Corporate Financial Accounting
Corporate Financial Accounting
14th Edition
ISBN: 9781305653535
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 14, Problem 14.1FSA

Financial Statement Analysis

The financial statements for Nike, Inc., are presented in Appendix 1£ at the end of the text. The following additional information is available (in thousands):

Accounts receivable at May 31, 2013 $ 3,117
Inventories at May 31, 2013 3,484
Total assets at May 31, 2013 17,545
Stockholders' equity at May 31, 2013 11,081

Instructions

  1. 1. Determine the following measures for the fiscal years ended May 31, 2015, and May 31, 2014. (Round ratios and percentages to one decimal place.)
  • A. Working capital
  • B. Current ratio
  • C. Quick ratio
  • D. Accounts receivable turnover
  • E. Number of days' sales in receivables
  • F. Inventory turnover
  • G. Number of days' sales in inventory
  • H. Ratio of liabilities to stockholders' equity
  • I. Asset turnover
  • J. Return on total assets, assuming interest expense is $28 million for the year ending May 31, 2015, and $24 million for the year ending May 31, 2014
  • K. Return on common stockholders’ equity
  • L. Price–earnings ratio, assuming that the market price was $ 101,67 per share on May 29, 2015, and $76.91 per share on May 30, 2014
  • M. Percentage relationship of net income to sales
  1. 2. What conclusions can be drawn from these analyses?

1(a)

Expert Solution
Check Mark
To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

Explanation of Solution

a. Working capital for 2016 and 2015

Working capital  (2016)= Current assets – Current liabilities = $15,976.0 – $6,334.0= $9,642.0

Working capital  (2015)= Current assets – Current liabilities = $15,587.0 – $6,332.0= $9,255.0

Working capital is determined as the difference between current assets and current liabilities.

Formula:

Working capital = Current assets – Current liabilities 

Conclusion

Thus, working capital for 2016 and 2015 is $9,667.0 and $9,255.0

1(b)

Expert Solution
Check Mark
To determine

The current ratio for the year

Explanation of Solution

Current ratio for 2016 and 2015

Current ratio(2016)=Current assetsCurrentliabilities=$15,025.0$5,358.0=2.8

Current ratio(2015)=Current assetsCurrentliabilities=$15,587.0$6,3320=2.5

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.  Current assets include cash and cash equivalents, short-term investments, net, accounts and notes receivables, net, inventories, and prepaid expenses and other current assets. Current liabilities include short-term obligations and accounts payable.

Formula:

Current ratio=Current assetsCurrentliabilities

Conclusion

Thus, current ratio for 2016 and 2015 is 2.8 and 2.5

1(c)

Expert Solution
Check Mark
To determine

Acid-test ratio for 2016

Explanation of Solution

Acid-test ratio (2015)=Quick assets Currentliabilities=$9,282.0$6,332.0=1.5

Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:

Acid Ratio=Quick assetsCurrentliabilities

Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets:

Quick assets  for 2016=(Cash + Short-term investments + Net accounts and notes receivables)=$3,138.0+$2,319.0+$3,241.0=$8,698.0

Quick assets  for 2015=(Cash + Short-term investments + Net accounts and notes receivables)=$3,852.0+$2,072.0+$3,358.0=$9,282.0

Conclusion

Hence, quick ratio for 2016 and 2015 are 1.6 and 1.5 respectively.

1(d)

Expert Solution
Check Mark
To determine

Accounts receivable turnover ratio for 2016 and 2015

Explanation of Solution

Accounts receivables turnover ratio (2016)}=Net credit salesAverage accounts receivables=$32,376.0$3,299.5=9.8

Accounts receivables turnover ratio (2015)}=Net credit salesAverage accounts receivables=$30,601.0$3,237.5=9.5

Accounts receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. Main purpose of accounts receivable turnover ratio is to manage the working capital of the company. This ratio is determined by dividing credit sales and sales return.

Formula:

Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables

Average accounts receivable, net for 2016 and 2015 is determined as follows:

Average accounts receivables (2016)}(Opening accounts receivables + Closing accounts receivables )2=$3,358.0+$3,241.02=$3,299.50

Average accounts receivables (2015)}(Opening accounts receivables + Closing accounts receivables )2=$3,117.0+$3,358.02=$3,237.50

Conclusion

Hence, the accounts receivable turnover ratio for 2016 and 2015 is 9.8 times and 9.5 times.

