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Chapter 17 - Analysis of Financial Statements

Chapter 17

Analysis of Financial Statements

QUESTIONS

1. With comparatie statements! financial statement items for t"o or more s#ccessieacco#ntin$ perio%s are place% si%e &y si%e on a sin$le statement! "ith the chan$e ineach item e'presse% as &oth a %ollar amo#nt an% a percent. Common(si)ecomparatie statements e'press each financial statement item as a percent of some&ase amo#nt that is assi$ne% a al#e of 1**+.

,. Total assets -or e#ialently! the total of lia&ilities pl#s e#ity/ are assi$ne% a al#e of1**+ on a common(si)e &alance sheet. Net sales -reen#es/ are assi$ne% a al#e of1**+ on a common(si)e income statement.

0. Financial reportin$ incl#%es the entire process of preparin$ an% iss#in$ financialinformation a&o#t a company. Financial statements are an important part of financialreportin$ t they are less than the "hole.

. The nat#re of a company2s siness! the composition of its c#rrent assets! an% thet#rnoer of its c#rrent assets are three important factors that sho#l% &e consi%ere% in%eci%in$ "hether a c#rrent ratio is $oo% or &a%.

3. A ,(to(1 c#rrent ratio may not &e a%e#ate if the company2s c#rrent assets consist ofa lar$e proportion of slo"(t#rnin$ acco#nts! notes! an% merchan%ise inentory. The$eneral nat#re of the siness also may ma4e the ,(to(1 r#le of th#m& ina%e#ate.

5. A%e#ate "or4in$ capital ena&les a company to carry s#fficient inentories! meetc#rrent %e&ts! ta4e a%anta$e of cash %isco#nts! an% e'ten% faora&le terms toc#stomers. Wor4in$ capital is a ma6or factor in %eterminin$ the short(term li#i%ityposition of a company.

7. When eal#ate% in li$ht of a company2s cre%it terms! the n#m&er of %ays2 sales#ncollecte% in%icates ho" #ic4ly acco#nts receia&le are conerte% into cash. Thisproi%es information a&o#t the releance of acco#nts receia&le &alances in meetin$the c#rrent o&li$ations of the siness.

. A hi$h acco#nts receia&le t#rnoer implies that acco#nts are collecte% #ic4ly!

there&y proi%in$ cash that can &e #se% to meet o&li$ations. A hi$h t#rnoer alsomeans that a $ien sales ol#me can &e s#pporte% "ith a lo"er inestment inacco#nts receia&le.

8. Users are intereste% in the capital str#ct#re of a company! as meas#re% &y %e&t an%e#ity ratios! for at least t"o reasons. First! as a company incl#%es more %e&t in itscapital str#ct#re! the ris4 that it "ill &e #na&le to meet interest an% principal paymentsincreases. Secon%! the e'istence of %e&t intro%#ces financial leera$e. If thecompany can earn a rate of ret#rn on its inestments that e'cee%s the rate of interestpai% to cre%itors! the %e&t "ill increase the rate of ret#rn to stoc4hol%ers.

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1*. Inentory t#rnoer reflects on the efficiency of inentory mana$ement. That is! a hi$hinentory t#rnoer means that a $ien sales ol#me can &e s#pporte% "ith a smallerinestment in inentory. This insi$ht into the spee% "ith "hich inentory is sol%%etermines the releance of the aaila&le inentory in meetin$ the c#rrent o&li$ationsof the siness! "hich is a foc#s of short(term li#i%ity.

11. Since mana$ement is responsi&le for a company2s performance! all ratios that are

#sef#l in eal#atin$ a company are of some #sef#lness in assessin$ mana$ementperformance. 9rofit mar$in! total asset t#rnoer! ret#rn on total assets! an% ret#rnon stoc4hol%ers2 e#ity are especially #sef#l for assessin$ mana$ement2sresponsi&ility for operatin$ efficiently an% profita&ly.

1,. Almost all companies hae some lia&ilities. Since total assets e#als total lia&ilitiespl#s e#ity! total assets are almost al"ays hi$her than common stoc4hol%ers2e#ity. Th#s! the %enominator in ret#rn on total assets is lar$er than commonstoc4hol%ers2 e#ity. Since the n#merator is the same for &oth! an% ret#rn on totalassets has a lar$er %enominator! it yiel%s a smaller percent. :Instructor note; A morecomplete meas#re of ret#rn on assets "o#l% a%% &ac4 -Interest E'pense ' et#rn on total assets -fiscal ,*1* an% ,**8/;

,*1*; D,!37!1 --D1*!,*!*8 D!1*1!07,/,/ G ,5.+

,**8; D1!8,!515 -- D!1*1!07, D3!311!17/,/ G ,7.+

13. E#ity ratio -,**8/;

D-10!53/D50!,05 G -5.0+/ :note; ne$atie ret#rn ratios are effectiely non(interpreta&le

E#ity ratio -,**/;

D111!*,*D1!1*!,5, G 8.+

15. He&t ratio -,**8/;

EU>m ,*!88 EU>m 03!70 G 3.7+

He&t ratio -,**/;

EU>m ,0!*7,EU>m 08!3, G 3.0+

17. 9rofit mar$in -,**8/;

D!,03D,!8*3 G 18.,+

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QUIC STUHJ

Q#ic4 St#%y 17(1 -3 min#tes/

Items not part of $eneral(p#rpose financial statements;1. Stoc4 price information an% analysis.

0. Kana$ement %isc#ssion an% analysis of financial performance.

3. Company ne"s releases.

8. 9rospect#s.

Q#ic4 St#%y 17(, -1* min#tes/

The fo#r #s#al stan%ar%s of comparisons are;

Intracompany. The company #n%er analysis proi%es stan%ar%s forcomparisons &ase% on prior performance an% relations &et"een itsfinancial items.

Competitor. One or more %irect competitors of the company #n%eranalysis can proi%e stan%ar%s for comparisons.

In%#stry. In%#stry statistics can proi%e stan%ar%s of comparisons.

9#&lishe% in%#stry statistics are aaila&le from seeral serices s#ch asH#n L Mra%street! Stan%ar% an% 9oor2s! an% Koo%y2s.

B#i%elines ->#les of Th#m&/. Beneral stan%ar%s of comparisons can%eelop from past e'periences. E'amples are the ,(to(1 leel for thec#rrent ratio or 1(to(1 leel for the aci%(test ratio.

All of these stan%ar%s of comparisons are #sef#l "hen properly applie%.Jet! analysis meas#res ta4en from a selecte% competitor or $ro#p ofcompetitors are often the &est stan%ar%s of comparisons. Also!intracompany an% in%#stry meas#res are important parts of all analyses.

The stan%ar% that is least li4ely to proi%e a $oo% &asis for comparison isthe #se of $#i%elines! or r#les of th#m&. B#i%elines m#st &e applie% "ithcare! an% then only if they seem reasona&le in li$ht of past e'perience an%in%#stry2s norms.

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Tren% percents

,*11 173.5+ -D,*1!5** D11!**/

,*1* 1**.*+ -the $ien &ase amo#nt/

Q#ic4 St#%y 17( -3 min#tes/

Common(si)e percents

,*11 3.,+ -D1*8!,** D,*1!5**/

,*1* 3,.+ -D5*!,** D11!**/


,*11 ,*1*Hollar

Chan$e9ercentChan$e

Short(term inestments..... D,17!** D153!*** D3,!** 0,.*+

Acco#nts receia&le.......... ,!1,* !*** -3!*/ (1,.0+

Notes paya&le..................... 37!*** * 37!*** -not calc#la&le/

Q#ic4 St#%y 17(5 -1* min#tes/

>atio ,*11 ,*1* Chan$e

1. 9rofit Kar$in................................... + 5+ Faora&le

,. He&t >atio....................................... 3+ *+ Unfaora&le

0. Bross Kar$in.................................. 00+ 3+ Unfaora&le. Aci%(test >atio................................ *.88 1.1* Unfaora&le

3. Acco#nts >eceia&le T#rnoer. ... 3. 5.5 Unfaora&le

5. Masic Earnin$s 9er Share............. D1., D1.,* Faora&le

7. Inentory T#rnoer........................ 0.3 0.0 Faora&le

. Hii%en% Jiel%................................ 1.*+ *.+ Faora&le

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Q#ic4 St#%y 17(8 -1* min#tes/

a. A 4ey a%anta$e to #sin$ hori)ontal an% ertical analyses "hen

e'aminin$ companies reportin$ #n%er %ifferent c#rrencies is that the

comp#tation of the percenta$es eliminates the c#rrency effects. This

enhances o#r comparatie analysis of companies. For e'ample! the$ross mar$in percent from a E#ropean company #sin$ IF>S! an% from a

Papanese company #sin$ Papan BAA9! an% from an American company

#sin$ U.S. BAA9 can &e %irectly compare% an% assesse%.

