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Chapter 15: Q14E (page 840)

Grand Oaks Realty’s net revenue & net income for the following five-year period using 2015 as the base year, follow:

Requirement:

  1. Compute a trend analysis for the net revenue & net income. Round to the nearest full percent.

  2. Which grew faster during the period, net revenue or the net income?

Short Answer

Expert verified

Answer

1. Given below

2. Net Income Increasing More as Compare to Revenue per year.

Step by step solution

01

Calculation of Trend % as per revenue


2019 (a)

2018 (b)

2017 (c)

2016 (d)

2015 (e)

Net revenue

$1,360,000

$1,180,000

$1,147,000

$1,008,000

$1,044,000

Trend percent

130%

113%

110%

97%

100%


(a/e)

(b/e)

(c/e)

(d/e)

(e/e)

02

Step 2:Calculation of Trend % as per income


2019 (a)

2018 (b)

2017 (c)

2016 (d)

2015 (e)

Net income

127,000

120,000

87,000

75,000

83,000

Trend percent

153%

145%

105%

90%

100%


(a/e)

(b/e)

(c/e)

(d/e)

(e/e)

03

Comment

Requirement 2

Net income grew faster as compared to net revenue.

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Most popular questions from this chapter

Big Beautiful Photo Shop has asked you to determine whether the company’s ability to pay current liabilities and total liabilities improved or deteriorated during 2018. To answer this question, you gather the following data:

2018

2017

Cash

\(58,000

\)47,000

Short-term Investments

34,000

0

Net Accounts Receivable

140,000

124,000

Merchandise Inventory

217,000

272,000

Total Assets

530,000

565,000

Total Current Liabilities

288,000

205,000

Long-term Notes Payable

40,000

50,000

Income from Operations

165,000

158,000

Interest Expense

55,000

41,000

Compute the following ratios for 2018 and 2017, and evaluate the company’s ability to pay its current liabilities and total liabilities:

a. Current ratio

b. Cash ratio

c. Acid-test ratio

d. Debt ratio

e. Debt to equity ratio

Net sales revenue, net income, and commonA stockholders’ equity for Azbel Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.

Requirements

1.Compute trend analyses for each item for 2017–2019. Use 2016 as the base year,and round to the nearest whole percent.

2.Compute the rate of return on common stockholders’ equity for 2017–2019, rounding to three decimal places.

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

  1. Compute the following ratios for both companies for the current year:

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.

Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Question: What is horizontal analysis, and how is a percentage change computed?
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