2015–2017. Use 2014 as the base year, and round to the
nearest whole percent.
2. Compute the rate of return on common stockholders’ equity for 2015–2017, rounding to three
decimal places.

© 2016 Pearson Education, Ltd. 17-33

SOLUTION

Requirement 1

2017 2016 2015 2014

Net Sales Revenue $ 764,000 $ 702,000 $ 642,000 $ 665,000
Trend Percentages 115% 106% 97% 100%
Net Income $57,000 $45,000 $38,000 $47,000
Trend Percentages 121% 96% 81% 100%
Ending Common
Stockholder’s Equity $362,000 $356,000 $328,000 $294,000
Trend Percentages 123% 121% 112% 100%

Requirement 2

Rate of return on common Net income – Preferred dividends

=
stockholders’ equity Average common stockholders’ equity

$57,000 – $0
2017: = 0.159 = 15.9%
[($356,000 + $362,000) / 2]

$45,000 - $0
2016: = 0.132 = 13.2%
[($328,000 + $356,000) / 2]

$38,000 - $0
2015: = 0.122 = 12.2%
[($294,000 + $328,000) / 2]

© 2016 Pearson Education, Ltd. 17-34

P17-28A Performing vertical analysis
Learning Objective 2
1. Net Income 10.7%

The Roost Department Stores, Inc. chief executive officer (CEO) has asked you to compare the
company’s profit performance and financial position with the averages for the industry. The CEO has
given you the company’s income statement and balance sheet as well as the industry average data for
retailers.

Requirements
1. Prepare a vertical analysis for Roost for both its income statement and balance sheet.
2. Compare the company’s profit performance and financial position with the average for the industry.

© 2016 Pearson Education, Ltd. 17-35

SOLUTION

Requirement 1

ROOST DEPARTMENT STORES, INC.

Income Statement
Year Ended December 31, 2016
Percent of
Total
Net Sales $
779,000 100.0%
Cost of Goods Sold 526,60
4 67.6
Gross Profit 252,39
6 32.4
Operating Expenses 163,59
0 21.0
Operating Income 88,806 11.4
Other Expenses 5,45
3 0.7
Net Income $
83,353 10.7%

ROOST DEPARTMENT STORES, INC.

Balance Sheet
December 31, 2016
Percent of
Total
Current Assets $ 316,780 67.4%
Fixed Assets, Net 120,320 25.6
Intangible Assets, Net 7,990 1.7
Other Assets 24,910 5.3
Total Assets $ 470,000 100.0%

Current Liabilities $ 217,140 46.2%

Long-term Liabilities 104,430 22.2
Total Liabilities 321,480 68.4
Stockholders’ Equity 148,520 31.6
Total Liabilities and Stockholders’ Equity $ 470,000 100.0%

Requirement 2

Roost’s gross profit percentage and profit margin ratio are both less than the industry average, which
indicates a(n) unfavorable profit performance as compared with industry. They have a slightly higher
investment in fixed and intangible assets than the industry average. The company’s percentage of debt to

© 2016 Pearson Education, Ltd. 17-36

total assets is slightly higher than the industry, which would generally indicate a weaker financial
position than the average for the industry.

© 2016 Pearson Education, Ltd. 17-37

Note: Problem P17-28A must be completed before attempting Problem P17-29A.

P17-29A Preparing common-size statements, analysis of profitability and financial position,

comparison with the industry, and using ratios to evaluate a company
Learning Objectives 3, 4
2. Gross Profit Percentage 32.4%

Consider the data for Roost Department Stores presented in Problem P17-28A.

Requirements
1. Prepare a common-size income statement and balance sheet for Roost. The first column of each
statement should present Roost’s common-size statement, and the second column, the industry
averages.
2. For the profitability analysis, compute Roost’s (a) gross profit percentage and (b) profit margin ratio.
Compare these figures with the industry averages. Is Roost’s profit performance better or worse than
the industry average?
3. For the analysis of financial position, compute Roost’s (a) current ratio and (b) debt to equity ratio.
Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47,
and the debt to equity industry average is 1.83. Is Roost’s financial position better or worse than the
industry averages?

© 2016 Pearson Education, Ltd. 17-38

SOLUTION

Requirement 1

ROOST DEPARTMENT STORES, INC.

Common-Size Income Statement
Year Ended December 31, 2016
Roost Industry
Average Average
Net Sales 100.0% 100.0%
Cost of Goods Sold 67.6 65.8
Gross Profit 32.4 34.2
Operating Expenses 21.0 19.7
Operating Income 11.4 14.5
Other Expenses 0.7 0.4
Net Income 10.7% 14.1%

ROOST DEPARTMENT STORES, INC.

Common-Size Balance Sheet
December 31, 2016
Roost Industry
Average Average
Current Assets 67.4% 70.9%
Fixed Assets, Net 25.6 23.6
Intangible Assets, Net 1.7 0.8
Other Assets 5.3 4.7
Total Assets 100.0% 100.0%

Current Liabilities 46.2% 48.1%

Long-term Liabilities 22.2 16.6
Total Liabilities 68.4 64.7
Stockholders’ Equity 31.6 35.3
Total Liabilities and Stockholders’ Equity 100.0% 100.0%

Requirement 2

Roost Industry
Gross Profit Percentage $252,396 / $779,000 = 32.4% 34.2%
Profit Margin Ratio $83,353 / $779,000 = 10.7% 14.1%

Roost’s gross profit percentage and profit margin ratio are both less than the industry average.