&. Altho#$h ratio analysis can eliminate c#rrency %ifferences! it cannot

eliminate %ifferences in the application of BAA9 #n%er %ifferent

acco#ntin$ systems. For e'ample! if "e compare the $ross mar$in

percent for a E#ropean company applyin$ FIFO #n%er IF>S ers#s an

American company applyin$ IFO #n%er U.S. BAA9! the percents "ill &eimpacte% &y %ifferences in FIFO ers#s IFO. Th#s! "e m#st still a%6#st

the acco#ntin$ n#m&ers for f#n%amental %ifferences in acco#ntin$

metho%s "hen performin$ ratio analysis.

A%%itional e'amples that are ar$#a&ly een more pro&lematic; -1/

Consi%er t"o companies! one reportin$ #n%er U.S. BAA9 an% the other

#n%er IF>S! "hich "e are reie"in$ ia the Operatin$ Cash Flo"

Aera$e Total Assets ratio. We can potentially see the %ii%en%s an%

the interest items reporte% %ifferently for these t"o companies #n%er the

t"o %ifferent reportin$ re$imes. That type of %ifference "o#l% persist

-that is! not &e reerse%/. -,/ Consi%er the same type of comparison an%

"e loo4 at the >et#rn on Total Assets ratio. A$ain! "e can potentially

%ifferences in asset al#es thro#$h the IF>S more a$$ressie metho%s

to mar4 #p reersals of preio#s "rite(%o"ns an% thro#$h some lon$(

term asset real#ation metho%s that %iffer from U.S. BAA9. Hifferent

from this para$raphs first e'ample! ho"eer! many of these %ifferences

in asset real#ations "ill &e capt#re% oer time -m#ltiple perio%s/ "ith

&oth acco#ntin$ systems.

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EE>CISES

E'ercise 17(1 -1* min#tes/

1. C 5. C,. A 7. A0. A . M. M 8. C3. M 1*. H

Q#ic4 St#%y 17(, -3 min#tes/

1. Acco#nts >eceia&le T#rnoer an% the Hays2 Sales Uncollecte%.

,. Wor4in$ Capital! also calle% net "or4in$ capital.

0. 9rofit Kar$in an% the Total Asset T#rnoer.

>et#rn on Total Assets.

E'ercise 17(0 -,* min#tes/

,*10 ,*1, ,*11 ,*1* ,**8

Sales................................ 1 1* 15 135 1**

Cost of $oo%s sol%......... 18* 11 171 13 1**

Acco#nts receia&le...... 181 10 17 15, 1**

Analysis; The tren% in sales is positie. While this is &etter than no $ro"th!one cannot %efinitiely say "hether the sales tren% is faora&le "itho#ta%%itional information a&o#t the economic con%itions in "hich this tren%

occ#rre% s#ch as inflation rates an% competitors performances.Bien the tren% in sales! the comparatie tren%s in &oth cost of $oo%s sol%an% acco#nts receia&le are some"hat #nfaora&le. In partic#lar! for the mostrecent year! &oth are increasin$ at sli$htly faster rates -in%e' for cost of $oo%ssol% is 18* an% acco#nts receia&le is 181/ compare% to sales -in%e' is 1/.

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E'ercise 17( -,3 min#tes/

Ans"er; Net income %ecrease%.

S#pportin$ calc#lations; When the s#m of each year2s common(si)e cost of$oo%s sol% an% total e'penses is s#&tracte% from the common(si)e salespercent! the net income percent is as follo"s;,*1* net income percent; 1**.* ( 3.1 ( 1.1 G ,7.+ of sales,*11 net income percent; 1**.* ( 5*.8 ( 10. G ,3.0+ of sales,*1, net income percent; 1**.* ( 5,. ( 1.0 G ,0.0+ of sales

Ne't! notice that if ,*1* sales are ass#me% to &e D1**! then sales for ,*11 areD1*0.,* an% the sales for ,*1, are D1*.*. If the net income percents for thethree years are applie% to these amo#nts! the net incomes are;,*1* net income; D1**.** ' ,7.+ G D,7.*,*11 net income; D1*0.,* ' ,3.0+ G D,5.11,*1, net income; D1*.* ' ,0.0+ G D,.00

This sho"s that net income %ecrease% oer the three(year perio%.

E'ercise 17(3 -,3 min#tes/

,*11 ,*1*

Sales.................................................................... 1**.*+ 1**.*+

Cost of $oo%s sol%............................................. 55 .* 3, .Bross profit......................................................... 0.* 7.5

Operatin$ e'penses........................................... ,1 .* 18 .

Net income.......................................................... 10 .* + , ., +

Analysis; Oerall! this companys sit#ation has "orsene%. This is ei%entfrom the s#&stantial %ecline in net income as a percent of sales for ,*11-10.*+/ relatie to ,*1* -,.,+/. The main c#lprit is the increase in cost of$oo%s sol% as a percent of sales from 3,.+ in ,*1* to 55.*+ in ,*11. On a

some"hat positie note! the company has not e'perience% as lar$e of anincrease in operatin$ e'penses as a percent of salesR from 18.+ in ,*1* to,1.*+ in ,*11. Een more positie is the companys leel of sales increasefrom D303!*** in ,*1* to D7,*!*** in ,*11.

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E'ercise 17(7 -,* min#tes/

San%erson CompanyCommon(Si)e Comparatie Malance Sheets

Hecem&er 01! ,*1*(,*1,

,*1, ,*11

,*1*

Cash................................................................. 3.8+ .*+ 8.8+

Acco#nts receia&le! net................................ 17.1 1.* 10.,

Kerchan%ise inentory.................................... ,1.3 1.3 1.,

9repai% e'penses............................................ 1.8 ,.1 1.1

9lant assets! net ............................................. 30 .5 37 .0 51 .5

Total assets ..................................................... 1** .* + 1** .* + 1** .* +

Acco#nts paya&le........................................... ,.8+ 15.8+ 10.,+

on$(term notes paya&le sec#re% &ymort$a$es on plant assets ........................ 1. ,0.* ,,.1

Common stoc4! D1* par al#e....................... 01. 05.3 0.5

>etaine% earnin$s .......................................... , .8 ,0 .3 ,1 .*

Total lia&ilities an% e#ity.............................. 1** .* + 1** .* + 1** .* +

Col#mn %oes not e#al 1**.* %#e to ro#n%in$.

Analysis; Seeral o&serations can &e ma%e.

-1/ Cash as a percent of assets has %ecline%@this is faora&le proi%e% s#fficientcash is aaila&le for operations.

-,/ Acco#nts receia&le hae increase% as a percent of assets@this may &e#nfaora&le in that assets are tie% #p in an #npro%#ctie manner an% there aremore assets at ris4 of #ncollectionR it co#l% &e faora&le if increase% saleso#t"ei$h these costs an% ris4s.

-0/ 9lant assets hae %ecline% as a percent of assets@this is faora&le if thecompany is operatin$ more efficientlyR it co#l% &e #nfaora&le if the company is%o"nsi)in$ %#e to poor performance.

-/ Acco#nts paya&le hae mar4e%ly increase% as a percent of assets@this co#l%reeal li#i%ity constraints.

-3/ Common stoc4 has mar4e%ly %ecline%@this co#l% reflect a stoc4 y&ac4pro$ram or other mechanisms to re%#ce shares o#tstan%in$.

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E'ercise 17( -,3 min#tes/

1. C#rrent ratio

,*1,; G 1.7 to 1

,*11; G ,.3, to 1

,*1*; G ,.8* to 1

,. Aci%(test ratio

,*1,; G *.80 to 1

,*11; G 1.0* to 1

,*1*; G 1.73 to 1

Analysis an% Interpretation; San%erson2s short(term li#i%ity position has

"ea4ene% oer this three(year perio%. Moth the c#rrent an% aci%(test ratios

sho" %eclinin$ tren%s. Altho#$h "e %o not hae information a&o#t the

nat#re of the company2s siness! the aci%(test ratio shifts from 1.73 to 1

%o"n to *.80 to 1 an% the c#rrent ratio shifts from ,.8* to 1 %o"n to 1.7

to 1@&oth s#$$est a potential li#i%ity pro&lem. Still! "e m#st reco$ni)e

that in%#stry stan%ar%s co#l% sho" that the ,*1* ratios "ere too hi$h

-instea% of ,*1, ratios as &ein$ too lo"/.

