Chapter 18, Problem 18.1BYP

(a)

To determine

Trend Analysis: Trend analysis is an extended feature of horizontal analysis that enables the user to get the trend for a particular account during a relatively longer time period. It makes the base year’s amount as 100 and then calculates the percentage for the amount of following years.

Profit Margin: Profit margin ratio reflects the portion of net income in the net sales. It is a profitability measure tool that is used to evaluate the net income a business earns on every dollar of net sales. It is computed as net income divided by net revenue.

Asset Turnover: It is the extended form of rate of return on total assets. Rate of return on total assets measures the profit generated but asset turnover measures the sales generated whereas from the use of total assets.

Return on Assets: It is a measure of net income earned on the basis of total assets used in the business. A company’s rate of return on assets shows the amount earned as the percentage of average total assets.

Return on Common Stockholders’ Equity: It is a measure of net income available to common stockholders of the company. A company’s rate of return on equity shows the amount earned for each dollar invested by the common stockholders.

Debt to Assets Ratio: It is the ratio between total assets of the company and the total liabilities. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Times Interest Earned: It reflects company’s earnings as the times of its interest expenses. It is used to evaluate the ability to pay interest expense, a company has. Higher ratio is preferred as it enables to pay the obligation of interest.

To prepare: The trend analysis of (1) net sales and (2) net income for Company A.

(b)

To determine

To evaluate: The profitability of Company A for 2012 and 2013 based on the (1) profit margin, (2) asset turnover, (3) return on assets and (4) return on common stockholders’ equity.

(c)

To determine

To evaluate: Company A’s solvency for 2012 and 2013 based on the (1) debt to assets ratio and (2) times interest earned.

(d)

To determine

To identify: The useful information outside annual report to evaluate a company for investment.