Chapter 24, Problem 10SPA

RATIO ANALY SIS OF COMPARATI VE FIN ANCIAL STATE MENT S Refer to the financial statements in Problem 24-8A.

REQUIRED

Calculate the following ratios and amounts for 20-1 and 20-2 (round all calculations to two decimal places):

(a) Return on assets (Total assets on January 1, 20-1, were $175,750.)

(b) Return on common stockholders’ equity (Total common stockholders’ equity on January 1, 20-1, was $106,944.)

(c) Earnings per share of common stock (The average numbers of shares outstanding were 8,400 shares in 20-1 and 9,200 in 20-2.)

(d) Book value per share of common stock

(e) Quick ratio

(f) Current ratio

(g) Working capital

(h) Receivables turnover and average collection period (Net receivables on January 1, 20-1, were $39,800.)

(i) Merchandise inventory turnover and average number of days to sell inventory (Merchandise inventory on January 1, 20-1, was $48,970.)

(j) Debt-to-equity ratio

(k) Asset turnover (Assets on January 1, 20-1, were $175,750.)

(l) Times interest earned ratio

(m) Profit margin ratio

(n) Assets-to-equity ratio

(o) Price-earnings ratio (The market price of the common stock was $100.00 and $85.00 on December 31, 20-2 and 20-1, respectively.)

To determine

Calculate the following ratios and amounts for 20-1 and 20-2.

1. (a) Return on assets
2. (b) Return on common stockholders’ equity
3. (c) Earnings per share
4. (d) Book value per share
5. (e) Quick ratio
6. (f) Current ratio
7. (g) Working capital
8. (h) Receivables turnover and average collection period
9. (i) Merchandise inventory and average number of days to sell inventory
10. (j) Debt-equity ratio
11. (k) Assets turnover
12. (l) Times interest earned ratio
13. (m) Profit margin ratio
14. (n) Assets to equity ratio
15. (o) Price-earnings ratio

Explanation of Solution

  Financial statement analysis:

  Financial statement analysis is a valuable measure for evaluating management performance.

  The methods of analysis must be used carefully with in their limitations.

(a)

Calculate return on assets during the period of 20-2.

$\begin{array}{c}\text{Return on assets =}\frac{\text{Net income}}{\text{Average total assets}}\\ =\frac{\$93,013}{\left(\$200,720+\$329,900\right)÷2}\\ =35.06\%\end{array}$

Calculate return on assets during the period of 20-1.

$\begin{array}{c}\text{Return on assets =}\frac{\text{Net income}}{\text{Average total assets}}\\ =\frac{\$60,874}{\left(\$106,904+\$159,108\right)÷2}\\ =45.76\%\end{array}$

(b)

Calculate return on common stockholders’ equity during the period of 20-2.

$\begin{array}{c}\text{Retunr on commonstockholders' equity =}\frac{\text{Net income}}{\text{Average common stockholders' equity}}\\ =\frac{\$93,013}{\left(\$159,108+\$270,126\right)÷2}\\ =43.34\%\end{array}$

Calculate return on common stockholders’ equity during the period of 20-1.

$\begin{array}{c}\text{Return on common stockholders' equity =}\frac{\text{Net income}}{\text{Average common stockholders' equity}}\\ =\frac{\$60,874}{\left(\$106,904+\$159,108\right)÷2}\\ =45.76\%\end{array}$

(c)

Calculate earnings per share of common stock during the period of 20-2.

$\begin{array}{c}\text{Earnings per share of common stock =}\frac{\text{Net income}}{\text{Outstanding common shares}}\\ =\frac{\$93,013}{9,200\text{shares}}\\ =\$10.11\text{per share}\end{array}$

Calculate earnings per share of common stock during the period of 20-1.

$\begin{array}{c}\text{Earnings per share of common stock =}\frac{\text{Net income}}{\text{Outstanding common shares}}\\ =\frac{\$60,874}{8,400\text{shares}}\\ =\$7.25\text{per share}\end{array}$

(d)

Calculate book value per share of common stock during the period of 20-2.