17-11

D0*!** D!3** D111!3** D8!7**D1,!8**

D03!5,3 D5,!3** D,!3** D8!073D73!,3*

D05!** D8!,** D30!*** D!***D8!,3*

D0*!** D!3**D1,!8**

D03!5,3 D5,!3**D73!,3*

D05!** D8!,**D8!,3*

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E'ercise 17(8 -,3 min#tes/

1. Hays2 sales #ncollecte%

,*1,; ' 053 G .* %ays

,*11; ' 053 G 0.* %ays

,. Acco#nts receia&le t#rnoer

,*1,; G .8 times

,*11; G 8.3 times

0. Inentory t#rnoer

,*1,; G ., times

,*11; G 3.1 times

. Hays sales in inentory

,*1,; ' 053 G 88 %ays

,*11; ' 053 G 7 %ays

Analysis an% Interpretation; The n#m&er of %ays2 sales #ncollecte% hasincrease% an% the acco#nts receia&le t#rnoer has %ecline%. Also! theinentory t#rnoer has %ecrease% an% %ays sales in inentory hasincrease%. While none of these chan$es in ratios that occ#rre% from ,*11to ,*1, appear %ramatic! it seems that San%erson is &ecomin$ lessefficient in mana$in$ its inentory an% in collectin$ its receia&les.

17-12

D!3**D57,!3**

D5,!3**D30*!***

D57,!3**-D!3** D5,!3**/,

D30*!***

-D5,!3** D8!,**/,

D1*!,,3-D111!3** D,!3**/,

D0!3**-D,!3** D30!***/,

D111!3**D1*!,,3

D,!3**D0!3**

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E'ercise 17(1* -,3 min#tes/

1. He&t an% e#ity ratios

,*1, ,*11

Total lia&ilities an% %e&t ratio D1,!8** D87!3**................ D,,5!*

* 0 .7 +

D73!,3* D1*,!3**................ D177!73* 08 .8 +

Total e#ity an% e#ity ratio

D15,!3** D1,8!1**.............. ,81!5** 35 .0

D15,!3** D1*!73*.............. VVVVVVV VVVV ,57!,3* 5* .1

Total lia&ilities an% e#ity....... D31!**

*

1** .* + D3!*** 1** .* +

,. He&t(to(e#ity ratio

,*1,; D,,5!** D,81!5** G *.7 to 1

,*11; D177!73* D,57!,3* G *.57 to 1

0. Times interest earne%

,*1,; -D0!1** D!3,3 D11!1**/ D11!1** G . times

,*11; -D01!073 D7!3 D1,!0**/ D1,!0** G ., times

Analysis an% Interpretation; San%erson a%%e% %e&t to its capital str#ct#re

%#rin$ ,*1,! "ith the res#lt that the %e&t ratio increase% from 08.8+ to

0.7+. In a%%ition! the %e&t(to(e#ity ratio also increase% from *.57 to 1 to

*.7 to 1. o"eer! the increase% profita&ility of the company allo"e% it to

increase the times interest earne% from ., to . times. Apparently! thecompany is a&le to han%le the increase% %e&t. o"eer! "e sho#l% note

that the %e&t increase is entirely in c#rrent lia&ilities! "hich places a

$reater stress on short(term li#i%ity.

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E'ercise 17(11 -0* min#tes/

1. 9rofit mar$in

,*1,; D0!1** D57,!3** G 3.1+

,*11; D01!073 D30*!*** G 3.8+

,. Total asset t#rnoer

,*1,; G 1. times

,*11; G 1.0 times

0. >et#rn on total assets

,*1,; G 7.1+

,*11; G 7.7+

Analysis an% Interpretation; San%erson2s operatin$ efficiency appears to

&e %eclinin$ &eca#se the ret#rn on total assets %ecrease% from 7.7+ to

7.1+. While the total asset t#rnoer faora&ly increase% sli$htly from ,*11

to ,*1,! the profit mar$in #nfaora&ly %ecrease% from 3.8+ to 3.1+. The

%ecline in profit mar$in in%icates that San%erson2s a&ility to $enerate net

income from sales has %ecline%.

17-14

D57,!3**-D31!*** D3!***/,

D30*!***

-D3!*** D07,!3**/,

D0!1**-D31!*** D3!***/,

D01!073-D3!*** D07,!3**/,

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E'ercise 17(1, -,* min#tes/

1. >et#rn on common stoc4hol%ers2 e#ity

,*1,; G 1,.,+

,*11; G 1,.+

,. 9rice(earnin$s ratio! Hecem&er 01

,*1,; D13 D,.1* G 7.1

,*11; D1 D1.80 G 7.0

0. Hii%en% yiel%

,*1,; D*.0* D13 G ,.*+

,*11; D*.13 D1 G 1.1+

Analysis an% interpretation This companys ret#rn on common stoc4hol%ers e#ity is $oo%! t not

$reat. A ro#$hly 1,+ ret#rn ma4es it an accepta&le inestmentproi%e% its ris4 is not too hi$h.

This companys price(earnin$s ratio is some"hat lo" as the mar4et has

historically aera$e% &et"een 1* to 13 for 9E. This s#$$ests that themar4et %oes not hae hi$h e'pectations a&o#t f#t#re earnin$s or $ro"thfor this company.

The %ii%en% yiel% is on the lo" si%e. This stoc4 is li4ely consi%ere% apotential $ro"th stoc4X@ho"eer! the price(earnin$s ratio s#$$eststhat the mar4et %oes not perceie a hi$h li4elihoo% of $ro"th.

E'ercise 17(10A-1* min#tes/

1. A Income -loss/ from contin#in$ operations

,. C E'traor%inary $ain -loss/


. A Income -loss/ from contin#in$ operations


5. M Bain -loss/ from %isposin$ of a %iscontin#e% se$ment

7. M Income -loss/ from operatin$ a %iscontin#e% se$ment

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D0!1**-D,81!5** D,57!,3*/,

D01!073-D,57!,3* D,*!73*/,

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A Income -loss/ from contin#in$ operations

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E'ercise 17(1 -13 min#tes/

PIN KE>CANHISINB! INC.Income Statement

For Jear En%e% Hecem&er 01! ,*11

Net sales...................................................................... D0!***!***E'penses Cost of $oo%s sol%.................................................. D1!3*!*** Salaries e'pense..................................................... 5*!*** Hepreciation e'pense............................................. 0,!3**

Total e'penses........................................................ ,!53,!3**Income from contin#in$ operations &efore ta'es... 07!3**

Income ta'es e'pense............................................... 117!***Income from contin#in$ operations......................... ,0*!3**

Hiscontin#e% se$ment oss from operatin$ retail siness

se$ment -net of ta'/............................................. -3!***/ Bain on sale of retail siness

se$ment -net of ta'/............................................. 73!*** 001!***Income &efore e'traor%inary $ain............................ 351!3**

E'traor%inary $ain on con%emnation ofcompany property -net of ta'/................................ 00*!***

Net income.................................................................. D 81!3**

E'ercise 17(13 -13 min#tes/

1. C#rrent ratio G -in Ys/ Y 1!55!0 Y 357!,,, G ,.8*-in Ds/ D15!5.0 D3!57,.,,8 G ,.8*

Net profit mar$in G -in Ys/ Y ,37!0, Y 1!57,!,0 G 13.+

-in Ds/ D,!370.,5 D15!7,.,0* G 13.+

Sales(to(assets G -in Ys/ Y 1!57,!,0 Y 1!*,!8* G *.80-in Ds/ D15!7,.,0* D1!*,.8*0 G *.80

,. The res#lts in part 1 reeal that ratios can help #s oercome%ifferences attrita&le to c#rrencies. o"eer! ratios %o not oercomepotential %ifferences in application of acco#ntin$ principles.