© 2016 Pearson Education, Ltd. 17-39

P17-29A, cont.
Requirement 3

Roost Industry
Current Ratio $316,780 / $217,140 = 1.46 1.47
Debt to Equity $321,480 / $148,520 = 2.16 1.83

Roost’s current ratio is close to the industry average, but the debt to equity ratio is worse.

P17-30A Determining the effects of business transactions on selected ratios

Learning Objective 4
1. Current Ratio 1.49

Financial statement data of Off Road Traveler Magazine include the following items:

Requirements
1. Compute Off Road Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to
two decimal places, and use the following format for your answer:

2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each
transaction separately.
a. Purchased merchandise inventory of $48,000 on account.
b. Borrowed $127,000 on a long-term note payable.
c. Issued 56,000 shares of common stock, receiving cash of $106,000.
d. Received cash on account, $5,000.

© 2016 Pearson Education, Ltd. 17-40

SOLUTION

Requirement 1

Current Assets: Current Liabilities:

Cash $ 23,000 Accounts Payable $103,000
Accounts Receivable 80,000 Accrued Liabilities 38,000
Merchandise Inventory 184,000 Short-Term Notes Payable 51,000
Total Current Assets $287,000 Total Current Liabilities 192,000
Long-Term Liabilities 224,000
Total Liabilities $416,000

Current Ratio Debt Ratio Earnings per Share

$287,000 / $192,000 = 1.49 $416,000 / $637,000 = 0.65 $74,000 / 50,000 = 1.48

Requirement 2

Current Ratio Debt Ratio Earnings per Share

a. ($287,000 + 48,000) / ($416,000 + 48,000) /
($192,000 + 48,000) = 1.40 ($637,000 + 48,000) = 0.68 $74,000 / 50,000 = $1.48
b. ($287,000 + 127,000) / ($416,000 + 127,000) /
$192,000 = 2.16 ($637,000 + 127,000) = 0.71 $74,000 / 50,000 = $1.48
c. ($287,000 + 106,000) / $416,000/ $74,000 /
$192,000 = 2.05 ($637,000 + 106,000) = 0.56 (50,000 + 5,000) = $1.35
d. $287,000 / $192,000 = 1.49 $416,000 / $637,000 = 0.65 $74,000 / 60,000 = $1.48

P17-31A Using ratios to evaluate a stock investment

Learning Objective 4
1. 2016 e. 49%

Comparative financial statement data of Dangerfield, Inc. follow:

© 2016 Pearson Education, Ltd. 17-41

1. Market price of Dangerfield’s common stock: $76.67 at December 31, 2016, and $37.20 at
December 31, 2015.
2. Common shares outstanding: 13,000 during 2016 and 11,000 during 2015 and 2014.
3. All sales are on credit.

Requirements
1. Compute the following ratios for 2016 and 2015:
a. Current ratio
b. Cash ratio
c. Times-interest-earned ratio
d. Inventory turnover
e. Gross profit percentage
f. Debt to equity ratio
g. Rate of return on common stockholders’ equity
h. Earnings per share of common stock
i. Price/earnings ratio
2. Decide (a) whether Dangerfield’s ability to pay debts and to sell inventory improved or deteriorated
during 2016 and (b) whether the investment attractiveness of its common stock appears to have
increased or decreased.

© 2016 Pearson Education, Ltd. 17-42

SOLUTION

Requirement 1

2016 2015
Total current assets $365,000 $377,000
a. = 1.60 = 1.56
Total current liabilities $228,000 $242,000
Cash + Cash
$94,000 + 0 $93,000 + 0
b. equivalents = .41 = .38
$228,000 $242,000
Total current liabilities
Net income + Income
$57,000 + $37,000 + 25,000
tax expense + Interest
c. 23,000 + 10,000 = 9.00 + 16,000 = 4.88
expense
$10,000 $16,000
Interest expense
Cost of Goods Sold $237,000 $214,000
d. Average Merchandise ($145,000 + = 1.55 ($160,000 + = 1.16
Inventory 160,000) / 2 210,000) / 2
Gross Profit $228,000 $214,000
e. = 49% = 50%
Net Sales $465,000 $428,000
Total Liabilities $342,000 $340,000
f. = 1.43 = 1.58
Total Equity $240,000 $215,000
Net income – $57,000 – (3% × $37,000 – (3% ×
Preferred dividends 96,000) 96,000)
g. = 41.2% = 32.5%
Average Common ($144,000 + ($119,000 +
Stockholder’s Equity 119,000) / 2 91,000) / 2
Net income –
Preferred dividends $57,000 – 2,880
$37,000 – 2,880
h. Weighted average (13,000 + = $4.51 = $3.10
11,000
number of common 11,000) / 2
shares outstanding
Market Price per share
$76.67 $37.20
i. of common stock = = 12.0
$4.51 17 $3.10
Earnings Per Share

Requirement 2

a. Dangerfield is in a better position to pay debt in 2016 than in 2015. The current ratio, cash ratio,
and times-interest-earned ratio all improved. The inventory turnover improved, and there was a
slight increase in gross profit percentage.
b. The attractiveness of Dangerfield’s stock has improved in 2016. The rate of return on common
stockholder’s equity increased as well as the earnings per share and price/earnings ratio.

