$ 2,450,000
24,500
$ 2,425,500
850,000
$ 1,575,500
$ 970,000
280,000
$ 1,250,000
$ 325,500
30,000
$ 355,500
40,000
$ 315,500
97,000
$ 218,500
101.0%
1.0
100.0%
35.0
65.0%
40.0%
11.5
51.5%
13.5%*
1.2
14.7%
1.6
13.1%*
4.0
9.1%*
Publishing
Industry
Average
101.0%
1.0
100.0%
40.0
60.0%
39.0%
10.5
49.5%
10.5%
1.2
11.7%
1.7
10.0%
4.0
6.0%
The cost of goods sold is 5 percentage points lower than the industry
average, but the selling expenses and administrative expenses are 2
percentage points higher than the industry average. The combined impact is
for net
income as a percentage of sales to be 3 percentage points better
than the industry average. Apparently, the company is managing the cost of
publishing books better than the industry but has slightly higher selling and
administrative expenses relative to the industry. The cause of the higher
selling and administrative expenses as a percentage of sales, relative to the
industry, can be investigated further.
Exercise 94
ATLAS FITNESS EQUIPMENT COMPANY
Comparative Balance Sheet
December 31, 2004 and 2003
2004
Amount
Percent
2003
Amount
Percent
Current assets...............................
Property, plant, and equipment....
Intangible assets...........................
Total assets....................................
$180,000
340,000
30,000
$550,000
32.73%
61.82
5.45
100.00%
$150,000
330,000
35,000
$515,000
29.13%
64.08
6.79*
100.00%
Current liabilities...........................
Long-term liabilities......................
Common stock...............................
Retained earnings.........................
Total liabilities and
stockholders equity................
$120,000
175,000
50,000
205,000
21.82%
31.82
9.09
37.27
$125,000
150,000
40,000
200,000
24.27%
29.13
7.77
38.83
$550,000
100.00%
$515,000
100.00%
Sales.............................................
Cost of goods sold.....................
Gross profit.................................
Selling expenses.........................
Administrative expenses...........
Total operating expenses..........
Income before income tax.........
Income tax expense...................
Net income..................................
b.
2004
Amount
2003
Amount
Increase (Decrease)
Amount
Percent
$ 400,000
170,000
$ 230,000
$ 70,000
50,000
$ 120,000
$ 110,000
28,000
$ 82,000
$460,000
200,000
$260,000
$ 60,000
40,000
$100,000
$160,000
40,000
$120,000
$(60,000)
(30,000)
$(30,000)
$ 10,000
10,000
$ 20,000
$(50,000)
(12,000)
$(38,000)
(13.04)%
(15.00)%
(11.54)%
16.67%
25.00%
20.00%
(31.25)%
(30.00)%
(31.67)%
Exercise 97
a. (1)
(2)
b.
Current ratio =
Current assets
Current liabilities
Current year:
$4,362
$7,914
= 0.55
Acid-test ratio =
Quick assets
Current liabilities
Current year:
$2,847
$7,914
= 0.36
Preceding year:
$6,251
$4,257
= 1.47
Preceding year:
$5,033
$4,257
= 1.18
The liquidity of PepsiCo has declined significantly over this time period.
Both the current and acid-test ratios have declined by more than half from
the preceding year. A review of the current assets and liabilities reveals that
cash and marketable securities have dropped significantly while short-term
borrowings were made during the current year. The combined effect reduced
PepsiCos liquidity position. During this time period, PepsiCo was acquiring
bottlers. This investment required cash and short-term borrowings, which
placed a temporary squeeze on liquidity.
Exercise 99
a. (1)
Net sales
(2)
$1,450,000
= 7.0
$207,143
Preceding year:
$1,300,000
= 6.0
$216,667
$222,466
= 56.0 days
$3,973 *
$235,068
= 66.0 days
$3,562
b.
Exercise 912
a. (1)
$25,661
= 75.7
($400 $278) / 2
Gateway:
(2)
$5,241
= 24.1
($315 $120) / 2
$278
= 4.0 days
$70.3 *
$120
Dell has a much higher inventory turnover ratio than does Gateway (75.7 vs.