1(e)

Expert Solution
Check Mark
To determine

Number of days’ sales in receivables for 2016 and 2015

Explanation of Solution

 Number of days’ sales in receivable (2016)}=Average accounts receivable Average daily sales=$3,299.5088.7=37.2days

 Number of days’ sales in receivable (2015)}=Average accounts receivable Average daily sales=$3,237.5083.8=38.6days

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

 Number of days’ sales in receivable=Average accounts receivable Average daily sales

Average daily sales are determined by dividing sales by 365 days. Average accounts receivables for 2016 and 2015 are determined in previous requirement. Thus, average daily sales for 2016 and 2015 are determined as follows:

Average daily sales (2016)Sales365days=$32,376.0365days=$88.7

Average daily sales (2015)Sales365days=$30,601.0365days=$83.8

Conclusion

Hence, the number of days’ sales in receivable for 2016 and 2015 are 9.8 days and 9.5 days respectively.

1(f)

Expert Solution
Check Mark
To determine

Inventory turnover ratio for 2016 and 2015

Explanation of Solution

Inventory turnover ratio (2016)=Cost of goods soldAverage inventory=$17,405.0$4,587.5=3.8times

Inventory turnover ratio (2015)=Cost of goods soldAverage inventory=$16,534.0$4,142.0=4.0times

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

Inventory turnover=Cost of goods soldAverage inventory

Average inventory for 2016 and 2015 is determined as below:

Average inventory (2016)}(Opening inventory + Closing inventory )2=$4,337.0+$4,838.02=$4,587.50

Average inventory (2015)}(Opening inventory + Closing inventory )2=$3,947.0+$4,337.02=$4,142.0

Conclusion

Hence, the inventory turnover ratio for 2016and 2015 is 3.8 and 4.0 respectively.

1(g)

Expert Solution
Check Mark
To determine

Number of days sales in inventory for 2016 and 2015

Explanation of Solution

 Number of days’ sales in inventory (2016)}=Average inventory Average daily cost of goods sold=$4,587.5$47.7=96.2days

 Number of days’ sales in inventory (2015)}=Average inventory Average daily cost of goods sold=$4,142.0$45.3=91.4days

Number of days’ sales in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them.

Formula:

 Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold

Average daily cost of goods sold are determined by dividing cost of goods sold by 365 days. Thus, average daily cost of goods sold are determined as follows:

Average daily cost of goods sold (2016)Cost of goods sold365days=$17,405.0365days=$47.7

Average daily cost of goods sold (2015)Cost of goods sold365days=$16,534365days=$45.3

Conclusion

Hence, the number of days’ sales in inventory for 2016 and 2015 are 96.2 days and 91.4 days respectively.

1(h)

Expert Solution
Check Mark
To determine

Ratio of liabilities to stockholders’ equity for 2016 and 2015

Explanation of Solution

 Ratio of liabilities to stockholders' equity (2016)}=Total liabilitiesStockholders' equity=$9,138.0$12,258.0=0.7

 Ratio of liabilities to stockholders' equity (2015)}=Total liabilitiesStockholders' equity=$8,890.0$12,707.0=0.7

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

 Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity

Conclusion

Conclusion:

Hence, the ratio of liabilities to stockholders’ equity for 2016 and 2015 is 0.7.

1(i)

Expert Solution
Check Mark
To determine

Asset turnover ratio for 2016 and 2015

Explanation of Solution

Asset turnover (2016) =SalesAverage total assets=$32,376.0$21,496.5=1.5

Asset turnover (2015) =SalesAverage total assets=$300,601.0$20,095.5=1.5

Asset turnover ratio is used to determine the asset’s efficiency towards sales.

Formula: Asset turnover =NetrevenueAverage total assets

Working notes for average total assets for 2016 and 2015 are as follows:

Average total assets (2016)=Beginning total assets + Ending total assets 2=$21,597.0+$21,396.02=$21,496.5

Average total assets (2015)=Beginning total assets + Ending total assets 2=$18,594.0+$21,597.02=$20,095.5

Conclusion

Hence, asset turnover ratio for 2016 and 2015 is 1.5.