© 2016 Pearson Education, Ltd. 17-43

P17-32A Using ratios to decide between two stock investments
Learning Objective 4
1. Best Digital e. $4.67

Assume that you are purchasing an investment and have decided to invest in a company in the digital
phone business. You have narrowed the choice to Best Digital Corp. and Very Zone, Inc. and have
assembled the following data.

Selected income statement data for the current year:

Selected balance sheet and market price data at the end of the current year:

Selected balance sheet data at the beginning of the current year:

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good
shape financially. Assume that you have analyzed all other factors and that your decision depends on the
results of ratio analysis.

© 2016 Pearson Education, Ltd. 17-44

Requirements
1. Compute the following ratios for both companies for the current year:
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy.

SOLUTION

Requirement 1

Best Digital, Corp. Very Zone, Inc.

Cash + Cash
equivalents + Short- ($23,000 + 0 + ($21,000 + 0 +
a. term Investments + 38,000 + 37,000) = .98 15,000 + 47,000) = .84
Accounts Receivable $100,000 $99,000
Total current liabilities
Cost of Goods Sold $207,000 $259,000
b. Average Merchandise ($65,000 + = 2.84 ($97,000 + = 2.77
Inventory 81,000) / 2 90,000) / 2
365 365 365
Net Credit Sales / $417,925 / $ 493,845 /
c. = 34 days = 35 days
(Average net Accounts ($37,000 + ($47,000 +
Receivable) 42,000) / 2 49,000) / 2
Total Liabilities $100,000 $131,000
d. = 38.3% = 40.3%
Total Assets $261,000 $325,000
Net income –
Preferred dividends
$56,000 − 0 $72,000 − 0
e. Weighted average = $4.67 = $4.24
12,000 17,000
number of common
shares outstanding
Market Price per share
$70.05 $97.52
f. of common stock = 15.0 = 23.0
$4.67 $4.24
Earnings Per Share
Annual Dividend per
$.60 $.40
g. share = 13.0% = 9.0%
$4.67 $4.24
Earnings Per Share

© 2016 Pearson Education, Ltd. 17-45

P17-32A, Cont.
Requirement 2

Best Digital’s would be the better investment based on the strategy of a low price earnings ratio, with
financial strength. Best Digitals price earnings ratio is only 15.0, compared to 23.0 for Very Zone, and
Best Digital’s acid-test ratio and debt ratio are better than Very Zone. Best Digital is earning more per
share and paying out a higher dividend percentage.

P17A-33A Preparing an income statement

Learning Objective 5
Appendix 17A
Net Income $108,600

The following information was taken from the records of Grey Motorsports, Inc. at November 30, 2016:

Prepare a multi-step income statement for Grey Motorsports for the fiscal year ended November 30,
2016. Include earnings per share.

© 2016 Pearson Education, Ltd. 17-46

SOLUTION

GREY MOTORSPORTS, INC.

Income Statement
Year Ended November 30, 2016

Net Sales Revenue $ 797,000

Cost of Goods Sold 440,000
Gross Profit 357,000
Operating Expenses:
Selling Expenses $125,000
Administrative Expenses 95,000 220,000
Operating Income 137,000
Other Revenues and (Expenses): 0
Income Before Income Taxes 137,000
Income Tax Expense 35,000
Income from Continuing Operations 102,000
Discontinued Operations (less applicable tax of $4,400) 6,600
Net Income $ 108,600

Earnings per Share of Common Stock (30,000 shares outstanding)

Income from Continuing Operations $ 2.90
Income from Discontinued Operations 0.22
Net Income $ 3.12

Common
Shares
Outstanding
Earnings per Share of Common Stock
Income from Continuing Operations $102,000 − $15,000 =
$87,000 / 30,000 $ 2.90
Income from Discontinued
Operations $6,600 / 30,000 0.22
Net Income $108,600 − $15,000 = $93,600 / 30,000 $ 3.12
Preferred Dividends 5,000 shares × $3 = $15,000

© 2016 Pearson Education, Ltd. 17-47

Problems (Group B)
P17-34B Computing trend analysis and return on common equity
Learning Objectives 2, 4
2. 2016 10.2%

Net sales revenue, net income, and common stockholders’ equity for Atkinson Mission Corporation, a
manufacturer of contact lenses, follow for a four-year period.

Requirements
1. Compute trend analyses for each item for 2015–2017. Use 2014 as the base year, and round to the
nearest whole percent.
2. Compute the rate of return on common stockholders’ equity for 2015–2017, rounding to three
decimal places.

SOLUTION

Requirement 1

2017 2016 2015 2014

Net Sales Revenue $ 763,000 $ 704,000 $ 641,000 $ 661,000
Trend Percentages 115% 107% 97% 100%
Net Income $57,000 $35,000 $33,000 $43,000
Trend Percentages 133% 81% 77% 100%
Ending Common
Stockholder’s Equity $370,000 $358,000 $330,000 $298,000
Trend Percentages 124% 120% 111% 100%

Requirement 2

Rate of return on common Net income – Preferred dividends

=
stockholders’ equity Average common stockholders’ equity

$57,000 – $0
2017: = 0.157 = 15.7%
[($370,000 + $358,000) / 2]

$35,000 − $0
2016: = 0.102 = 10.2%
[($358,000 + $330,000) / 2]

$33,000 − $0
2015: = 0.105 = 10.5%
[($330,000 + $298,000) / 2]

P17-35B Performing vertical analysis

© 2016 Pearson Education, Ltd. 17-48
Learning Objective 2
1. Net Income 10.9%

The Russell Department Stores, Inc. chief executive officer (CEO) has asked you to compare the
company’s profit performance and financial position with the averages for the industry. The CEO has
given you the company’s income statement and balance sheet as well as the industry average data for
retailers.

