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Chapter 15: Q5RQ (page 835)
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?
Answer
Vertical analysis is used to show the relative size of each item line of the income statement and the balance sheet.
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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%.
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.
The following data are adapted from the financial statements of Bridget’s Shops, Inc.:
Total Current Assets $ 1,216,000
Accumulated Depreciation 2,000,000
Total Liabilities 1,540,000
Preferred Stock 0
Debt Ratio 55%
Current Ratio 1.60
Prepare Bridget’s condensed balance sheet as of December 31, 2018.
Determining the effects of business transactions on selected ratios
Financial statement data of Modern Traveler’s Magazine include the following items:
Cash | \(19,000 |
Accounts Receivable, Net | 82,000 |
Merchandise Inventory | 183,000 |
Total Assets | 638,000 |
Accounts Payable | 102,000 |
Accrued Liabilities | 35,000 |
Short-term Notes Payable | 50,000 |
Long-term Liabilities | 221,000 |
Net Income | 69,000 |
Common Shares Outstanding | 50,000 shares |
Requirements
Current ratio | Debt ratio | Earnings per share |
2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.
a. Purchased merchandise inventory of \)42,000 on account.
b. Borrowed \(121,000 on a long-term note payable.
c. Issued 5,000 shares of common stock, receiving cash of \)103,000.
d. Received cash on account, $5,000.
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