1

Chapter 14

Week 14
E 1433 (LO2)

Computation of Ratios

1.

Debt ratio = $37,500/$109,000 = 34.4%

2.

Current ratio = $29,000/$20,000 = 1.45

3.

Return on sales = $33,000/$265,000 = 12.5%

4.

Asset turnover = $265,000/$109,000 = 2.43

5.

Return on equity = $33,000/$71,500 = 46.2%

6.

Price-earnings ratio = $150,000/$33,000 = 4.5

E 1434 (LO2)

Ratios and Computing Missing Values

b.

Current ratio = Total current assets/Total current liabilities

1.2 = (b)/$80,000; (b) = $96,000

a.

Cash + Accounts receivable = Total current assets

(a) + $55,000 = $96,000; (a) = $41,000

c.

Total assets = Current assets + Long-term assets

(c) = $96,000 + $35,000 + $120,000 = $251,000

d.

Total current liabilities = Accounts payable + Income taxes payable

$80,000 = $64,000 + (d); (d) = $16,000

f.

Debt ratio = Total liabilities/Total assets

0.50 = (f)/$251,000; (f) = $125,500

e.

Total liabilities = Current liabilities + Long-term liabilities

$125,500 = $80,000 + (e); (e) = $45,500

i.

Total liabilities and stockholders equity = Total assets

(i) = $251,000

h.

Total liabilities and stockholders equity = Total liabilities + Total stockholders equity
$251,000 = $125,500 + (h); (h) = $125,500

g.

Total stockholders equity = Paid-in capital + Retained earnings

$125,500 = (g) + $78,500; (g) = $47,000

In order, the answers are:

a.
b.
c.

$41,000
$96,000
$251,000

d.
e.
f.

$16,000
$45,500
$125,500

g.
h.
i.

$47,000
$125,500
$251,000

Chapter 14

E 1436 (LO3)
1.

Common-Size Income Statement

2009

Sales..............................................
Cost of goods sold.......................
Gross profit on sales ...................
Selling and general expenses.....
Operating income.........................
Interest expense...........................
Income before income tax ...........
Income tax expense .....................
Net income....................................

$ 885,000
(570,000)
$ 315,000
(106,000)
$ 209,000
(35,000)
$ 174,000
(52,000)
$ 122,000

2008

100.0
64.4
35.6
12.0
23.6
4.0
19.7*
5.9
13.8*

$ 545,000
(305,000)
$ 240,000
(84,000)
$ 156,000
(20,000)
$ 136,000
(41,000)
$ 95,000

100.0
56.0
44.0
15.4
28.6
3.7
25.0*
7.5
17.4*

*Difference due to rounding.

2.

Return on sales for King Engineering in 2009 is 13.8% compared to 17.4% in

2008. The cause of the decrease in the return on sales is that cost of goods
sold as a percentage of sales is much higher in 2009 (64.4%) compared to
2008 (56.0%). This increase is partially offset by lower selling and general
expenses, and lower income tax expense in 2009.

E 1438 (LO3)

Common-Size Balance Sheet

1.

2.

68,000
86,000
136,000
182,000
$ 472,000

3.4
4.3
6.8
9.1
23.6

Cash ..............................................
Accounts receivable ....................
Inventory .......................................
Property, plant, and equipment ..
Total assets ..................................

Sales..............................................

$2,000,000

2008

50,000
80,000
60,000
110,000
$ 300,000

3.1
5.0
3.8
6.9
18.8

$1,600,000

Total assets as a percentage of sales for Elison in 2009 are 23.6% compared
to 18.8% in 2008. This means that Elison needed more assets in place in
2009 to generate $1 of sales than in 2008. Both inventory and property, plant,
and equipment increased substantially as a percentage of sales in 2009.

E 1440 (LO3)
1.

2009

Income Statement Analysis

Gross profit = Sales Gross profit percentage

= $230,000 30%
= $69,000
Cost of goods sold = Sales Gross profit
= $230,000 $69,000
= $161,000

Chapter 14

2.

Net income = Sales Return on sales

= $230,000 10%
= $23,000

3.