1(j)

Expert Solution
Check Mark
To determine

Return on total assets for 2016 and 2015

Explanation of Solution

Rate of return on assets (2016)=Netincome + Interest expenseAverage total assets=$3,760.0+$19.0$21,496.5=17.6%

Rate of return on assets (2015)=Netincome + Interest expenseAverage total assets=$3,273.0+$28.0$20,095.5=16.4%

Return on assets determines the particular company’s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets.

Formula:

Rate of return on assets=Netincome + Interest expenseAverage total assets

Conclusion

Hence, rate of return on assets for 2016 and 2015 are 17.6% and 16.4% respectively.

1(k)

Expert Solution
Check Mark
To determine

Return on common stockholders’ equity for 2016 and 2015

Explanation of Solution

Return on stockholders' equity(2016)}= Net income Average stockholder’s equity=$3,760.0$12,482.5=30.1%

Return on stockholders' equity(2015)}= Net income Average stockholder’s equity=$3,2730.0$12,353.5=26.5%

Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.

Formula: Rate of return on stockholders' equtiy = Net incomeAverage  stockholder’s equity

Average stockholders’ equity is determined as follows:

Average  stockholders' equity (2016)=(Beginning  stockholders' equity  + Ending  stockholders' equity  2)=$12,707.0+$12,258.02=$12,482.5

Net income to sales (2016 ) = Net incomeSales=$3,760.0$32,376.0=11.6%

Conclusion

Hence, rate of return on stockholders’ equity for 2016 and 2015 are 30.1% and 26.5% respectively.

1(l)

Expert Solution
Check Mark
To determine

Price earnings ratio for 2016 and 2015

Explanation of Solution

Price earnings ratio (2016)=Market price per shareEarning per share=$54.90$2.21=24.8 times

Price earnings ratio (2015)=Market price per shareEarning per share=$52.81$1.85=28.5 times

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

Price/earnings ratio= Market price per share of common stockEarnings per share

Conclusion

Hence, the calculated price-earnings ratio for 2016 and 2015 is 24.8 and 28.5 respectively.

1(m)

Expert Solution
Check Mark
To determine

Net income to sales for 2016 and 2015

Explanation of Solution

Net income to sales (2016 ) = Net incomeSales=$3,760.0$32,376.0=11.6%

Net income to sales (2015) = Net incomeSales=$3,273.0$30,601.0=10.7%

Net income to sales is determined by dividing net income to sales.

Formula:

Net income to sales = Net incomeSales

Thus, summary table of determined ratios are below:

Particulars 2016 2015
  1. a. Working capital
$9,667.0 $9,255.0
  1. b. Current ratio
2.8 2.5
  1. c. Acid test ratio
1.6 1.5
  1. d. Accounts receivable turnover ratio
9.8 9.5
  1. e. Number of days’ sales in receivables
37.2 days 38.6 days
  1. f. Inventory turnover ratio
3.8 times 4.0 times
  1. g. Number of days sales in inventory
96.2 days 91.4 days
  1. h. Ratio of liabilities to stockholders’ equity
0.7 0.7
  1. i. Asset turnover ratio
1.5 1.5
  1. j. Return on total assets
17.6% 16.4%
  1. k. Return on common stockholders’ equity
30.1% 26.5%
  1. l. Price earnings ratio
24.8 times 28.5 times
  1. m. Net income to sales
11.6% 10.7%

2.

Expert Solution
Check Mark
To determine

To draw: Conclusion about the analysis made

Explanation of Solution

  • The working capital ratio have increased in the year 2016 when compared with 2015.
  • The current ratio and quick ratio of the company have increased during the year 2016.
  • The accounts receivable turnover ratio and number of days’ sales in receivables have increased in the year 2016. But, whereas, number of days’ sales receivables have decreased slightly.  Thus, here, company takes over one month to collect the accounts receivables from credit sales. 
  • Inventory turnover ratio and number of days’ sales in inventory is increased and it is critical for the company. Thus, it shows a favorable change.
  • Creditor’s protection remained constant and thus, it is very sound from the ratio of liabilities to stockholders’ equity.
  • Asset turnover ratio indicates assets were used effectively towards generation of revenues for both the years.
  • Return on total assets have increased during the year 2016. Net income has increased.
  • Return on common stockholders’ equity has increased and it has strong earnings performance in the year 2016.
  • The price-earnings ratio have decreased in the year 2016.
  • The percentage of net income to sales have increased during 2016.

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Chapter 14 Solutions

Corporate Financial Accounting

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