$\begin{array}{c}\text{Book value per share of common stock =}\frac{\text{Total stockholders' equity}}{\text{Outstanding common shares}}\\ =\frac{\$270,126}{(\$100,000÷\$10\text{par value)}}\\ =\$27.01\text{per share}\end{array}$

Calculate book value per share of common stock during the period of 20-1.

$\begin{array}{c}\text{Book value per share of common stock =}\frac{\text{Total stockholders' equity}}{\text{Outstanding common shares}}\\ =\frac{\$159,108}{(\$84,000÷\$10\text{par value)}}\\ =\$18.94\text{per share}\end{array}$

(e)

Calculate quick ratio during the period of 20-2.

$\begin{array}{c}\text{Quick ratio}\text{=}\frac{\text{Quick assets}}{\text{Current liabilites}}\\ =\frac{\left(\$42,900+\$73,642\right)}{\$59,774}\\ =1.95\text{to1}\end{array}$

Calculate quick ratio during the period of 20-1.

$\begin{array}{c}\text{Quick ratio}\text{=}\frac{\text{Quick assets}}{\text{Current liabilites}}\\ =\frac{\left(\$22,006+\$47,510\right)}{\$41,642}\\ =1.67\text{to1}\end{array}$

(f)

Calculate current ratio during the period of 20-2.

$\begin{array}{c}\text{Current ratio}\text{=}\frac{\text{Current assets}}{\text{Current liabilites}}\\ =\frac{\$212,390}{\$59,774}\\ =\$3.55\text{to 1}\end{array}$

Calculate current ratio during the period of 20-1.

$\begin{array}{c}\text{Current ratio}\text{=}\frac{\text{Current assets}}{\text{Current liabilites}}\\ =\frac{\$121,070}{\$41,642}\\ =\$2.91\text{to 1}\end{array}$

(g)

Calculate working capital during the period of 20-2.

$\begin{array}{c}\text{Working capital =}\text{Current assets }-\text{Current liabilites}\\ \text{=}\text{\$212,390}-\$59,774\\ =\$152,616\end{array}$

Calculate working capital during the period of 20-1.

$\begin{array}{c}\text{Working capital =}\text{Current assets }-\text{Current liabilites}\\ \text{=}\text{\$121,070}-\$41,642\\ =\$79,428\end{array}$

(h)

Calculate receivables turnover during the period of 20-2.

$\begin{array}{c}\text{Receivables turnover =}\frac{\text{Credit sales}}{\text{Average accounts receivables}}\\ =\frac{\$650,220}{\left(\$47,510+\$73,642\right)÷2}\\ =10.73\text{times}\end{array}$

Calculate receivables turnover during the period of 20-1.

$\begin{array}{c}\text{Receivables turnover =}\frac{\text{Credit sales}}{\text{Average accounts receivables}}\\ =\frac{\$420,600}{\left(\$39,800+\$47,510\right)÷2}\\ =9.63\text{times}\end{array}$

Calculate average collection period during the period 20-2.

$\begin{array}{c}\text{Average collection period =}\frac{365}{\text{Accounts receivable turnover}}\\ =\frac{365}{10.73\text{times}}\\ =34.02\text{days}\end{array}$

Calculate average collection period during the period 20-1.

$\begin{array}{c}\text{Average collection period =}\frac{365}{\text{Accounts receivable turnover}}\\ =\frac{365}{9.63\text{times}}\\ =37.90\text{days}\end{array}$

(i)

Calculate merchandise inventory turnover during the period 20-2.

$\begin{array}{c}\text{Merchandise inventory turnover =}\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\frac{\$395,410}{\left(\$50,396+\$92,060\right)÷2}\\ =5.55\text{times}\end{array}$

Calculate merchandise inventory turnover during the period 20-1.

$\begin{array}{c}\text{Merchandise inventory turnover =}\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\frac{\$258,668}{\left(\$48,970+\$50,396\right)÷2}\\ =5.21\text{times}\end{array}$

Calculate average number of days to sell inventory during the period of 20-2.