Operating expenses = Sales 15%

= $230,000 0.15
= $34,500

4.

Sales Cost of goods sold Operating expenses Income taxes = Net income
$230,000 $161,000 $34,500 Income taxes = $23,000
Income taxes = $11,500
E 1441 (LO2)
Income Statement and Balance Sheet Analysis

1.

Return on equity = Net income/Stockholders equity

Return on equity = ($72,000/$910,000) = 7.9%

2.

The current ratio at the beginning of 2009 was 1.58, while at the end of 2009
it was 1.09. The current ratio decreased by 0.49.
1.58 = $293,000/$185,000

3.

1.09 = $324,000/$296,000

Given:

Total liabilities + Stockholders equity = $750,000

Hence:

Total assets = $750,000

Given:

Current assets = 40% of total assets

= $750,000 40%
= $300,000

(a) Given: Current ratio = 1.5

That is: (Current assets/Current liabilities)
Current liabilities

(b) Given:
Also:
Or:

= 1.5
= Current assets/1.5
= $300,000/1.5
= $200,000

Stockholders equity/Total liabilities = 3

Stockholders equity = 3 Total liabilities
Stockholders equity + Total liabilities
3 Total liabilities + Total liabilities
Total liabilities
Debt ratio

= $750,000
= $750,000
= $187,500
= $187,500/$750,000
= 25%

Chapter 14

E 1444 (LO4)

DuPont Framework

1.
Cash ....................................................................
Accounts receivable ..........................................
Inventory .............................................................
Property, plant, and equipment ........................
Total assets ........................................................

Faulty
$
140
900
2,200
1,800
$ 5,040

Total liabilities ....................................................

Stockholders equity..........................................

$ 3,780
1,260

$11,730
3,910

Sales....................................................................
Cost of goods sold.............................................
Wage expense ....................................................
Other expenses ..................................................
Net income..........................................................

$12,000
(7,650)
(1,300)
(2,940)
$
110

$45,000
(32,100)
(4,200)
(7,760)
$
940

ROE
Faulty

8.7%
($110/$1,260)

Return on Sales
0.9%
($110/$12,000)

Benchmark

24.0%
($940/$3,910)

2.1%
($940/$45,000)

E 1444 (LO4)
2.

Asset Turnover
2.38
($12,000/$5,040)

Assets/Equity
4.00
($5,040/$1,260)

2.88
($45,000/$15,640)

4.00
($15,640/$3,910)

(Concluded)

Faultys return on equity of 8.7% is lower than Benchmarks return on equity

of 24.0% because Faulty is less profitable than is Benchmark. Faultys return
on sales is only 0.9%, compared to 2.1% for Benchmark, indicating that each
dollar in sales is less profitable for Faulty. The level of leverage for Faulty
and Benchmark is the same. Faulty is also less efficient than Benchmark at
using its assets to generate sales.

P 1464 (LO2)
1.

Benchmark
$
500
2,740
6,100
6,300
$15,640

Ratio Analysis

Ratios

2009

2008

a.
b.
c.
d.
e.

1.36
38.6%
3.01
7.4%
36.1%

0.80
37.5%
2.80
6.3%
28.0%

Current ratio ............................................................

Debt ratio .................................................................
Asset turnover.........................................................
Return on sales.......................................................
Return on equity .....................................................

Calculations

a. Current ratio
2009: $60,000/$44,000
2008: $40,000/$50,000
b. Debt ratio
2009: $68,000/$176,000
2008: $60,000/$160,000
c. Asset turnover
2009: $530,000/$176,000
2008: $448,000/$160,000
d. Return on sales
2009: $39,000/$530,000
2008: $28,000/$448,000
e. Return on equity
2009: $39,000/$108,000
2008: $28,000/$100,000
P 1464 (LO2)
(Concluded)
2.

There is improvement. Many of the ratios have improved from 2008 to 2009.
In particular, both profitability and efficiency increased from 2008 to 2009,
combining to increase overall return on assets. There may be some concern
about the increasing amount of leverage. However, the level of debt still appears to be low.