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9>OMEK SET A

9ro&lem 17(1A -5* min#tes/

Part 1

C#rrent ratio; Hecem&er 01! ,*1,; D!* D,*!,** G ,. to 1

Hecem&er 01! ,*11; D07!8, D18!85* G 1.8 to 1

Hecem&er 01! ,*1* D3*!5 D18!* G ,.5 to 1

Part 2

MENNINBTON COK9ANJCommon(Si)e Comparatie Income Statements

For Jears En%e% Hecem&er 01! ,*1,! ,*11! an% ,*1*

,*1, ,*11 ,*1*

Sales.................................................... 1**.**+ 1**.**+ 1**.**+

Cost of $oo%s sol%............................. 5* .,* 5, .3* 5 .**

Bross profit......................................... 08.* 07.3* 05.**

Sellin$ e'penses................................ 1.1, 10.* 10.,*A%ministratie e'penses................... 8 .* .* .,3

Total e'penses................................... ,0 .15 ,, .5* ,1 .3

Income &efore ta'es........................... 15.5 1.8* 1.33

Income ta'es....................................... 0 .1* 0 .*3 , .83

Net income.......................................... 10 .3 + 11 .3 + 11 .5* +

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9ro&lem 17(1A(Concluded)

Part 3

MENNINBTON COK9ANJMalance Sheet Hata in Tren% 9ercents

Hecem&er 01! ,*1,! ,*11! an% ,*1*

,*1, ,*11 ,*1*

Assets

C#rrent assets.................................. 83.7,+ 7.+ 1**.**+

on$(term inestments.................... *.** 10. 1**.**

9lant assets...................................... 137.8 15., 1**.**

Total assets....................................... 1,.0 1,*.7* 1**.**

ia&ilities an% E#ity

C#rrent lia&ilities.............................. 1*0.7*+ 1*,.5+ 1**.**+

Common stoc4................................. 100.00 100.00 1**.**

Other contrite% capital................. 13*.** 13*.** 1**.**

>etaine% earnin$s............................ 115.81 1*.8 1**.**

Total lia&ilities an% e#ity............... 1,.0 1,*.7* 1**.**

Part 4

Si$nificant relations reeale%Mennin$tons sellin$ e'penses! a%ministratie e'penses! an% income ta'estoo4 lar$er portions of each sales %ollar in ,*11 than ,*1*. o"eer! &eca#sethe cost of $oo%s sol% too4 a smaller portion in ,*11! some efficiency "as$aine%. In ,*1, these tren%s contin#e%. Sellin$ e'penses! a%ministratiee'penses! an% income ta'es contin#e% to ta4e a $reater portion of each sales%ollar "hile the $ross profit portion contin#e% to improe.Mennin$ton e'pan%e% its plant assets in ,*11! financin$ the e'pansionthro#$h the sale of lon$(term inestments! thro#$h a re%#ction in "or4in$capital -the c#rrent ratio %ecrease% from ,.5 to 1 to 1.8 to 1/! an% perhaps

thro#$h the sale of a small amo#nt of stoc4. As to the stoc4 increase! it is notpossi&le to tell from these t"o statements "hether the company sol% sharesor %eclare% a stoc4 %ii%en%. In either case! the increase in retaine% earnin$s%#rin$ ,*11 in%icates that net income "as lar$er than the re%#ctions fromcash -an% perhaps stoc4/ %ii%en%s. From the ,*1, lar$e income relatie tothe smaller increase in retaine% earnin$s! it appears cash %ii%en%s "ere pai%.

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9ro&lem 17(,A -1,* min#tes/

Part 1

SUBO COK9ANJIncome Statement Tren%s

For Jears En%e% Hecem&er 01! ,*1,(,**5

,*1, ,*11 ,*1* ,**8 ,** ,**7 ,**5

Sales.................................. 18,.3+ 15.5+ 130.+ 1*.5+ 101.,+ 1,,.*+ 1**.*+

Cost of $oo%s sol%........... ,03. 181. 153.* 1. 10., 1,3.3 1**.*

Bross profit....................... 101.* 103.7 105. 103.1 1,5.8 117.* 1**.*

Operatin$ e'penses......... ,53.5 ,*7. 18*.5 1*.5 1,1.8 1,*.0 1**.*

Net income........................ 3*.3 8,.3 1*.7 101. 1,8.8 113.* 1**.*

SUBO COK9ANJMalance Sheet Tren%s

Hecem&er 01! ,*1,(,**5

,*1, ,*11 ,*1* ,**8 ,** ,**7 ,**5

Cash................................... 5.7+ .8+ 8,.8+ 8.8+ 88.*+ 87.*+ 1**.*+

Acco#nts rec&le.! net....... ,00.* ,.7 ,,1. 158.8 18.3 11.7 1**.*

Kerchan%ise inentory.... 007.3 ,3. ,1. 11.* 15,.0 107.8 1**.*

Other c#rrent assets........ ,,.1 ,,1.1 1,5.0 ,01.5 ,**.* ,**.* 1**.*

on$(term inestments.... @ @ @ 1**.* 1**.* 1**.* 1**.*

9lant assets! net............... ,37.* ,35., ,,.3 1,5.3 10*.7 115. 1**.*

Total assets....................... ,7.0 ,,,.8 185.* 1. 10.5 1,.* 1**.*

C#rrent lia&ilities.............. 11. 05.0 ,,7., 18.* 15.* 133.1 1**.*

on$(term lia&ilities......... 0*5., ,55.7 ,38.3 1,*.3 1,0.1 100.0 1**.*

Common stoc4.................. 135.0 135.0 135.0 101.0 101.0 1**.* 1**.*

Other pai%(in capital......... 135.0 135.0 135.0 11,.3 11,.3 1**.* 1**.*

>etaine% earnin$s............ ,5,.7 ,0*. 181.7 175.0 15,.1 13.* 1**.*

Total lia&ilities L e#ity... ,7.0 ,,,.8 185.* 1. 10.5 1,.* 1**.*

17-20

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9ro&lem 17(,A (concluded)

Part 2

Analysis an% Interpretation

The statements an% the tren% percent %ata in%icate that the companysi$nificantly e'pan%e% its plant assets in ,*1*. 9rior to that time! the

company en6oye% increasin$ $ross profit an% net income.

Sales $re" stea%ily for the entire perio% of ,**5 to ,*1,. o"eer!

&e$innin$ in ,*1*! cost of $oo%s sol% an% operatin$ e'penses increase%

%ramatically relatie to sales! res#ltin$ in a si$nificant re%#ction in net

income.

In ,*1,! net income "as only 3*.3+ of the ,**5 &ase year amo#nt.

At the same time that net income "as %eclinin$! assets "ere increasin$.

This in%icates that S#$o "as &ecomin$ less efficient in #sin$ its assets

to $enerate income.

The short(term li#i%ity of the company contin#e% to %ecline. Acco#nts

receia&le %i% not chan$e si$nificantly for the perio% of ,*1* to ,*1,!

t cash stea%ily %ecline% an% inentory sharply increase% as %i%

c#rrent lia&ilities.

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Trans(action

C#rrentAssets

Q#ic4Assets

C#rrentia&ilities

C#rrent>atio

Aci%(Test>atio

Wor4in$Capital

Me$innin$ D53*!*** D,5!*** D,5*!*** ,.3* 1.1* D08*!***

Kay , 73!*** VVVVVVV 73!*** VVVV VVVV VVVVVVV

Mal. 7,3!*** ,5!*** 003!*** ,.15 *.3 08*!***

Kay 1*0!*** 1*0!***

( 3!*** VVVVVVV VVVVVVV VVVV VVVV VVVVVVV

Mal. 77*!*** 08!*** 003!*** ,.0* 1.15 03!***

Kay 1* 18!*** 18!***

( 18!*** ( 18!*** VVVVVVV VVVV VVVV VVVVVVV

Mal. 77*!*** 08!*** 003!*** ,.0* 1.15 03!***Kay 13 ( ,1!*** ( ,1!*** ( ,1!*** VVVV VVVV VVVVVVV

Mal. 78!*** 05!*** 01!*** ,.08 1.17 03!***

Kay 17 * * VVVVVVV VVVV VVVV VVVVVVV

Mal. 78!*** 05!*** 01!*** ,.08 1.17 03!***

Kay ,, VVVVVVV VVVVVVV *!*** VVVV VVVV VVVVVVV

Mal. 78!*** 05!*** 03!*** ,.1, 1.* 083!***

Kay ,5 ( *!*** ( *!*** ( *!*** VVVV VVVV VVVVVVV Mal. 7*8!*** 0,!*** 01!*** ,.,5 1.* 083!***

Kay ,7 73!*** 73!*** 73!*** VVVV VVVV VVVVVVV

Mal. 7!*** *0!*** 08!*** ,.*, 1.* 083!***

Kay , 8*!*** 8*!*** VVVVVVVV VVVV VVVV VVVVVVV

Mal. 7!*** 80!*** 08!*** ,.,3 1.,7 3!***

Kay ,8 ( 153!*** ( 153!*** VVVVVVVV VVVV VVVV VVVVVVV

Mal. D7*8!*** D0,!*** D08!*** 1., *. D0,*!***

Me$innin$ &alances C#rrent assets -$ien/............................... D53*!*** C#rrent lia&ilities -D53*!*** ,.3*/............ ,5*!*** Q#ic4 assets -D,5*!*** ' 1.1*/.................. ,5!***