Requirements
1. Prepare a vertical analysis for Russell for both its income statement and balance sheet.
2. Compare the company’s profit performance and financial position with the average for the industry.

© 2016 Pearson Education, Ltd. 17-49

SOLUTION

Requirement 1

RUSSELL DEPARTMENT STORES, INC.

Income Statement
Year Ended December 31, 2016
Percent of
Total
Net Sales $ 780,000 100.0%
Cost of Goods Sold 528,060 67.7
Gross Profit 251,940 32.3
Operating Expenses 159,900 20.5
Operating Income 92,040 11.8
Other Expenses 7,020 0.9
Net Income $ 85,020 10.9%

P17-35B
Requirement 1, cont.

RUSSELL DEPARTMENT STORES, INC.

Balance Sheet
December 31, 2016
Percent of
Total
Current Assets $ 323,520 67.4%
Fixed Assets, Net 124,800 26.0
Intangible Assets, Net 8,160 1.7
Other Assets 23,520 4.9
Total Assets $ 480,000 100.0%

Current Liabilities $ 221,760 46.2%

Long-term Liabilities 108,480 22.6
Total Liabilities 330,240 68.8
Stockholders’ Equity 149,760 31.2
Total Liabilities and Stockholders’ Equity $ 480,000 100.0%

Requirement 2

Russell’s gross profit percentage and profit margin ratio are both less than the industry average, which
indicates a(n) unfavorable profit performance as compared with the industry. They have a slightly higher
investment in fixed and intangible assets than the industry average. The percentage of debt to total assets
is higher than the industry average, which would generally indicate a weaker financial position than that
of the average for the industry.

© 2016 Pearson Education, Ltd. 17-50

Note: Problem P17-35B must be completed before attempting Problem P17-36B.

P17-36B Preparing common-size statements, analysis of profitability and financial position,

comparison with the industry, and using ratios to evaluate a company
Learning Objectives 3, 4
1. Current Assets 67.4%

Consider the data for Russell Department Stores presented in Problem P17-35B.

Requirements
1. Prepare a common-size income statement and balance sheet for Russell. The first column of each
statement should present Russell’s common-size statement, and the second column, the industry
averages.
2. For the profitability analysis, compute Russell’s (a) gross profit percentage and (b) profit margin
ratio. Compare these figures with the industry averages. Is Russell’s profit performance better or
worse than the industry average?
3. For the analysis of financial position, compute Russell’s (a) current ratio and (b) debt to equity ratio.
Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47,
and the debt to equity industry average is 1.83. Is Russell’s financial position better or worse than
the industry averages?

SOLUTION

Requirement 1

RUSSELL DEPARTMENT STORES, INC.

Common-Size Income Statement
Year Ended December 31, 2016
Specialty Industry
Average Average
Net Sales 100.0% 100.0%
Cost of Goods Sold 67.6 65.8
Gross Profit 32.4 34.2
Operating Expenses 20.9 19.7
Operating Income 11.5 14.5
Other Expenses 0.6 0.4
Net Income 10.9% 14.1%

© 2016 Pearson Education, Ltd. 17-51

P17-36B
Requirement 1, cont.

RUSSELL DEPARTMENT STORES, INC.

Common-Size Balance Sheet
December 31, 2016
Russell Industry
Average Average
Current Assets 67.4% 70.9%
Fixed Assets, Net 26.0 23.6
Intangible Assets, Net 1.7 0.8
Other Assets 4.9 4.7
Total Assets 100.0% 100.0%

Current Liabilities 46.2% 48.1%

Long-term Liabilities 22.6 16.6
Total Liabilities 68.8 64.7
Stockholders’ Equity 31.2 35.3
Total Liabilities and Stockholders’ Equity 100.0% 100.0%

Requirement 2

Russell Industry
Gross Profit Percentage $251,940 / $780,000 = 32.3% 34.2%
Profit Margin Ratio $85,020 / $780,000 = 10.9% 14.1%

Russell’s gross profit percentage and profit margin ratio are both less than the industry average.

Requirement 3

Russell Industry
Current Ratio $323,520 / $221,760 = 1.46 1.47
Debt to Equity $330,240 / $149,760 = 2.21 1.83

Russell’s current ratio is close to the industry average, but the debt to equity ratio is worse.

© 2016 Pearson Education, Ltd. 17-52

P17-37B Determining the effects of business transactions on selected ratios
Learning Objective 4
1. Earnings per Share $1.83

Financial statement data of Yankee Traveler’s Magazine include the following items:

Requirements
1. Compute Yankee Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two
decimal places, and use the following format for your answer:

2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each
transaction separately.
a. Purchased merchandise inventory of $42,000 on account.
b. Borrowed $123,000 on a long-term note payable.
c. Issued 4,000 shares of common stock, receiving cash of $106,000.
d. Received cash on account, $7,000.

