Analyzing Comparative Financial Statements Using Selected Ratios
Use the data given in PA13-1 for Pinnacle Plus.
Required:
- 1. Compute the gross profit percentage in the current and previous years. Round the percentages to one decimal place. Are the current year results better, or worse, than those for the previous year?
- 2. Compute the net profit margin for the current and previous years. Round the percentages to one decimal place. Are the current year results better, or worse, than those for the previous year?
- 3. Compute the earnings per share for the current and previous years. Are the current year results better, or worse, than those for the previous year?
- 4. Stockholders’ equity totaled $100,000 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. Express the ROE as percentages rounded to one decimal place. Are the current year results better, or worse, than those for the previous year?
- 5. Net property and equipment totaled $110,000 at the beginning of the previous year. Compute the fixed asset turnover ratios for the current and previous years. Round the ratios to two decimal places. Are the current year results better, or worse, than those for the previous year?
- 6. Compute the debt-to-assets ratios for the current and previous years. Round the ratios to two decimal places. Is debt providing financing for a larger or smaller proportion of the company’s asset growth?
- 7. Compute the times interest earned ratios for the current and previous years. Round the ratios to one decimal place. Are the current year results better, or worse, than those for the previous year?
- 8. After Pinnacle Plus released its current year’s financial statements, the company’s stock was trading at $18. After the release of its previous year’s financial statements, the company’s stock price was $15 per share. Compute the P/E ratios for both years, rounded to one decimal place. Does it appear that investors have become more (or less) optimistic about Pinnacle’s future success?
1.
To Compute: the gross profit percentage for current and previous year.
Explanation of Solution
Financial Ratios
Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.
Compute the gross profit percentage for the previous year.
Compute the gross profit percentage for the current year.
By comparing the percentage gross profit percentage of Company PP during previous year (51.5%) with current year (52.7%) there is an increase in the gross profit percentage by 1.2cents in current year which is comparatively higher than previous year this indicates that company is earning high profit for per dollar of sales.
2.
To Compute: the net profit margin for current and previous year.
Explanation of Solution
Compute the net profit margin for previous year.
Compute the net profit margin for the current year.
Company PPdid better job in current year compared to the previous year net profit margin.
Working Notes:
Company PP | ||||
Financial statement | ||||
December 31 | ||||
Particulars |
Current year Amount ($)(A) |
Previous year Amount ($)(B) |
||
$ |
||||
Income statement | ||||
Sales revenue | 110,000 | 99,000 | 11,000 | 11.1 |
Cost of goods sold | 52,000 | 48,000 | 4,000 | 8.3 |
Gross profit | 58,000 | 51,000 | 7,000 | 13.7 |
Operating expenses | 36,000 | 33,000 | 3,000 | 9.1 |
Interest expenses | 4,000 | 4,000 | 0 | 0 |
Income before income tax expense | 18,000 | 14,000 | 4,000 | 28.6 |
Income tax expense (30%) | 5,400 | 4,200 | 1,200 | 28.6 |
Net income | 12,600 | 9,800 | 2,800 | 28.6 |
Balance sheet | ||||
Cash | 69,500 | 38,000 | 31,500 | 82.9 |
Accounts receivable | 17,000 | 12,000 | 5,000 | 41.7 |
Inventory | 25,000 | 38,000 | (13,000) | (34.2) |
Property and equipment | 95,000 | 105,000 | (10,000) | (9.5) |
Total assets | 206,500 | 193,000 | 13,500 | 7 |
Accounts payable | 42,000 | 35,000 | 7,000 | 20 |
Income tax payable |
1,000 | 500 | 500 | 100 |
Note payable(long-term) | 40,000 | 40,000 | 0 | 0 |
Total liabilities | 83,000 | 75,500 | 7,500 | 9.9 |
Common stock(par $10) |
90,000 | 90,000 | 0 | 0 |
Retained earnings |
33,500 | 27,500 | 6,000 | 21.8 |
Total liabilities and stockholders’ equity | 206,500 | 193,000 | 13,500 | 7 |
Table (1)
3.
To Compute: the earnings per share for the current year and previous year.
Explanation of Solution
Calculate the earnings per share for the previous year.
Calculate theearnings per share for the current year.
Company’s earnings per share has an Eps of ($1.40)which is comparatively higher than previous year earnings per share ($1.09), there is an increased Eps by 0.31cents($1.40 -$1.09). Increase in the EPS value shows a good profit for the stockholder’s for the investment made by them.
Working Notes:
4.
To Compute: the return on equity for current and previous each year.
Explanation of Solution
Calculate the return on equity for the previous year.
Calculate the return on equity for the current year.
Company has generated more returns on equity in current year (10.5%) which is comparatively higher than the return on equity of previous year (9.0%). Increase in the return on equity increase the net profit margin of Company PP.
Working Notes:
Calculate Average stockholder’s equity for the previous year.
Calculate Average stockholder’s equity for the current year.
5.
To Compute: the fixed asset turnover for current and previous year.
Explanation of Solution
Calculate the fixed asset turnover for the previous year.
Calculate the fixed asset turnover for the current year.
Company has better utilized its investment in fixed assets in the current year (1.10) which is comparatively high to the utilization of its investment in fixed asset in previous year (0.9) for every dollar invested in fixed assets. Company PP has better utilized its fixed assets in the current year compared to its previous year’s performance.
Working Notes:
Calculate the fixed asset turnover for the previous year.
Calculate the fixed asset turnover for the current year.
6.
To Compute: the debt – to - asset for current and previous year.
Explanation of Solution
Compute the debt – to - asset for the previous year.
Compute the debt – to - asset for the current year.
Company has received a contribution of 40% from its creditors which is comparatively little higher than the contribution made by its creditors during previous year (39%). Company PP maintains a same debt and equity financing balance in the current year as same as previous year.
7.
To Compute: the time interest earned for current and previous year.
Explanation of Solution
Compute the time interest earned for previous year.
Compute the time interest earned for current year.
Company’s times interest earned ratio has improved by 1.0 cents (5.5-4.5). Company PP times interest earned ratio for the current year(5.5) shows that the company has enough net income which is earned before paying interest and income taxes to meet out their interest expense for the year.
8.
To Compute: the price earnings ratio for current and previous year.
Explanation of Solution
Compute the price earnings ratio for previous year.
Compute the price earnings ratio for current year.
Price earnings ratio of Company PP shows that investors have become less confident about the future success of the company because the company price earnings ratio has decreased by 13.8 to 12.9 in the current year by 0.9 cents which is comparatively less than the price earnings ratio of previous year. Increase in the price earnings ratio shows that investors of the company have trust in company’s future performance and their increase in profits. Lower price earnings ratioshows that investors of the company do not expecteffective financial performance.
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Chapter 13 Solutions
Connect 1 Semester Access Card for Fundamentals of Financial Accounting
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