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9ro&lem 17(A (Concluded)

8. Total asset t#rnoer

G 1.7 times

1*. >et#rn on total assets

G ,0.1+


G 03.+

17-24

D0!5**

-D,00!,** D1,!**/,

D!*3*-D,00!,** D1,!**/,

D!*3*-D18!** D1,1!0**/,

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Part 1

>yan Company 9riest Company

a. C#rrent ratio

G ,.3 to 1 G ,.3 to 1

&. Aci%(test ratio

G 1.* to 1 G 1.* to 1

c. Acco#nts receia&le t#rnoer

G 1.* times G 10.3 times

%. Inentory t#rnoer

G 7.* times G .3 times

e. Hays sales in inentory

' 053 G 5,. %ays ' 053 G 8*.1 %ays

f. Hays2 sales #ncollecte%

' 053 G ,.5 %ays ' 053 G ,8.0 %ays

Short(term cre%it ris4 analysis; >yan an% 9riest hae essentially e#al c#rrentratios an% e#al aci%(test ratios. o"eer! >yan &oth t#rns its merchan%isean% collects its acco#nts receia&le more rapi%ly than %oes 9riest. On this&asis! >yan pro&a&ly is the &etter short(term cre%it ris4.

17-25

D55*!***

-D05!** D!1** D,!**/,

D3!1**-D0!* D3!5**/,

D0!*D3!1**

D05!** D!1**D55*!***

D7*!,**

-D35!** D5!,** D30!,**/,

D13*!*D5*!0*

D50!***D5*!0*

D,00!*3*D8,!0**

D83!5**D8,!0**

D30,!3**-D101!3** D1*5!**/,

D101!3**D30,!3**

D35!** D5!,**D7*!,**

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9ro&lem 17(3A(Concluded)

Part 2

>yan Company 9riest Company

a. 9rofit mar$in ratio G 1*.0+ G 10.3+

&. Total asset t#rnoer

G 1.5 times G 1.7 times

c. >et#rn on total assets

G 15.3+ G ,0.1+

%. >et#rn on common stoc4hol%ers2 e#ity

G ,.*+ G 0,.+

e. 9rice(earnin$s ratio

G 1,.8 G 8.

f. Hii%en% yiel%

G 5.*+ G 5.*+

Inestment analysis; 9riest2s profit mar$in ratio! total asset t#rnoer! ret#rnon total assets! an% ret#rn on common stoc4hol%ers2 e#ity are all hi$her than>yan2s. Altho#$h the companies pay the same %ii%en%! 9riest2s price(earnin$s ratio is lo"er. All of these factors s#$$est that 9riest2s stoc4 is li4elythe &etter inestment.

17-26

D57!77*D55*!***

D55*!***-D0!* D0!***/,

D57!77*-D0!* D0!***/,

D57!77*-D,8!0** D,58!0**/,

D,3D1.8

D1.3*D,3

D1*3!***D7*!,**

D7*!,**-D305!3* D07,!3**/,

D1*3!***-D305!3* D07,!3**/,

D1*3!***-D0!13* D,83!5**/,

D,3D,.35

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9ro&lem 17(5AA-5* min#tes/

Part 1

Effect of income ta'es -%e&its or losses in parentheses/

9reta'

0*+ Ta'

Effect After(Ta'

i. oss from operatin$ a %iscontin#e% se$ment......... -18!,3*/ -3!773/ -10!73/

6. Bain on ins#rance recoery of torna%o %ama$e.. 0*!1,* 8!*05 ,1!*

&. Correction of oerstatement of prior years sales... -17!***/ -3!1**/ -11!8**/

n. Bain on sale of %iscontin#e% se$ments assets...... 03!*** 1*!3** ,!3**

Part 2 Income from contin#in$ operations -an% its components/

4. Net sales.......................................................... D 888!3**

p. Interest reen#e.............................................. 13!***

$. Bain from settlin$ la"s#it.............................. 3!***

Total reen#es an% $ains............................... 1!*38!3**. Cost of $oo%s sol%.......................................... D0!3**

m. Hepreciation e'pense@Kachinery............... 03!***

l. Hepreciation e'pense@M#il%in$s................. 30!***

e. Other operatin$ e'penses.............................. 1*7!**

c. oss on sale of machinery............................. ,5!3*

%. oss from settlin$ la"s#it.............................. ,!73*

Total e'penses................................................ -70*!3** /

Income from contin#in$ operations &efore ta'es.... 0,8!***a. Income ta'es e'pense -0*+/......................... -8!7** /

Income from contin#in$ operations after ta'es. D ,0*!0**

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9ro&lem 17(5AA(Concluded)

Part 3 Income from %iscontin#e% se$ment

i. oss from operatin$ a %iscontin#e%

se$ment -after(ta'! see part 1/........................................ D -10!73/n. Bain on sale of %iscontin#e% se$ments

assets -after(ta'/.............................................................. ,!3**

Income from %iscontin#e% se$ment -after(ta'/............... D 11!*,3

Part 4 Income &efore e'traor%inary items

Income from contin#in$ oper. after ta'es -from 9art ,/...... D,0*!0**

Income from %iscontin#e% se$ment -from 9art 0/............... 11!*,3

Income &efore e'traor%inary items................................... D,1!0,3

Part 5 Net income

Income &efore e'traor%inary items................................... D,1!0,36. E'traor%inary item

Bain on ins#rance recoery of torna%o %ama$e -after(ta'/................................................................................... ,1!*

Net income........................................................................... D,5,!*8

17-28

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9>OMEK SET M

9ro&lem 17(1M -5* min#tes/

Part 1

C#rrent ratio; Hecem&er 01! ,*1,; D33!5* D,0!07* G ,. to 1

Hecem&er 01! ,*11; D00!55* D,*!1* G 1.7 to 1

Hecem&er 01! ,*1*; D07!0** D17!3** G ,.1 to 1

Part 2

SAWB>ASS CO>9O>ATIONCommon(Si)e Comparatie Income StatementsFor Jears En%e% Hecem&er 01! ,*1,! ,*11! an% ,*1*

,*1, ,*11 ,*1*

Sales.................................................... 1**.**+ 1**.**+ 1**.**+

Cost of $oo%s sol%............................. 33 .** 3, .,* 5 .1

Bross profit......................................... 3.** 7.* 30.38

Sellin$ e'penses................................ 11.3 1,.3 10.1,

A%ministratie e'penses................... .8 8 .03 11 .30

Total e'penses................................... ,* .7 ,1 .* , .53

Income &efore ta'es........................... ,.,5 ,5.** ,.8

Income ta'es....................................... , .30 , .8 , .87

Net income.......................................... ,1 .70 + ,0 .*5 + ,3 .87 + Some totals may not foot %#e to ro#n%in$.

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9ro&lem 17(1M (Concluded)

Part 3

SAWB>ASS CO>9O>ATIONMalance Sheet Hata in Tren% 9ercents

Hecem&er 01! ,*1,! ,*11! an% ,*1*

,*1, ,*11 ,*1*

Assets

C#rrent assets.................................... 18.75+ 8*.,+ 1**.**+

on$(term inestments...................... *.** ,0., 1**.**

9lant assets........................................ 1,.,5 10.00 1**.**

Total assets......................................... 101.50 117.15 1**.**

ia&ilities an% E#ity

C#rrent lia&ilities................................ 100.3+ 113.01+ 1**.**+

Common stoc4................................... 1,3.** 1,3.** 1**.**

Other contrite% capital................... 1,*.70 1,*.70 1**.**

>etaine% earnin$s.............................. 107.* 11,.*8 1**.**

Total lia&ilities an% e#ity................. 101.50 117.15 1**.**

Part 4

Si$nificant relations reeale%

Sa"$rass2s cost of $oo%s sol% too4 a lar$er percent of sales each year.Sellin$ an% a%ministratie e'penses an% income ta'es too4 a some"hatsmaller portion each year! t not eno#$h to offset the effect of cost of$oo%s sol%. As a res#lt! income &ecame a smaller percent of sales eachyear.