© 2016 Pearson Education, Ltd. 17-53

SOLUTION

Requirement 1

Current Assets: Current Liabilities:

Cash Accounts Payable

$ 21,000 $102,000
Accounts Receivable Accrued Liabilities
82,000 38,000
Merchandise Inventory Short-Term Notes Payable
183,000 46,000
Total Current Assets Total Current Liabilities
$286,000 186,000
Long-Term Liabilities
222,000
Total Liabilities
$408,000

Current Ratio Debt Ratio Earnings per Share

$286,000 / $186,000 = 1.54 $408,000 / $634,000 = 0.64 $73,000 / 40,000 = $1.83

Requirement 2

Current Ratio Debt Ratio Earnings per Share

a. ($286,000 + 42,000) / ($408,000 + 42,000) /
($186,000 + 42,000) = 1.44 ($634,000 + 42,000) = 0.67 $73,000 / 40,000 = $1.83
b. ($286,000 + 123,000) / ($408,000 + 123,000) /
$186,000 = 2.20 ($634,000 + 123,000) = 0.70 $73,000 / 40,000 = $1.83
c. ($286,000 + 106,000) / $408,000/ $73,000 /
$186,000 = 2.11 ($634,000 + 106,000) = 0.55 (40,000 + 4,000) = $1.66
d. $286,000 / $186,000 = 1.54 $408,000 / $634,000 = 0.64 $73,000 / 40,000 = $1.83

© 2016 Pearson Education, Ltd. 17-54

P17-38B Using ratios to evaluate a stock investment
Learning Objective 4
1. 2015 d. 1.15

Comparative financial statement data of Canfield, Inc. follow:

1. Market price of Canfield’s common stock: $84.32 at December 31, 2016, and $51.75 at December
31, 2015.
2. Common shares outstanding: 10,000 during 2016 and 9,000 during 2015 and 2014.
3. All sales are on credit.

© 2016 Pearson Education, Ltd. 17-55

Requirements
1. Compute the following ratios for 2016 and 2015:
a. Current ratio
b. Cash ratio
c. Times-interest-earned ratio
d. Inventory turnover
e. Gross profit percentage
f. Debt to equity ratio
g. Rate of return on common stockholders’ equity
h. Earnings per share of common stock
i. Price/earnings ratio
2. Decide (a) whether Canfield’s ability to pay debts and to sell inventory improved or deteriorated
during 2016 and (b) whether the investment attractiveness of its common stock appears to have
increased or decreased.

© 2016 Pearson Education, Ltd. 17-56

SOLUTION

Requirement 1

2017 2016
Total current assets $366,000 $382,000
a. = 1.64 = 1.55
Total current liabilities $223,000 $246,000
Cash + Cash
$99,000 + 0 $96,000 + 0
b. equivalents = .44 = .39
$223,000 $246,000
Total current liabilities
Net income + Income
$54,000 + $35,000 + 25,000
tax expense + Interest
c. 19,000 +12,000 = 7.08 + 14,000 = 5.29
expense
$12,000 $14,000
Interest expense
Cost of Goods Sold $237,000 $215,000
d. Average Merchandise ($145,000 + = 1.54 ($163,000 + = 1.15
Inventory 163,000) / 2 210,000) / 2
Gross Profit $222,000 $209,000
e. = 48.4% = 49.3%
Net Sales $459,000 $424,000
Total Liabilities $343,000 $341,000
f. = 1.42 = 1.54
Total Equity $242,000 $221,000
Net income – $54,000 – (4% × $35,000 – (4% ×
Preferred dividends 98,000) 98,000)
g. = 37.5% = 29.9%
Average Common ($144,000 + ($123,000 +
Stockholder’s Equity 123,000) / 2 85,000) / 2
Net income –
Preferred dividends $50,080
$31,080
h. Weighted average (10,000 + 9,000) = $5.27 = $3.45
9,000
number of common /2
shares outstanding
Market Price per share
$84.32 $51.75
i. of common stock = 16 = 15
$5.27 $3.45
Earnings Per Share

Requirement 2

a. Canfield is in a better position to pay debt in 2016 than in 2015. The current ratio, cash ratio, and
times-interest-earned ratio all improved. The inventory turnover improved, but was offset by a
decrease in the gross profit percentage.
b. The attractiveness of Canfield’s stock has improved in 2016. The rate of return on common
stockholder’s equity increased as well as the earnings per share and price/earnings ratio.

© 2016 Pearson Education, Ltd. 17-57

P17-39B Using ratios to decide between two stock investments
Learning Objective 4
1c. Red Zone 36 days

Assume that you are purchasing an investment and have decided to invest in a company in the digital
phone business. You have narrowed the choice to Digital Plus Corp. and Red Zone, Inc. and have
assembled the following data.

Selected income statement data for the current year:

Selected balance sheet and market price data at the end of the current year:

Selected balance sheet data at the beginning of the current year:

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good
shape financially. Assume that you have analyzed all other factors and that your decision depends on the
results of ratio analysis.

© 2016 Pearson Education, Ltd. 17-58

Requirements
1. Compute the following ratios for both companies for the current year:
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy.

