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Chapter 15: Q1SE (page 835)
Explaining financial statements
Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?
Answer
Horizontal analysis, vertical analysis, and ratio analysis
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Question: What is vertical analysis? What item is used as the base for the income statement? What item is used as the base for the balance sheet?
The Klein Department Stores, Inc. chief executive officer (CEO) has asked you tocompare the company’s profit performance and financial position with the averages for the industry. The CEO has given you the company’s income statement and balance sheet as well as the industry average data for retailers.
Requirements
1.Prepare a vertical analysis for Klein for both its income statement and balance sheet.
2.Compare the company’s profit performance and financial position with the averagefor the industry.
Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.
MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018 | |||
Dollars in thousands | 2019 | 2018 | 2017 |
Net Sales Revenue | \( 181,000 | \) 160,000 | |
Cost of Goods Sold | 93,500 | 86,500 | |
Selling and Administrative Expenses | 45,000 | 40,500 | |
Interest Expense | 8,000 | 12,000 | |
Income Tax Expense | 11,000 | 10,500 | |
Net Income | \( 23,500 | \) 10,500 | |
Additional data: | |||
Total Assets | \( 209,000 | \) 187,000 | \( 167,000 |
Common Stockholders’ Equity | 96,000 | 91,500 | 80,500 |
Preferred Dividends | 2,000 | 2,000 | 0 |
Common Shares Outstanding During the Year | 15,000 | 15,000 | 10,000 |
Requirements
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%.
Completing a comprehensive financial statement analysis
In its annual report, XYZ Athletic Supply, Inc. includes the following five-year financial summary:
XYZ ATHLETIC SUPPLY, INC. | ||||||
Five-Year Financial Summary (Partial; adapted) | ||||||
(Dollar amounts in thousands except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2016 |
Net sales revenue | \(275,000 | \)222,000 | \(199,000 | \)171,000 | 131,000 | |
Net Sales Revenue Increase | 24% | 12% | 16% | 31% | 17% | |
Domestic Comparative Store Sales Increase | 6% | 6% | 5% | 8% | 10% | |
Other Income—Net | 2,090 | 1,780 | 1,770 | 1,700 | 1,310 | |
Cost of Goods Sold | 208,725 | 169,386 | 154,822 | 134,235 | 103,883 | |
Selling and Administrative Expenses | 41,280 | 36,340 | 31,670 | 27,450 | 22,540 | |
Interest: | ||||||
Interest Expense | (1,070) | (1,370) | (1,330) | (1,100) | (800) | |
Interest Income | 140 | 155 | 150 | 230 | 140 | |
Income Tax Expense | 4,420 | 3,900 | 3,610 | 3,390 | 2,730 | |
Net Income | 21,735 | 12,939 | 9,488 | 6,755 | 2,497 | |
Per Share of Common Stock: | ||||||
Net Income | 1.10 | 0.80 | 0.70 | 0.50 | 0.28 | |
Dividends | 0.45 | 0.43 | 0.39 | 0.35 | 0.31 | |
Financial Position | ||||||
Current Assets, Excluding Merchandise Inventory | \(30,900 | \)27,200 | \(26,800 | \)24,400 | $21,800 | |
Merchandise Inventory | 24,700 | 22,400 | 21,600 | 19,300 | 17,000 | 16,800 |
Property, Plant, and Equipment, Net | 51,600 | 46,200 | 40,500 | 35,000 | 25,200 | |
Total Assets | 107,200 | 95,800 | 88,900 | 78,700 | 64,000 | |
Current Liabilities | 32,600 | 27,800 | 28,800 | 25,600 | 17,000 | |
Long-term Debt | 23,000 | 21,200 | 16,800 | 18,600 | 12,900 | |
Stockholders’ Equity | 51,600 | 46,800 | 43,300 | 35,500 | 34,100 | |
Financial Ratios | ||||||
Acid-Test Ratio | 0.9 | 1.0 | 0.9 | 1.0 | 1.3 | |
Rate of Return on Total Assets | 22.5% | 15.5% | 12.8% | 10.9% | 9.9% | |
Rate of Return on Common Stockholders’ Equity | 44.2% | 28.7% | 24.1% | 19.4% | 18.9% |
Requirements
Analyze the company’s financial summary for the fiscal years 2014–2018 to decide whether to invest in the common stock of XYZ. Include the following sections in your analysis.
1. Trend analysis for net sales revenue and net income (use 2014 as the base year).
2. Profitability analysis.
3. Evaluation of the ability to sell merchandise inventory.
4. Evaluation of the ability to pay debts.
5. Evaluation of dividends.
6. Should you invest in the common stock of XYZ Athletic Supply, Inc.? Fully explain your final decision
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