24.1), or a 3:1 ratio. Likewise, Dell has nearly half the number of days sales
in inventory (4.0 days vs. 8.3), or a 2:1 superiority ratio. However, we can
conclude that Gateways is making significant advances on Dell since the
superiority ratio for the number of days sales of inventory using the ending
inventory balance is less than for the inventory turnover (using average
inventory balances).
These significant differences are a result of Dells make-to-order operating
strategy. Dell has successfully developed a manufacturing process that is
able to fill a customer order quickly. As a result, Dell does not need to
prebuild computers for inventory. Gateway, in contrast, prebuilds computers
to be sold in its retail channel and for some of its telephone and internet
sales. In this industry, there is great obsolescence risk in holding computers
in inventory. New technology can make an inventory of computers difficult to
sell; therefore, inventory is costly and risky. Dells operating strategy is
considered revolutionary and is now being adopted by many both in and out
of the computer industry. Indeed, at the time of this writing, Gateway and
Hewlett-Packard are changing their practices to mirror those of Dell. As a
side note, Apple Computer employs similar manufacturing techniques as
does Dell and, thus, also enjoys excellent inventory efficiency.
Exercise 913
a.
Total liabilities
$2,604,000
$252,000 + $168,000 *
= 2.50
$168,000
$216,000 $192,000
$192,000
= 2.13
c.
Both the ratio of liabilities to stockholders equity and the number of times
bond interest charges were earned have improved significantly from 2003 to
2004. These results are the combined result of a higher income before taxes,
lower serial bonds payable, and lower current liabilities in the year 2004
compared to 2003.
Exercise 914
a.
$520,000 + $40,000
$3,000,000 *
= 18.7%
2003:
$600,000 $40,000
= 25.6%
$2,500,000
*($2,800,000 + $3,200,000)/2
($2,200,000 + $2,800,000)/2
Net income
$600,000
$520,000
= 20.8%
$2,500,000 *
*($2,270,000 + $2,730,000)/2
Rate earned on
common stockholders' equity:
2004:
$520,000 $60,000
= 23.0%
$2,000,000 *
*($2,230,000 + $1,770,000)/2
b.
($1,730,000 + $2,270,000)/2
2003:
$600,000 $60,000
= 36.0%
$1,500,000
($1,770,000 + $1,230,000)/2
Exercise 915
a.
Net income
b.
$29,105
= 3.36%
($882,986 $848,115 ) / 2
2001:
$52,363
= 6.49%
($848,115 $765,117 ) / 2
Net income
$29,105
= 4.91%
($612,129 $574,029) / 2
2001:
$52,363
= 9.61%
($574,029 $515,622) / 2
c.
Both the rate earned on total assets and the rate earned on stockholders
equity have deteriorated over the two-year period. The rate earned on total
assets declined from 6.49% to 3.36%, which is nearly half the return of the
prior year. The rate earned on stockholders equity declined from 9.61% to
4.91%. The rate earned on stockholders equity exceeds the rate earned on
total assets due to the use of positive leverage.
d.
Fiscal year 2002 was a difficult time for the apparel industry. The rate earned
on total assets for Ann Taylor barely exceeded the industry average (3.36%
vs. 3.2%). The rate earned on stockholders equity was less than the industry
average by more than a whole percentage point (6.49% vs. 7.6%). This
suggests that the industry uses more leverage than does Ann Taylor, on
average.
Exercise 916
a.
Fixed assets
b.
Total liabilities
Exercise 916
c.
(Concluded)
Net sales
= 1.14
$500,000 + $90,000
= 12.83%
$4,600,000 *
*($4,400,000 + $4,800,000)/2
e.
Net income
Exercise 917
a.
b.
Net income
Preferred dividends
$600,000
= 12 times
$50,000
c.
$600,000 $50,000
= $2.20
250,000 shares
d.
Price-earnings ratio:
$44
= 20
$2.20
e.
Common dividends
f.
Dividend yield:
$0.88
= 2%
$44.00
Exercise 918
a.
$588,000 $108,000
= $1.20
400,000 shares
b.