The lar$e e'pansion of plant assets in ,*11 "as finance% &y a re%#ction inc#rrent assets! an increase in c#rrent lia&ilities! a lar$e re%#ction in lon$(term inestments! an% apparently &y a stoc4 sale. One effect of this plan"as to re%#ce the c#rrent ratio in ,*11. o"eer! the c#rrent ratiorecoere% in ,*1,. This apparently res#lte% from profits! limitin$ theamo#nt of %ii%en%s pai%! an% the li#i%ation of lon$(term inestments.

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9ro&lem 17(,M -1,* min#tes/

Part 1

HEUCE COK9ANJIncome Statement Tren%s

For Jears En%e% Hecem&er 01! ,*1,(,**5

,*1, ,*11 ,*1* ,**8 ,** ,**7 ,**5

Sales.................................. 5.+ 7.*+ 75.*+ 1.0+ 7.3+ 8*.5+ 1**.*+

Cost of $oo%s sol%........... 7.0 1.0 ,.1 5.0 81.7 80. 1**.*

Bross profit....................... 38., 55.7 7*.* 75.0 0.0 7.3 1**.*

Operatin$ e'penses......... 70.5 1.5 . 8*. 85.* 87.5 1**.*

Net income........................ 0.3 3*. 30.8 5*.8 58.5 75.3 1**.*

HEUCE COK9ANJMalance Sheet Tren%s

Hecem&er 01! ,*1,(,**5

,*1, ,*11 ,*1* ,**8 ,** ,**7 ,**5

Cash..................................... 3.5+ 5,.1+ 7,.+ 73.8+ 5.,+ 8.7+ 1**.*+

Acco#nts rec&le.! net....... *.* .* 5.7 8.0 80.0 85.* 1**.*

Kerchan%ise inentory.... 7. 1. . 3.8 .8 8*.8 1**.*

Other c#rrent assets........ *.* *.* 5.7 80.0 80.0 1**.* 1**.*

on$(term inestments.... ,5.* ,*.* 15.* 1**.* 1**.* 1**.* 1**.*

9lant assets! net............... 113. 115.8 11.5 .1 8*. 8,.7 1**.*

Total assets....................... 5.3 7.8 8*.1 .3 81.3 80.7 1**.*

C#rrent lia&ilities.............. 31.1 3.1 53., 55.7 7.1 8,.5 1**.*

on$(term lia&ilities......... 0,. .* 3,. 33., 70.5 1.5 1**.*

Common stoc4.................. 1**.* 1**.* 1**.* 1**.* 1**.* 1**.* 1**.*

Other pai%(in capital......... 1**.* 1**.* 1**.* 1**.* 1**.* 1**.* 1**.*

>etaine% earnin$s............ ,1,.3 187.3 177.3 15,.3 107.3 1*5.0 1**.*

Total lia&ilities L e#ity. . . 5.3 7.8 8*.1 .3 81.3 80.7 1**.*

17-31

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9ro&lem 17(,M (Concluded)

Part 2

Analysis an% Interpretation

The statements an% the tren% percent %ata sho" that sales %ecline%eery year. o"eer! cost of $oo%s sol% %i% not fall as rapi%ly as sales.As a res#lt! $ross profit fell more rapi%ly than sales.

Operatin$ e'penses fell less rapi%ly than $ross profit! so the final res#lt"as that net income fell to 0.3+ of the &ase year.

Kana$ement "as not a&le to re%#ce costs an% e'penses fast eno#$h to4eep #p "ith the sales %ecline.

Altho#$h the profits %ecrease% %#rin$ these years! the company %i%contin#e to earn a net income.

It appears that the cash $enerate% from operations "as #se% primarilyto re%#ce &oth c#rrent an% lon$(term lia&ilities.

The company ma%e a lar$e e'pansion of its plant assets %#rin$ ,*1*!financin$ this e'pansion primarily thro#$h the li#i%ation of lon$(terminestments.

17-32

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Trans(action

C#rrentAssets

Q#ic4Assets

C#rrentia&ilities

C#rrent >atio

Aci%(Test>atio

Wor4in$Capital

Me$innin$ D,*!*** D1,*!*** D1**!*** ,.* 1.,* D1*!***

P#ne 1 1*1!*** 1*1!***

( 5,!*** VVVVVVVV VVVVVVVV VVVV VVVV VVVVVVV

Mal. 018!*** ,,1!*** 1**!*** 0.18 ,.,1 ,18!***

P#ne 0 7!*** 7!***

( 7!*** ( 7!*** VVVVVVVV VVVV VVVV VVVVVVV

Mal. 018!*** ,,1!*** 1**!*** 0.18 ,.,1 ,18!***

P#ne 3 10*!*** VVVVVVVV 10*!*** VVVV VVVV VVVVVVV

Mal. 8!*** ,,1!*** ,0*!*** 1.83 *.85 ,18!***

P#ne 7 8*!*** 8*!*** 8*!*** VVVV VVVV VVVVVVV

Mal. 308!*** 011!*** 0,*!*** 1.5 *.87 ,18!***

P#ne 1* 1*!*** 1*!*** VVVVVVV VVVV VVVV VVVVVVV

Mal. 718!*** 81!*** 0,*!*** ,.,3 1.30 088!***

P#ne 1, ( ,*!*** ( ,*!*** VVVVVVVV VVVV VVVV VVVVVVV

Mal. 08!*** ,11!*** 0,*!*** 1.07 *.55 118!***

P#ne 13 VVVVVVVV VVVVVVVV 5*!*** VVVV VVVV VVVVVVV

Mal. 08!*** ,11!*** 0*!*** 1.15 *.35 38!***

P#ne 18 * * VVVVVVVV VVVV VVVV VVVVVVV

Mal. 08!*** ,11!*** 0*!*** 1.15 *.35 38!***

P#ne ,, ( 11!*** ( 11!*** ( 11!*** VVVV VVVV VVVVVVV

Mal. ,!*** ,**!*** 058!*** 1.15 *.3 38!***

P#ne 0* ( 5*!*** ( 5*!*** ( 5*!*** VVVV VVVV VVVVVVV

Mal. D05!*** D1*!*** D0*8!*** 1.18 *.3 38!***

Me$innin$ &alances C#rrent assets -$ien/............................ D,*!*** C#rrent lia&ilities -D,*!*** ,.*/......... 1**!*** Q#ic4 assets -D1**!*** ' 1.,*/............... 1,*!***

17-33

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9ro&lem 17(M -3* min#tes/

1. C#rrent ratio

G ,.5 to 1

,. Aci%(test ratio

G 1.7 to 1

0. Hays2 sales #ncollecte%

' 053 G ,,., %ays

. Inentory t#rnoer

G 8. times

3. Hays sales in inentory

' 053 G 00.3 %ays

5. He&t(to(e#ity ratio

-D1*!3** D,!0** D1!5** D,3!***/ -D1!*** D0*!1**/ G *.33 to 1

7. Times interest earne%

D,8!,** D1!,** G ,.0 times

. 9rofit mar$in ratio

G 1,.*+

17-34

D3!1** D3!8** D11!1** D,!*** D1,!3** D1!***D1*!3** D,!0** D1!5**

D3!1** D3!8** D11!1** D,!***D1*!3** D,!0** D1!5**

D11!1** D,!***

D,13!3**

D105!1**-D1,!3** D15!**/,

D1,!3**D105!1**

D,3!**D,13!3**

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9ro&lem 17(M(Concluded)

8. Total asset t#rnoer

G ,.1 times

1*. >et#rn on total assets

G ,3.*+


G 08.*+

17-35

D,13!3**

-D11*!3** D83!8**/,

D,3!**-D11*!3** D83!8**/,

D,3!**-D71!1** D51!0**/,

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Part 1

o#% Company Clear Company

a. C#rrent ratio

G ,.0 to 1 G ,., to 1

&. Aci%(test ratio

G 1., to 1 G 1., to 1

c. Acco#nts -an% notes/ receia&le t#rnoer

G .7 times G. times

%. Inentory t#rnoer

G 0.* times G 3. times

e. Hays sales in inentory

' 053 G 11*. %ays ' 053 G 50.5 %ays

f. Hays2 sales #ncollecte%

' 053 G 3.3 %ays ' 053 G 3.3 %ays

Short(term cre%it ris4 analysis; o#% an% Clear hae nearly e#al c#rrentratios an% e#al aci%(test ratios. o"eer! Clear &oth t#rns itsmerchan%ise an% collects its acco#nts receia&le m#ch more rapi%ly thano#%. On this &asis! Clear pro&a&ly is the &etter short(term cre%it ris4.