SOLUTION

Requirement 1

Digital Plus Red Zone

Cash + Cash
equivalents + Short- ($24,000 + 0 + ($15,000 + 0 +
a. term Investments + 37,000 + 38,000) = .97 14,000 + 46,000) = 0.79
Accounts Receivable $102,000 $95,000
Total current liabilities
Cost of Goods Sold $207,000 $259,000
b. Average Merchandise ($65,000 + = 2.84 ($99,000 + = 2.76
Inventory 81,000) / 2 89,000) / 2
365 365 365
Net Credit Sales / $416,830 / $ 497,130 /
c. = 35 days = 36 days
(Average net Accounts ($38,000 + ($46,000 +
Receivable) 42,000) / 2 51,000) / 2
Total Liabilities $102,000 $132,000
d. = 38.8% = 40.7%
Total Assets $181,000 $188,000
Net income –
Preferred dividends
$54,000 − 0 $76,000 − 0
e. Weighted average = $5.40 = $4.75
10,000 16,000
number of common
shares outstanding
Market Price per share
$86.40 $104.50
f. of common stock = 16 = 22
$5.40 $4.75
Earnings Per Share
Annual Dividend per
$1.20 $1.00
g. share = 22% = 21%
$5.40 $4.75
Earnings Per Share

© 2016 Pearson Education, Ltd. 17-59

P17-39B, Cont.
Requirement 2

Digital Plus would be the better investment based on the strategy of a low price earnings ratio, with
financial strength. Digital Plus’ price earnings ratio is only 16 compared to 22 for Red Zone, and
Digital’s acid-test ratio, inventory turnover, and days’ sales in receivables are better than Red Zone. On
the majority of the ratios, Digital Plus looks better than Red Zone.

P17A-40B Preparing an income statement

Learning Objective 5
Appendix 17A
Net Income $149,800

The following information was taken from the records of Shepard Motorsports, Inc. at November 30,
2016:

Prepare a multi-step income statement for Shepard Motorsports for the fiscal year ended November 30,
2016. Include earnings per share.

© 2016 Pearson Education, Ltd. 17-60

SOLUTION

SHEPARD MOTORSPORTS, INC.

Income Statement
Year Ended November 30, 2016

Net Sales Revenue $ 860,600

Cost of Goods Sold 425,000
Gross Profit 435,600
Operating Expenses:
Selling Expenses $ 150,000
Administrative Expenses 95,000 245,000
Operating Income 190,600
Other Revenues and (Expenses): 0
Income Before Income Taxes 190,600
Income Tax Expense 45,000
Income from Continuing Operations 145,600
Discontinued Operations (less applicable tax of $2,800) 4,200
Net Income $ 149,800

Earnings per Share of Common Stock (28,000 shares outstanding)

Income from Continuing Operations $ 2.95
Income from Discontinued Operations 0.15
Net Income $ 3.10

Common
Shares
Outstanding
Earnings per Share of Common Stock
Income from Continuing Operations $145,600 − $63,000 =
$82,600 / 28,000 $ 2.95
Income from Discontinued
Operations $4,200 / 28,000 0.15
Net Income $149,800 − $63,000 = $86,800 / 28,000 $ 3.10
Preferred Dividends 9,000 shares × $7 = $63,000

© 2016 Pearson Education, Ltd. 17-61

Continuing Problem
P17-41 Using ratios to evaluate a stock investment

This problem continues the Daniels Consulting situation from Problem P16-46 of Chapter 16. Assuming
Daniels Consulting’s net income for the year was $90,537 and knowing that the current market price of
Daniels’s stock is $200 per share, calculate the following ratios for 2017 for the company:
a. Current ratio
b. Cash ratio
c. Debt ratio
d. Debt to equity ratio
e. Earnings per share
f. Price/earnings ratio
g. Rate of return on common stockholders’ equity

© 2016 Pearson Education, Ltd. 17-62

SOLUTION

Total current assets $1,457,524 + $25,700 + $2,150 $1,485,374

a. = 43.56
Total current liabilities $7,300 + $1,800 + $25,000 $34,100
Cash + Cash equivalents $1,457,524 + $0 $1,457,524
b. = 42.74
Total current liabilities $7,300 + $1,800 + $25,000 $34,100
Total Liabilities $1,333,238
c. = 85%
Total Assets $1,568,478
Total Liabilities $1,333,238
d. = 5.67
Total Equity $235,240
Net income – Preferred
dividends
$90,537 − 0 $90,537 $1.57
e. Weighted average =
(115,240 + 240) / 2 57,740
number of common
shares outstanding
Market Price per share of
$200.00 127.34
f. common stock =
$1.57
Earnings Per Share
Net income – Preferred
dividends $90,537 – 0 $90,537
g. = 68%
Average Common ($235,240 + $31,003) / 2 $133,122
Stockholder’s Equity

© 2016 Pearson Education, Ltd. 17-63

Comprehensive Problem for Chapter 17
Analyzing a company for its investment potential
In its annual report, WRM Athletic Supply, Inc. includes the following five-year financial summary:

Requirements
1. Analyze the company’s financial summary for the fiscal years 2016–2020 to decide whether to
invest in the common stock of WRM. Include the following sections in your analysis, and fully
explain your final decision.
a. Trend analysis for net sales and net income (use 2016 as the base year).
b. Profitability analysis.
c. Evaluation of the ability to sell merchandise inventory (WRM uses the LIFO method).
d. Evaluation of the ability to pay debts.
e. Evaluation of dividends.

© 2016 Pearson Education, Ltd. 17-64

SOLUTION

Requirement 1

2020 2019 2018 2017 2016

Net Sales $ 290,000 $ 215,000 $ 194,000 $165,000 $139,000
Trend Percentages 209% 155% 140% 119% 100.0%
Net Income $26,834 $12,024 $8,866 $5,677 $4,082
Trend Percentages 657% 295% 217% 139% 100.0%

Trends in net sales and net income are both upward, which is positive.

