Exam 13: Analysis of Financial Statements

A company had a market price of $27.50 per share, earnings per share of $1.25, and dividends per share of $0.40. Its price-earnings ratio equals:

Intra-company analysis compares a company's current performance to its own prior performance.

Comparative calendar year financial data for a company are shown below. Calculate the following ratios for 2018: (a) return on total assets (b) return on common stockholders' equity. Sales Gross profit Income before taxes Net income Liabilities Common stock ( \1 2 par) Contributed capital in excess of par Retained earnings Total liabilities and equity \ 270,000 79,200 51,200 December 31, 2018 \ 493,500 180,000 135,000 204,000 \ 1,012,500 \ 607,500 224,800 78,700 51,700 December 31 2017 \ 452,500 180,000 135,000 177,300 \ 944,800

Three of the most common tools of financial analysis are (1) ________, (2) ________, and (3) ________.

Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

Refer to the following selected financial information from McCormik, LLC. Compute the company's inventory turnover for Year 2. Year 2 Year 1 Cash \ 37,500 36,850 Short-term investments 90,000 90,000 Accounts receivable, net 85,500 86,250 Merchandise inventory 121,000 117,000 Prepaid expenses 12,100 13,500 Plant assets 388,000 392,000 Accounts payable 113,400 111.750 Net sales 711,000 706,00 Cost of goods sold 390,000 385,500

The current year-end balance sheet data for a company are shown below. Calculate the company's: (a) working capital (b) current ratio (c) acid-test ratio. Assets: Cash $ 38,000 Marketable securities 45,000 Accounts receivable (net) 127,500 Merchandise inventory 149,500 Long-term investments 135,000 Plant assets (net) 517,500 Total assets $ 1,012,500 Liabilities and equity: Accounts payable $ 148,700 Accrued liabilities 90,000 Notes payable (secured by plant assets) 254,800 Common stock ($12 par) 180,000 Contributed capital in excess of par 135,000 Retained earnings 204,000 Total liabilities and equity $1,012,500

An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

The following summaries from the income statements and balance sheets of Kouris Company and Brittania, Inc. are presented below. (1) For both companies for 2018, compute the: (a) Current ratio (b) Acid-test ratio (c) Accounts receivable turnover (d) Inventory turnover (e) Days' sales in inventory (f) Days' sales uncollected Which company do you consider to be the better short-term credit risk? Explain. (2) For both companies for 2018, compute the: (a) Profit margin ratio (b) Return on total assets (c) Return on common stockholders' equity Which company do you consider to have better profitability ratios? Current assets: Cash and cash equivalents Accounts receivable, net of allowance Inventories Other current assets Total current assets Property, plant, and equipment, net Other long term assets Total assets Liabilities and Stockholders' Equity \ 634.0 2,101.1 1,514.9 429.9 4,679.9 1,620.8 413.9 \ 6,713.9 \ 575.5 1,804.1 1,373.8 401.3 4,154.7 1,614.5 670.8 \ 6,440.0 Current liabilities: Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long term liabilities Total liabilities Stockholders' equity: Common stock Contributed capital in excess of par value Unearned stock compensation Accumulated other comprehensive loss Retained earnings Total stockholders' equity Total liabilities and stockholders' equity \ 205.7 75.4 572.7 1,054.2 107.2 2,015.2 708.0 2,723.2 2.8 589.0 (0.6) (239.7) 3,639.2 3,990.7 \ 6,713.9 \ 55.3 425.2 504.4 765.3 83.0 1,833.2 767.8 2,601.0 2.8 538.7 (5.1) (192.4) 3,495.0 3,839.0 \ 6,440.0 Kouris Company Consolidated Statement of Income May 31,2018 (in millions) Revenues Cost of sales Grossprofit Operating expenses Operating income Interest expense Other revenues and expenses Income before tax Income taxes Income before effect of accounting change Cumulative effect of accounting change, net of tax Net income \ 10,697.0 6,313.6 4,383.4 3,137.6 1,245.8 42.9 79.9 1,123.0 382.9 740.1 \ 266.1 \ 474.0 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Brittania, Inc.}$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Consolidated Balance Sheets}$ Jan. 3, Jan. 4, 2018 2017 Assets Current assets: Cash and cash equivalents Accounts receivable, net of allowance Inventories Other current assets Total current assets Property, plant, and equipment, net Other long term assets Total assets \3 4.5 15.5 27.2 3.5 80.7 5.7 1.1 \8 7.5 \2 2.2 14.7 28.4 4.2 69.5 7.0 1.5 \7 8.0 Liabilities and Stockholders' Equity Current liabilities: Accounts payable \ 8.5 \ 16.6 Accrued liabilities 7.8 5.6 Total current liabilities 16.3 12.2 Long term liabilities 2.5 2.6 Total liabilities 18.8 14.8 Stockholders' equity: Common stock 2.3 2.3 Contributed capital in excess of par value 17.8 17.4 Unearned stock compensation (0.1) (0.5) Accumulated other comprehensive loss (6.9) (1.3) Treasury stock 55.9 5.50.7 Retained earnings 68.7 63.2 Total stockholders' equity \ 87.5 \ 78.0 Brittania, Inc. Consolidated Statement of Income January 3, 2018 (in millions) Revenues \ 133.5 Cost of sales 87.3 Gross profit 46.2 Operating expenses 37.3 Operating income 8.9 Interest expense (0.1) Other revenues and expenses 0.3 Income before tax 9.1 Income taxes \ .9.2 Net income \ .2.12

The measurement of key relations among financial statement items is known as:

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

Horizontal analysis:

Use the balance sheets of Glover shown below to calculate the following ratios for 2018 (round to the hundredths): (a) Current ratio. (b) Acid-test ratio. (c) Debt ratio. (d) Equity ratio. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Glover Company }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Balance Sheets }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { December 31,2018 and 2017 }$ 2018 2017 Assets: Cash \ 43,000 \ 22,000 Accounts receivable 38,000 42,000 Merchandise inventory 61,000 52,000 Prepaid insurance 6,000 9,000 Long-term investments 49,000 20,000 Plant assets (net) 218,000 218,000 Total assets \ 415,000 \ 363,000 Liabilities and Equity: Current liabilities \ 62,000 \ 75,000 Long-term liabilities 45,000 36,000 Rommon stock 150,000 150,000 Totained earnings 158,000 102,000

Common-size statements:

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

General-purpose financial statements include the (1)________, (2) ________, (3) ________, (4) ________ and (5) ________.

Gains and losses that are neither unusual nor infrequent are reported as:

Net income divided by net sales is the:

Identify and describe three common tools of financial statement analysis.