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Chapter 15: Q6RQ (page 835)
Describe a common-size statement and how it might be helpful in evaluating a company.
The common-sized statement refers to the preparation of financial statements that indicates different items as the percentage of a common base figure.
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The financial statements of Ion Corporation include the following items:
Current Year Preceding Year
Balance Sheet:
Cash \( 6,000 \) 8,000
Short-term Investments 4,400 10,700
Net Accounts Receivable 21,600 29,200
Merchandise Inventory 30,800 27,600
Prepaid Expenses 6,000 3,600
Total Current Assets 68,800 79,100
Total Current Liabilities 53,200 37,200
Income Statement:
Net Sales Revenue $ 184,800
Cost of Goods Sold 126,000
Compute the following ratios for the current year:
7. Current ratio
8. Acid-test ratio
9. Inventory turnover
10. Gross profit percentage
Grand Oaks Realty’s net revenue & net income for the following five-year period using 2015 as the base year, follow:
Requirement:
Compute a trend analysis for the net revenue & net income. Round to the nearest full percent.
Which grew faster during the period, net revenue or the net income?
Using ratios to evaluate a stock investment
Comparative financial statement data of Garfield, Inc. follow:
| GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017 | ||
2018 | 2017 | |
Net sales revenue | \(461,000 | \)424,000 |
Cost of goods sold | 241,000 | 211,000 |
Gross profit | 220,000 | 213,000 |
Operating expenses | 137,000 | 135,000 |
Income from operations | 83,000 | 78,000 |
Interest expenses | 9,000 | 13,000 |
Income before taxes | 74,000 | 65,000 |
Income tax expenses | 18,000 | 24,000 |
Net income | \(56,000 | \)41,000 |
| GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017 | |||
2018 | 2017 | 2016 | |
Assets | |||
Current assets | |||
Cash | \(99,000 | \)98,000 | |
Accounts receivables, Net | 108,000 | 114,000 | 107,000 |
Merchandise inventory | 146,000 | 164,000 | 202,000 |
Prepaid expenses | 20,000 | 9,000 | |
Total current assets | 373,000 | 385,000 | |
Property, plant, and equipment | 211,000 | 181,000 | |
Total assets | \(584,000 | \)566,000 | \(602,000 |
Liabilities | |||
Total current liabilities | \)227,000 | \(246,000 | |
Long-term liabilities | 117,000 | 100,000 | |
Total liabilities | 344,000 | 346,000 | |
Stockholder’s equity | |||
Preferred stock, 3% | 98,000 | 98,000 | |
Common stockholder equity, no par | 142,000 | 122,000 | 89,000 |
Total liabilities and stockholder’s equity | \)584,000 | \(566,000 | |
1. Market price of Garfield’s common stock: \)69.36 at December 31, 2018, and $38.04 at December 31, 2017.
2. Common shares outstanding: 14,000 on December 31, 2018 and 12,000 on December 31, 2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
a. Current ratio
b. Cash ratio
c. Times-interest-earned ratio
d. Inventory turnover
e. Gross profit percentage
f. Debt to equity ratio
g. Rate of return on common stockholders’ equity
h. Earnings per share of common stock
i. Price/earnings ratio
2. Decide (a) whether Garfield’s ability to pay debts and to sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
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
Using ratios to evaluate a stock investment
Comparative financial statement data of Sanfield, Inc. follow:
| SANFIELD, INC. Comparative Income Statement Years Ended December 31, 2018, and 2017 | ||
2018 | 2017 | |
Net Sales Revenue | \( 462,000 | \) 430,000 |
Cost of Goods Sold | 236,000 | 213,000 |
Gross Profit | 226,000 | 217,000 |
Operating Expense | 135,000 | 133,000 |
Income from Operations | 91,000 | 84,000 |
Interest Expense | 8,000 | 12,000 |
Income Before Income Tax | 83,000 | 72,000 |
Income Tax Expense | 18,000 | 22,000 |
Net Income | \( 65,000 | \) 50,000 |
| SANFIELD, INC. Comparative Balance Sheet December 31, 2018, and 2017 | |||
2018 | 2017 | 2016 | |
Asset | |||
Current Assets: | |||
Cash | \( 99,000 | \) 97,000 | |
Accounts Receivable, Net | 109,000 | 117,000 | \( 100,000 |
Merchandise Inventory | 142,000 | 164,000 | 207,000 |
Prepaid Expenses | 15,000 | 5,000 | |
Total Current Assets | 365,000 | 383,000 | |
Property, Plant, and Equipment, Net | 215,000 | 177,000 | |
Total Assets | \) 580,000 | \( 560,000 | \) 599,000 |
Liabilities | |||
Total Current Liabilities | \( 222,000 | \) 244,000 | |
Long-term Liabilities | 113,000 | 92,000 | |
Total Liabilities | 335,000 | 336,000 | |
Stockholders’ Equity | |||
Preferred Stock, 4% | 92,000 | 92,000 | |
Common Stockholders’ Equity, no par | 153,000 | 132,000 | 85,000 |
Total Liabilities and Stockholders’ Equity | \( 580,000 | \) 560,000 | |
1. Market price of Sanfield’s common stock: \(51.48 at December 31, 2018, and \)37.08 at December 31, 2017.
2. Common shares outstanding: 16,000 on December 31, 2018 and 15,000 on December 31, 2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
2. Decide (a) whether Sanfield’s ability to pay debts and sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
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