
Concept explainers
a)
Prepare a 5-year trend analysis, using 2010 as a base year, of (1) net sales, (2) net income, (3) total assets and comment on the findings.
a)

Explanation of Solution
Trend Analysis: Trend analysis is type of horizontal analysis used to calculate the changes in economic cycle of a business for several years in terms of changes in percentage using one of the years as base year.
Prepare a 5-year trend analysis, using 2010 as a base year, of (1) net sales, (2) net income, (3) total assets:
Net Sales, Net Income, and Total Assets | |||||
Trend Analysis | |||||
(Amount in thousands of dollars) | |||||
Particulars |
Year 1 (2010) |
Year 2 (2011) |
Year 3 (2012) |
Year 4 (2013) |
Year 5 (2014) |
Net sales | $1,483,524 | $1,693,985 | $1,669,563 | $1,684,996 | $2,100,590 |
Trend percentages | 100% | 114.2% | 112.5% | 113.6% | 141.6% |
Net income | $77,037 | $103,479 | $99,859 | $94,341 | $137,173 |
Trend percentages | 100% | 134.3% | 129.6% | 122.5% | 178.1% |
Total assets | $1,294,754 | $1,382,542 | $1,458,842 | $1,605,588 | $1,792,209 |
Trend percentages | 100% | 106.8% | 112.7% | 124.0% | 138.4% |
Table (1)
Comments:
- Net sales of the company increased from 2010 to 2011 and decreased in 2012. But in 2013 it increased slightly and in 2014 it increased dramatically.
- Net income of the company increased from 2010 to 2011 and decreased in 2012. But in 2013 it increased slightly and in 2014 it increased dramatically.
- Trend of Total assets of the company indicates that there is an increase in assets from 2010 to 2014.
b)
Calculate 1) gross profit percentage, 2) return on sales, and 3) return on assets for 2013 and 2014 and comment on profitability of the Company CS.
b)

Explanation of Solution
1) Calculate gross profit percentage for 2013 and 2014:
Gross Profit Percentage: Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.
Calculate gross profit percentage for 2013.
Net sales = $1,684,996
Gross profit on sales = $743,655
Calculate gross profit percentage for 2014.
Net sales = $2,100,590
Gross profit on sales = $954,951
Gross profit percentage for 2013 and 2014 are 44.13% and 45.46% respectively.
2) Calculate return on sales ratio for 2013 and 2014.
Return on sales ratio: The ratio which evaluates the amount of net income earned for every dollar of net sales is referred to as return on sales ratio. Higher ratio indicates highly profitable company.
Compute the return on sales ratio for 2013.
Net sales = $1,684,996
Net income = $94,341
Compute the return on sales ratio for 2014.
Net sales = $2,100,590
Net income = $137,173
Return on sales ratio for 2013 and 2014are 5.59% and 6.53% respectively.
3) Calculate the return on assets for 2013 and 2014.
Return on assets:
Return on assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings with relative to its total assets.
Compute return on assets for 2013.
Average total assets = $1,532,215 (Refer working note)
Net income = $94,341
Compute return on assets for 2014.
Average total assets = $1,698,898.5 (Refer working note)
Net income = $137,173
Return on assets for 2013 and 2014 are 6.15% and 8.07% respectively.
Working note:
Calculate average total assets for 2013:
Calculate average total assets for 2014:
Comment on profitability:
- Profitability of Company CS is measured by gross profit percentage, return on sales ratio, and return on assets ratio.
- The all three ratio has increased from 2013 to 2014.
- This shows that the company’s profitability has increased.
c)
Calculate 1)
c)

Explanation of Solution
1) Calculate current ratio for 2013 and 2014:
Current ratio: Current ratio is one of the
Compute current ratio for 2013.
Current assets = $1,250,472
Current liabilities = $301,254
Compute current ratio for 2014.
Current assets = $1,266,041
Current liabilities = $373,120
Current ratio for 2013 and 2014 are 4.15 times and 3.39 times respectively.
2) Calculate the quick ratio for 2013 and 2014:
Quick Ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.
Compute Quick ratio for 2013:
Compute Quick ratio for 2014:
Quick ratio for 2013 and 2014 are 2.77 times and 2.10 times respectively.
3) Calculate operating cash flows to current liabilities ratio for 2013 and 2014.
Operating cash flows to current liabilities ratio: It indicates the ratio of the amount of cash flows from operating activities to settle the current liabilities.
Compute operating cash flows to current liabilities ratio for 2013:
Compute operating cash flows to current liabilities ratio for 2014:
Operating cash flows to current liabilities ratio for 2013 and 2014 are 0.99 times and 0.55 times respectively.
Comments:
- Liquidity of Company CS is measured by current ratio, quick ratio, and operating cash flows to current liabilities ratio.
- The current ratio of company for both the year is more than 2:1. This indicates that the company has good ability in meeting its short-term liabilities.
- The quick ratio of company for both the year is more than 1:1. This indicates that Company has more liquid assets that the standard requirement to settle the current liabilities.
- The Operating cash flows to current liabilities ratio of 2013 is more than 2014. It indicates that the company has more cash in 2013 than 2014 to settle the current liabilities.
d)
Determine debt to equity ratio for 2014 and 2013 and comment on the solvency of Company CS.
d)

Explanation of Solution
Debt-equity ratio: The debt-to-equity ratio indicates that the company’s debt as a proportion of its stockholders’ equity.
Compute debt to equity ratio for Company C S for the year 2013 and 2014.
For 2013:
Total stockholders’ equity = $1,252,864
Total liabilities = $352,724
For 2014:
Total stockholders’ equity = $1,355,234
Total liabilities = $436,975
Comments:
- Solvency of Company C S is measured by debt-to-equity ratio.
- Debt-to-equity ratio of Company C S is higher in the years 2014 as compared to 2013.
- This shows that decline in company’s potential to pay for the creditors in 2014.
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