Requirement 2

2020 2019 2018 2017 2016

Net Income $ 26,834 $12,024 $ 8,866 $5,677 $4,082
Net Sales $290,000 $215,000 $194,000 $165,000 $139,000
Profit Margin Ratio 9.3% 5.6% 4.6% 3.4% 2.9%
(Formula k)

Earnings per share $1.80 $1.50 $1.40 $1.20 $0.98

(Formula n)
Rate of return on assets 27.7 14.6 12.2 9.3 8.3
(Formula l)
Rate of return on common
stockholders’ equity 54.9 26.9 22.6 15.9 15.4
(Formula m)

The profit margin ratio, return on assets and return on equity are increasing over the five years
examined. The return on assets and the return on equity are both very respectful. The earnings per
share is increasing over time so the stock is attractive.

Requirement 3

2020 2019 2018 2017 2016

Net Sales $290,000 $215,000 $194,000 $165,000 $139,000
Cost of Goods Sold 218,660 163,400 150,350 129,360 110,227
Gross Profit 71,340 51,600 43,650 35,640 28,773
Gross Profit Percentage 24.6% 24.0% 22.5% 21.6% 20.7%
(Formula g)

Beginning Inventory 22,500 21,400 19,900 17,100 16,400

Ending Inventory 24,200 22,500 21,400 19,900 17,100
Average Inventory 23,350 21,950 20,650 18,500 16,750

© 2016 Pearson Education, Ltd. 17-65

 Comprehensive Problem, cont.
Requirement 3, cont.

Inventory Turnover 9.36 7.44 7.28 6.99 6.58

(Formula e)
Days’ sales in inventory 39.0 days 49.1 days 50.1 days 52.2 days 55.5 days
(Formula a)
Inventory turnover has increased over the period examined, which is a positive sign. The company is
selling inventory more rapidly. The gross profit percentage is around 24%.

Requirement 4

2020 2019 2018 2017 2016

Total Assets $105,700 $95,600 $88,300 $80,000 $64,700
Total Equity 50,900 46,800 42,500 35,900 35,400
Total Liabilities 55,800 48,800 45,800 44,100 29,300

Debt Ratio 51.8% 51.0% 51.9% 55.1% 45.3%

(Formula p)
Debt to Equity Ratio 1.08 1.04 1.08 1.23 .83
(Formula q)

Net Income $ 26,834 $12,024 $ 8,866 $5,677 $4,082

Income Tax Expense 4,430 3,830 3,690 3,380 2,760
Interest Expense 1,010 1,360 1,370 1,060 870
Total 32,274 17,214 13,926 10,117 7,712
Times-interest-earned
ratio 31.95 12.66 10.16 9.54 8.86
(Formula j)

Current Ratio
(Formula o) 1.70 1.85 1.66 1.71 2.28

Quick Ratio 0.9 1.0 0.9 1.0 1.3

(Formula d)

The current and quick ratios are fairly high. This indicates that the company can pay its liabilities. The
company’s debt to total assets is not extraordinarily high, which will facilitate the company making all
payments for debt. The times-interest-earned ratio has increased from 2016 to 2020 which is favorable.

© 2016 Pearson Education, Ltd. 17-66

Comprehensive Problem, cont.
Requirement 5

2020 2019 2018 2017 2016

Annual Dividend per share $0.40 $0.38 $0.34 $0.30 $0.26
Earnings per share $1.80 $1.50 $1.40 $1.20 $0.98

Dividend payout 22% 25% 24% 25% 27%

(Formula b)

The dividends per share and earnings per share ratios are both increasing over time. These are probably
the two most watched financial measures, so the stock is attractive.

Analysis:

WRM’s trend of net sales, net income, inventory turnover, earnings per share, and times-interest-earned
has improved. All other measures have held steady or improved. There are no apparent trouble spots in
WRM’s data. Therefore, invest in WRM for increasing dividends per share and steady growth.

© 2016 Pearson Education, Ltd. 17-67

Critical Thinking
Decision Case 17-1

Lance Berkman is the controller of Saturn, a dance club whose year-end is December 31. Berkman
prepares checks for suppliers in December, makes the proper journal entries, and posts them to the
appropriate accounts in that month. However, he holds on to the checks and mails them to the suppliers
in January.

Requirements
1. What financial ratio(s) is(are) most affected by the action?
2. What is Berkman’s purpose in undertaking this activity?

SOLUTION

Requirement 1

Recording payments in December, but mailing the checks in January, understates Accounts Payable and
Cash at year-end. This action makes the current ratio and the acid-test ratio look better than they really
are—so long as the ratio values exceed 1.0. (The reverse is true if those ratios are below 1.0.) The
following data illustrate the point:

Assumed
Assume the cash payments were not made Reported amounts - assuming the
amount of
in December cash payments were recorded
payment
Current assets $100 − $10 $100 − $10 $90
= = 2.0 = = = 2.25
Current liabilities $50 − $10 $50 − $10 $40

Quick assets $70 − $10 $70 − $10 $60

= = 1.4 = = = 1.50
Current liabilities $50 − $10 $50 − $10 $40

The debt ratio would also be affected, but to a lesser degree than the current ratio and the acid-test ratio.
Requirement 2
Berkman may want to improve the current ratio because it is the most widely used ratio. Creditors and
potential investors will look at that ratio first. By artificially boosting this ratio, it makes his financial
position look better than it actually is.