$\begin{array}{c}\begin{array}{l}\text{Average number of }\\ \text{days to sell inventory}\end{array})\text{ =}\frac{365}{\text{Merchandise inventory turnover}}\\ =\frac{365}{5.55\text{times}}\\ =65.77\text{days}\end{array}$

Calculate average number of days to sell inventory during the period of 20-1.

$\begin{array}{c}\begin{array}{l}\text{Average number of }\\ \text{days to sell inventory}\end{array})\text{ =}\frac{365}{\text{Merchandise inventory turnover}}\\ =\frac{365}{5.21\text{times}}\\ =70.06\text{days}\end{array}$

(j)

Calculate debt-equity ratio during the period of 20-2.

$\begin{array}{c}\text{Debt - equity ratio}\text{=}\frac{\text{Total liabilites}}{\text{Total stockholders' equity}}\\ =\frac{\$59,774}{\$270,126}\\ =0.22\text{to 1}\end{array}$

Calculate debt-equity ratio during the period of 20-1.

$\begin{array}{c}\text{Debt - equity ratio}\text{=}\frac{\text{Total liabilites}}{\text{Total stockholders' equity}}\\ =\frac{\$41,642}{\$159,108}\\ =0.26\text{to 1}\end{array}$

Calculate asset turnover ratio during the period of 20-2.

$\begin{array}{c}\text{Asset turnover =}\frac{\text{Net sales}}{\text{Average total assets}}\\ =\frac{\$650,220}{\left(\$200,750+\$329,900\right)÷2}\\ =2.45\text{to 1}\end{array}$

Calculate asset turnover ratio during the period of 20-1.

$\begin{array}{c}\text{Asset turnover =}\frac{\text{Net sales}}{\text{Average total assets}}\\ =\frac{\$420,600}{\left(\$175,750+\$200,750\right)÷2}\\ =2.23\text{to 1}\end{array}$

(l)

Calculate time interest earned ratio during the period of 20-2.

$\begin{array}{c}\text{Time interest earned ratio}\text{=}\frac{\left(\text{Net income + income tax +interest expense}\right)}{\text{Interest expense}}\\ =\frac{\left(\$93,013+31,005+\$1,282\right)}{\$1,282}\\ =97.74\text{times}\end{array}$

Calculate time interest earned ratio during the period of 20-1.

$\begin{array}{c}\text{Time interest earned ratio}\text{=}\frac{\left(\text{Net income + income tax +interest expense}\right)}{\text{Interest expense}}\\ =\frac{\left(\$60,874+13,630+\$1,204\right)}{\$1,204}\\ =62.88\text{times}\end{array}$

(m)

Calculate profit margin ratio during the period of 20-2.

$\begin{array}{c}\text{Profit margin =}\frac{\text{Net income}}{\text{Net sales}}\\ =\frac{\$93,013}{\$650,220}\\ =14.30\%\end{array}$

Calculate profit margin ratio during the period of 20-1.

$\begin{array}{c}\text{Profit margin =}\frac{\text{Net income}}{\text{Net sales}}\\ =\frac{\$93,013}{\$650,220}\\ =14.30\%\end{array}$

(n)

Calculate assets to equity ratio during the period of 20-2.

$\begin{array}{c}\text{Asset to equity ratio =}\frac{\text{Total assets}}{\text{Stockholders' equity}}\\ =\frac{\$329,900}{\$270,126}\\ =1.22\end{array}$

Calculate assets to equity ratio during the period of 20-1.

$\begin{array}{c}\text{Asset to equity ratio =}\frac{\text{Total assets}}{\text{Stockholders' equity}}\\ =\frac{\$200,750}{\$159,108}\\ =1.26\end{array}$

(o)

Calculate price earnings ratio during the period of 20-2.

$\begin{array}{c}\text{Price earnings ratio =}\frac{\text{Market per share}}{\text{Earnings per share}}\\ =\frac{\$100}{\$10.11}\\ =9.89\end{array}$

Calculate price earnings ratio during the period of 20-2.

$\begin{array}{c}\text{Price earnings ratio =}\frac{\text{Market per share}}{\text{Earnings per share}}\\ =\frac{\$85}{\$7.25}\\ =11.72\end{array}$