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Chapter 15: Q13RQ (page 835)
What are some common red flags in financial statement analysis?
Red Flags in Financial Analysis are as follows- Sales trending down from the past years, consistently higher liabilities than Assets, etc.
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Preparing common-size income statements
Refer to the data presented for Mulberry Designs, Inc. in Exercise E15-13.
Requirements
1. Prepare a comparative common-size income statement for Mulberry Designs,
Inc. using the 2018 and 2017 data. Round percentages to one-tenth percent (three
decimal places).
2. To an investor, how does 2018 compare with 2017? Explain your reasoning.
Briefly describe the ratios that can be used to evaluate a company’s ability to paycurrent liabilities.
Old Mills’s income statement appears as follows (amounts in thousands):
Use the following ratio data to complete Old Mills’s income statement:
1. Inventory turnover is 3.70 (beginning Merchandise Inventory was \(810; ending
Merchandise Inventory was \)770).
2. Profit margin ratio is 14%.
Lance Berkman is the controller of Saturn, a dance club whose year-end is December 31. Berkman prepares checks for suppliers in December, makes the proper journal entries, and posts them to the appropriate accounts in that month. However, he holds on to the checks and mails them to the suppliers in January.
Requirements
1. What financial ratio(s) is(are) most affected by the action to hold onto the checks until January?
2. What is Berkman’s purpose in undertaking this activity?
Using ratios to decide between two stock investments
Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Digitalized Corp. and Every Zone, Inc. and have assembled the following data.
Selected income statement data for the current year:
Digitalized | Every Zone | |
Net sales revenue (all on credit) | \(423,035 | \)493,845 |
Cost of goods sold | 210,000 | 260,000 |
Interest expenses | 0 | 19,000 |
Net income | 51,000 | 72,000 |
Selected balance sheet and market price data at the end of the current year:
Digitalized | Every Zone | |
Current assets: | ||
Cash | \(24,000 | \)17,000 |
Short-term investment | 40,000 | 14,000 |
Accounts receivables, Net | 40,000 | 48,000 |
Merchandise inventory | 66,000 | 97,000 |
Prepaid expenses | 23,000 | 12,000 |
Total current assets | \(193,000 | \)188,000 |
Total assets | 266,000 | 323,000 |
Total current liabilities | 105,000 | 96,000 |
Total liabilities | 105,000 | 128,000 |
Common stock | ||
\(1 par (12,000 shares) | 12,000 | |
\)1 par (17,000 shares) | 17,000 | |
Total stockholders equity | 161,000 | 195,000 |
Market price per share of common stock | 76.50 | 114.48 |
Dividend paid per common stock | 1.10 | 1.00 |
Selected balance sheet data at the beginning of the current year:
Digitalized | Every Zone | |
Balance sheet: | ||
Accounts Receivable, net | \(41,000 | \)54,000 |
Merchandise Inventory | 81,000 | 87,000 |
Total Assets | 261,000 | 272,000 |
Common Stock: | ||
\(1 par (12,000 shares) | 12,000 | |
\)1 par (17,000 shares) | 17,000 |
Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.
Requirements
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy.
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