© 2016 Pearson Education, Ltd. 17-68

Ethical Issue 17-1
Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For
example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-
term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross
fails to meet any of these requirements, the company’s lenders have the authority to take over
management of the company.
Changes in consumer demand have made it hard for Ross to attract customers. Current liabilities have
mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial
statements, Ross’s management is scrambling to improve the current ratio. The controller points out that
an investment can be classified as either long-term or short-term, depending on management’s intention.
By deciding to convert an investment to cash within one year, Ross can classify the investment as short-
term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify
long-term investments as short-term.

Requirements
1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial
position stronger as a result of reclassifying the investments?
2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a
result, Ross’s management decides not to sell the investments it had reclassified as short-term.
Accordingly, the company reclassifies the investments as long-term. Has management behaved
unethically? Give the reasoning underlying your answer.

SOLUTION
Requirement 1
Reclassifying the long-term investments as short-term will increase current assets and, therefore,
increase the current ratio. Whether the company’s “true” financial position is stronger is not a clear-cut
issue. On one hand, a better current ratio does, indeed, reflect a stronger financial position, as long as the
ratio data is legitimate. On the other hand, how an asset is characterized (current or noncurrent) does not
affect the underlying fundamentals of the financial position.

Requirement 2
Reclassifying a long-term investment as current to meet a debt agreement does not necessarily brand
Ross managers as unethical. The managers may have honestly intended to sell the investments in order
to meet obligations. In that case, the managers took appropriate action.

Reclassifying the investments from current back to long-term may suggest to some observers that
managers are playing a shell game. However, the case states that sales subsequent to the first
reclassification have improved the current ratio. Under these circumstances, Ross may not need to sell
the investments. The managers may prefer to hold the investments beyond one year and, therefore, need
to reclassify them as long-term. In that case, the managers’ action is appropriate.

This case illustrates how gray accounting issues can be. Here the debt agreement depends on the current
ratio, which is affected by an asset classification that managers control simply by their intentions.
Because the managers’ true intentions cannot be ascertained with certainty, it would be hard to prove
that the managers are behaving unethically.

© 2016 Pearson Education, Ltd. 17-69

Financial Statement Case 17-1
Use Starbucks Corporation’s Fiscal 2013 Annual Report to answer the following questions. Visit
http://www.pearsonhighered.com/Horngren to view a link to the Starbucks Corporation Annual
Report.

Requirements
1. Compute trend analyses for total net revenues and net earnings. Use October 2, 2011, as the base
year. What is the most notable aspect of these data?
2. Perform a vertical analysis for Starbucks Corporation’s asset section of the balance sheet as of
September 29, 2013, and September 30, 2012.

SOLUTION

Requirement 1

2013 2012 2011

Total net revenues $ 14,892.2 $ 13,299.5 $11,700.4
Trend Percentages 127% 114% 100%
Net earnings $8.3 $1,383.8 $1,245.7
Trend Percentages 0.67% 111% 100%

The net revenues continue to increase from 2011 to 2013 (increase is 14% from 2011 to 2012 and 13%
from 2012 to 2013). This continuous increase does not carry to net earnings, though. While net earnings
increased 11% from 2011 to 2012, there was a significant decrease from 2012 to 2013. This was
probably due a steady increase in operating expenses.

© 2016 Pearson Education, Ltd. 17-70

Financial Statement Case 17-1, cont.
Requirement 2

STARBUCKS CORPORATION
Consolidated Balance Sheet
(In millions)
Sep 29, Percent of Sep 30, Percent of
2013 Total 2012 Total
Current Assets
Cash and cash equivalents $ 2,575.7 22.4% $1,188.6 14.5%
Short-term investments 658.1 5.7 848.4 10.3
Accounts receivable, net 561.4 4.9 485.9 5.9
Inventories 1,111.2 9.6 1,241.5 15.1
Prepaid expenses and other current
assets 287.7 2.5 196.5 2.4
Deferred income taxes, net 277.3 2.4 238.7 2.9
Total current assets 5,471.4 47.5 4,199.6 51.1
Long-term investments 58.3 .5 116.0 1.4
Equity and cost investments 496.5 4.3 459.9 5.6
Property, plant and equipment, net 3,200.5 27.8 2,658.9 32.3
Deferred income taxes, net 967.0 8.40 97.3 1.2
Other assets 185.3 1.6 144.7 1.8
Other intangible assets 274.8 2.4 143.7 1.7
Goodwill 862.9 7.5 399.1 4.9
Total Assets $ 11,516.7 100.0% $8,219.2 100.0%

Team Project 17-1

Select an industry you are interested in, and pick any company in that industry to use as the benchmark.
Then select two other companies in the same industry. For each category of ratios, compute all the ratios
for the three companies. Write a two-page report that compares the two companies with the benchmark
company.

SOLUTION

Student responses will vary depending on the companies they select.

© 2016 Pearson Education, Ltd. 17-71

Team Project 17-2
Select a company and obtain its financial statements. Convert the income statement and the balance
sheet to common size, and compare the company you selected to the industry average. The Risk
Management Association’s Annual Statement Studies and Dun & Bradstreet’s Industry Norms & Key
Business Ratios publish common-size statements for most industries.

SOLUTION

Student responses will vary depending on the companies they select.

© 2016 Pearson Education, Ltd. 17-72