17-36

D083!5**

-D78!1** D10!5** D7!,**/,

D,8,!5**-D!** D1*7!1**/,

D!**D,8,!5**

D78!1** D10!5**D083!5**

D,13!,**D8,!3**

D11!7**D8,!3**

D,1!1**D88!***

D1,,!***D88!***

D,!***-D!*** D,!3**/,

D!***D,!***

D7,!3** D11!***D558!3**

D558!3**

-D7,!3** D11!*** D73!0**/,

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9ro&lem 17(5MA-5* min#tes/

Part 1 Effect of income ta'es -%e&its or losses in parentheses/

9reta',3+ Ta'

Effect After(Ta'

e. oss on h#rricane %ama$e................................... -7!***/-1!3**/

-33!3**/

l. oss from operatin$ a %iscontin#e% se$ment........... -10*!***/-0,!3**/

-87!3**/

n. Correction of oerstatement of prior years e'pense 3!*** 1!3** 0!3**

p. oss on sale of %iscontin#e% se$ments assets....... -18*!***/

-7!3**/

-1,!3**/

Part 2 Income from contin#in$ operations -an% its components/

i. Net sales............................................................. D,!53*!***

h. Interest reen#e................................................. 0*!***

6. Bain from settlin$ la"s#it................................ 7!***

Total reen#es an% $ains................................. ,!73!***

o. Cost of $oo%s sol%............................................ D1!*3*!***

&. Hepreciation e'pense@M#il%in$s................... 11*!***

. Hepreciation e'pense@E#ipment................. 155!***

a. Other operatin$ e'penses................................ 00!***

4. oss on sale of il%in$................................... 0!***

c. oss from settlin$ la"s#it................................ 5!***

Total e'penses an% losses............................... 1!7!***Income from contin#in$ operations &efore ta'es 1!*1!***

%. Income ta'es e'pense -,3+/............................ -,30!3** /

Income from contin#in$ operations after ta'es... D 75*!3**

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9ro&lem 17(5MA(Concluded)

Part 3 Income from %iscontin#e% se$ment

l. oss from operatin$ a %iscontin#e% se$ment -after(ta'/....... D -87!3**/

p. oss on sale of %iscontin#e% se$ments assets -after(ta'/. . . -1,!3** /

oss from %iscontin#e% se$ment -after(ta'/.................... D-,*!***/

Part 4 Income &efore e'traor%inary items

Income from cont. oper. after ta'es -from 9art ,/............... D 75*!3**

oss from %iscontin#e% se$ment -from 9art 0/.................. -,*!*** /

Income &efore e'traor%inary items.................................. D 3,*!3**

Part 5 Net income

Income &efore e'traor%inary items.............................................D 3,*!3**

E'traor%inary item;

e. oss on h#rricane %ama$e -after(ta'/......................................... -33!3** /

Net income.....................................................................................D 53!***

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SE>IA 9>OMEK @ S9 17

Serial 9ro&lem @ S9 17! M#siness Sol#tions -3 min#tes/

1. Bross mar$in "ith serices reen#eBross mar$in G Total reen#e = Cost of $oo%s sol%

G D!*** ( D1!*3, G D,8!8

Bross mar$in ratio G D,8!8 D!*** G 5.1 +

Bross mar$in "itho#t serices reen#eBross mar$in G Net -$oo%s/ sales = Cost of $oo%s sol%

G D1!580 ( D1!*3, G D!51

Bross mar$in ratio G D!51 D1!580 G ,.+

9rofit mar$in ratio G D1!00 D!*** G ,.+

,. C#rrent ratio G D83!35 D73 G 1*8.,

Aci%(test ratio G D8*!8, D73 G 1*0.8

0. He&t ratio G D73 D1,*!,5 G *.7+

E#ity ratio G D118!080D1,*!,5G 88.0+

. C#rrent assets are 78+ of total assets -D83!35D1,*!,5/

on$(term assets are ,1+ of total assets -D,!7**D1,*!,5/

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>eportin$ in Action @ MTN 17(1

1. Tren% percents for selecte% income statement acco#nts

Fiscal Jear ,*1* ,**8 ,**

>een#es.......................................................... ,.+ 1.1+ 1**.*+D1!830 D11!*53 D5!**8

Cost of $oo%s sol%.......................................... ,3.7+ ,*0.+ 1**.*+D!058 D3!85 D,!8,8

Operatin$ e'penses........................................ ,.*+ 175.1+ 1**.*+D0!05 D,!073 D1!08

Income ta'es -proision for income ta'es/. . 135.3+ 173.5+ 1**.*+D*8 D8* D317

Net income....................................................... 18.8+ 15.0+ 1**.*+D,!37 D1!80 D1!,8

,. Common(si)e percents for asset cate$ories an% acco#nts

Fiscal Jear ,*1* ,**8

Total c#rrent assets...................................... 37.*+ 38.+D3!10 D!,

9roperty an% e#ipment! net........................ 18.,+ 15.3+D1!837 D1!003

Intan$i&le assets........................................... 10.*+ 10.,+

D1!0,5 D1!*57Total assets for ,*1* an% ,**8 are D1*!,* an% D!1*1! respectiely.

0. For ,*1* an% ,**8! reen#es $re" at a lo"er rate than cost of $oo%ssol%. Operatin$ e'penses $re" slo"er than reen#es for &oth ,*1* an%,**8. Conse#ently! income increase% for ,*1* an% ,**8! t at a lo"errate than reen#e $ro"th.

The common(si)e percent fi$#res in part , sho" a shift a"ay fromc#rrent assets -38.+ in ,**8 s. 37.*+ in ,*1*/ an% $reater inestment

in property an% e#ipment -15.3+ in ,**8 s. 18.,+ in ,*1*/. Intan$i&leassets sho" flat to sli$htly %ecline% inestment -10.,+ in ,**8 s. 10.*+in ,*1*/.

. Ans"ers %epen% on the financial statement information o&taine%.

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Comparatie Analysis @ MTN 17(,

1.

ey fi$#res -D millions/ >IK Apple

Cash an% e#ialents...... 13.,+ D1!331 11.1+ D3!,50

Acco#nts receia&le! net. ,3.+ ,!38 7.1+ 0!051

Inentories........................ 5.1+ 5,, 1.*+ 33

>etaine% earnin$s............ 31.7+ 3!,7 8.,+ ,0!030

Cost of sales..................... 35.*+ !058 38.8+ ,3!50

>een#es.......................... 1**.*+ 1!830 1**.*+ ,!8*3

Total assets...................... 1**.*+ 1*!,* 1**.*+ 7!3*1

,. >IKs retaine% earnin$s ma4e #p a sli$htly $reater percenta$e of itstotal lia&ilities an% e#ity -31.7+/ is(Z(is Apple -8.,+/.

0. Apples cost of sales percent is sli$htly hi$her at 38.8+ compare% to>IKs at 35.*+.

This implies that Apple has the lo"er $ross mar$in ratio on sales of*.1+/! "hile >IK has the hi$her $ross mar$in ratio at .*+.

. >IK has the hi$her percent of total assets in the form of inentory at

5.1+! compare% to Apples 1.*+.

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Ethics Challen$e @ MTN 17(0

1. The CEO appears to hae selectiely chosen from the 11 aaila&leratios to present only the ones that sho" tren%s that are faora&le tothe company. -o"eer! some analysts may not interpret a %ecline in

sellin$ e'penses as a percent of reen#e as positie since it mi$htimply a scalin$ &ac4 on a%ertisin$ or promotion campai$ns./ TheCEOs motiation mi$ht &e to ma4e her performance! or the companys!or &oth! appear &etter than it is in the eyes of the analysts.

,. The conse#ences of this action &y the CEO mi$ht &e mi'e%. It is li4elythat the analysts "ill as4 other #estions that may reeal somene$atie tren%s s#ch as the tren%s in ret#rn an% profit mar$ins. TheCEOs actions may &ecome transparent to the analysts as they%iscoer the presence of less faora&le tren%s thro#$h their #estions.

If %iscoere%! s#ch a %isclos#re ploy &y the CEO "ill not reflectfaora&ly on the company. Moth the CEO an% the company are li4ely tos#ffer losses in rep#tation an% cre%i&ility.

Een if the CEO is a&le to s#ccee% "ith this strate$y in the short term!once the financial statements are iss#e% all #sers can compilea%%itional ratio information an% see that some of the tren%s are#nfaora&le to the company. This is li4ely to %ama$e the cre%i&ility ofthe CEO.

Comm#nicatin$ in 9ractice @ MTN 17(

There is no set sol#tion to this actiity. Each teams memoran%#m "illary &ase% on the in%#stry an% companies chosen for analysis.-Instructor; Consi%er ma4in$ a transparency of each teams memoran%#mfor #se in a classroom %isc#ssion of the fin%in$s./

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Ta4in$ It to the Net @ MTN 17(3

-D tho#san%s/ As of 1,01,** As of 1,01,**8

1. 9rofit mar$in ratio..... D011!*3D3!10,!75 G 5.1+ D03!88D3!,8!55 G .,+

,. Bross profit ratio....... D1!737!71 D3!10,!75 G 0.,+ D,!*30!107D3!,8!55 G 0.7+

0. >et#rn on totalassets........................

D011!*3 -:D0!50!718 D!,7!110,/ G 7.8+

D03!88 -:D0!573!*01 D0!50!718,/ G 11.8+

. >et#rn on commonstoc4hol%ers e#ity.

D011!*3 -:D01!188 D38,!8,,,/ G 5.+

D03!88 -:D7,*!38 D01!188,/ G .*+

3. Masic net income percommon share.........

D1.1 D1.87

An accepta&le alternatie sol#tion "o#l% &e to incl#%e minority interest in e#ity.

Ta4en from consoli%ate% statement of income.

Analysis an% Interpretation; ersheys performance $enerally improe% inall areas eal#ate% for the profita&ility metrics reporte% in the ta&le a&oe.

Team"or4 in Action @ MTN 17(5

Part 1

Team reports sho#l% loo4 somethin$ li4e the follo"in$;

ori)ontal Analysisori)ontal analysis is comparin$ a companys financial statement amo#ntsacross time. We compare %ata from comparatie statements that arehori)ontally ali$ne%R that is! "e compare the same items from one perio% toanother perio%. The chan$e %isclose% &y the comparison is $enerallye'presse% as a %ollar amo#nt an%or as a percent. For instance! "ecompare sales of one perio% to sales of another an% %etermine the %ollaramo#nt of the increase or %ecrease.

We also %etermine the percent of increase or %ecrease in sales that thischan$e represents. This type of comparison is $enerally complete% on a

line(&y(line &asis for &oth income statement an% &alance sheet items -an%sometimes for other financial statements/.

E'ample; Ass#me that prior year sales e#al D,*!***! an% c#rrent yearsales e#al D0**!***. ori)ontal analysis of sales yiel%s a D5*!*** increaseor a ,3+ increase in sales. -Comp#tation is %efine% as; Amo#nt ofchan$e Mase year :or D5*!***D,*!***./

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Team"or4 in Action(Concluded)

If a hori)ontal comparison is ma%e oer a n#m&er of perio%s! thecomparisons are ma%e to correspon%in$ amo#nts in a selecte% perio%calle% the &ase perio%. Each s#&se#ent perio%s amo#nt is compare% to

the &ase perio%. The chan$e is e'presse% as a percent of the &ase perio%.This is commonly referre% to as tren% analysis.

ertical Analysisertical analysis is comparin$ a company2s financial statement amo#nts toa baseamo#nt. Us#ally this &ase amo#nt is a total or a$$re$ate amo#nt.An income statement2s &ase is #s#ally total reen#e an% a &alance sheet2s&ase is #s#ally total assets. We analy)e "hat percent of the total -or &ase/the in%ii%#al statement items represent.

E'ample; Total assets for the perio% &ein$ analy)e% G D3**!*** -&asen#m&er/. Cash &alance is D1**!***. Cash is comp#te% to &e ,*+ of totalassets. -Comp#tation is %efine% as; In%ii%#al amo#nt A$$re$ate amo#nt:or D1**!***D3**!***./

Part 2

E'planations of the fo#r cate$ories or areas of ratio analysis follo";

a. i#i%ity analysis meas#res the aaila&ility of reso#rces to meet short(term cash re#irements. Efficiency analysis meas#res ho" pro%#ctie a

company is in #sin$ its assets.

&. Solency analysis meas#res a company2s lon$(r#n financial ia&ility an%its a&ility to coer lon$(term o&li$ations.

c. 9rofita&ility analysis meas#res a company2s a&ility to $enerate ana%e#ate ret#rn on ineste% capital.

%. Kar4et analysis meas#res the companys ret#rns -for e'ample! E9S an%%ii%en%/ relatie to its mar4et price.

Note; St#%ents "ill select ario#s ratios to ill#strate these cate$ories. Use

E'hi&it 17.15to erify the cate$ory! meas#rement! an% #se of each ratio.

Part 3

Each team mem&er presents res#lts to the entire team.

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Entreprene#rial Hecision @ MTN 17(7

1. No. Altho#$h the c#rrent ratio improe% oer the three(year perio%! theaci%(test ratio %ecline% an% acco#nts receia&le an% merchan%iseinentory t#rne% more slo"ly. These con%itions in%icate that an

increasin$ portion of the c#rrent assets consiste% of acco#ntsreceia&le an% inentories from "hich c#rrent lia&ilities co#l% not &epai%.

,. No. The %ecreasin$ t#rnoer of acco#nts receia&le in%icates thecompany is collectin$ its receia&les more slo"ly.

0. No. Sales are increasin$ an% acco#nts receia&le are t#rnin$ moreslo"ly. Either or &oth of these tren%s "o#l% pro%#ce an increase inacco#nts receia&le! een if the other remaine% #nchan$e%.

. Jes. To ill#strate! if sales are ass#me% to e#al D1** in ,**! the sales

tren% sho"s that they "o#l% e#al D1,3 in ,**8 an% D107 in ,*1*. Then!%ii%in$ each sales fi$#re &y its ratio of sales to plant assets "o#l% $ieD00.00 for plant assets in ,** -D1** 0.*/! D07. in ,**8 -D1,3 0.0/ an%D08.1 in ,*1* -D107 0.3/.

3. No. The percent of ret#rn on e#ity %eclines from 1,.,3+ in ,** to8.73+ in ,*1*.

5. The %ollar amo#nt of sellin$ e'penses increase% in ,**8 an% %ecrease%sharply in ,*1*. A$ain ass#min$ sales fi$#res of D1** in ,**! D1,3 in,**8! an% D107 in ,*1*! an% m#ltiplyin$ each &y its sellin$ e'pense to

net sales ratio $ies D13.0* of sellin$ e'penses in ,**! D17.10 in ,**8!an% D10.0 in ,*1*.

ittin$ the >oa% @ MTN 17(

One possi&le strate$y to f#lfill the re#irements of this assi$nment is;

Ass#me that a D07!3** salary "ill &e earne% #pon $ra%#ation at a$e ,3.Also! ass#me that the leel of inestment "ill &e at + of yo#r salary -or

D0!*** ann#ally/ startin$ at a$e ,3. My startin$ at a$e ,3 there "ill &e *ann#al compo#n%in$ perio%s #ntil a$e 53.

If the ann#al amo#nt ineste% %oes not chan$e an% yo# earn 1*+ for *years! then the inestment "ill $ro" to D1!0,7!778 -D0!*** ' ,.380 fromTa&le M./ at a$e 53. The D1!***!*** $oal can also &e reache% at a$e 53 ifthe inestment earns 8+ -D0!*** ' 007., G D1!*10!55/.

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Blo&al Hecision @ MTN 17(8

ey fi$#res -in EU>m/ NOIA

Cash an% e#ialents.................................... 0.,+ [ 1!1,

Acco#nts receia&le! net............................... ,,.0 7!81

Inentories...................................................... 3., 1!53

>etaine% earnin$s.......................................... ,. 1*!10,

Cost of sales................................................... 57.5 ,7!7,*

>een#es........................................................ 1**.* *!8

Total assets.................................................... 1**.* 03!70

Comparisons an% comments;

NOIAs cash an% receia&les is far &elo" that of >esearch In Kotionan% Apple as a percent of assets.

NOIA has the a hi$her percenta$e of acco#nts receia&le as apercenta$e of total assets as compare% to Apple an% is 6#st #n%er thatof >esearch In Kotion.

NOIAs retaine% earnin$s ma4e #p a smaller percenta$e of its totalfinancin$ -lia&ilities an% e#ity/ compare% to >esearch In Kotion an%Apple.

NOIAs cost of sales is hi$her than either of the other t"o companies.

Chap 017 Acc

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