Price-earnings ratio:
$36.00
= 30
$1.20
c.
Common dividends
d.
Dividend yield:
$1.25
= 3.47% (rounded)
$36.00
Exercise 919
a.
$2,800,000
(400,000)
600,000
$3,000,000
b.
$2,800,000 $640,000
= $8.64 per share
250,000 shares
PROBLEMS
Problem 91
1.
BETTER BISCUIT COMPANY
Comparative Income Statement
For the Years Ended December 31, 2004 and 2003
Sales.................................................
Sales returns and allowances.......
Net sales..........................................
Cost of goods sold.........................
Gross profit.....................................
Selling expenses.............................
Administrative expenses...............
Total operating expenses...............
Income from operations.................
Other income...................................
Income before income tax.............
Income tax expense........................
Net income.......................................
2.
2004
2003
$715,000
5,000
$710,000
281,250
$428,750
$136,400
42,350
$178,750
$250,000
3,500
$253,500
85,000
$168,500
$550,000
5,000
$545,000
225,000
$320,000
$110,000
35,000
$145,000
$175,000
3,000
$178,000
60,000
$118,000
Increase (Decrease)
Amount Percent
$165,000
0
$165,000
56,250
$108,750
$ 26,400
7,350
$ 33,750
$ 75,000
500
$ 75,500
25,000
$ 50,500
30.00%
0.00%
30.28%
25.00%
33.98%
24.00%
21.00%
23.28%
42.86%
16.67%
42.42%
41.67%
42.80%
Problem 92
1.
STAINLESS FLOW SYSTEMS INC.
Comparative Income Statement
For the Years Ended December 31, 2004 and 2003
Sales.....................................................
Sales returns and allowances...........
Net sales..............................................
Cost of goods sold.............................
Gross profit.........................................
Selling expenses.................................
Administrative expenses...................
Total operating expenses...................
Income from operations.....................
Other income.......................................
Income before income tax.................
Income tax expense............................
Net income...........................................
2004
Amount Percent
2003
Amount Percent
$810,000 100.62%
5,000
0.62
$805,000 100.00%
438,700
54.50
$366,300
45.50%
$165,800
20.60%
96,600
12.00
$262,400
32.60%
$103,900
12.90%*
2,000
0.25
$105,900
13.15%*
37,000
4.60
$ 68,900
8.55%*
$775,000 100.65%
5,000
0.65
$770,000 100.00%
416,000
54.03
$354,000
45.97%
$115,800
15.04%
93,400
12.13
$209,200
27.17%
$144,800
18.80%*
1,800
0.23
$146,600
19.03%*
51,000
6.62
$ 95,600
12.41%*
The net income as a percentage of sales has declined. All costs and
expenses, other than selling expenses, have maintained their approximate
cost as a percentage of sales relationship between 2003 and 2004. Selling
expenses as a percentage of sales, however, have increased from 15.04% to
20.60% of sales. Apparently, the new advertising campaign has not been
successful. The increased expense has not produced sufficient sales to
maintain relative profitability. Thus, selling expenses as a percentage of
sales have deteriorated.
Problem 93
1.
a.
b.
Current assets
$740,000
= 2.47
$300,000
c.
Acid-test ratio =
Quick assets
Current liabilities
2.
Transaction
Working
Capital
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
$440,000
440,000
440,000
440,000
415,000
440,000
560,000
440,000
540,000
440,000
Supporting Calculations
Current Acid-Test Current
Quick
Current
Ratio
Ratio
Assets
Assets
Liabilities
2.47
2.83
2.29
2.57
2.28
2.47
2.87
2.47
2.80
2.47
1.45
1.56
1.28
1.48
1.34
1.45
1.85
1.45
1.78
1.42
$740,000
680,000
780,000
720,000
740,000
740,000
860,000
740,000
840,000
740,000
$435,000
375,000
435,000
415,000
435,000
435,000
555,000
435,000
535,000
426,000
$300,000
240,000
340,000
280,000
325,000
300,000
300,000
300,000
300,000
300,000
Problem 94
1.
Numerator
2. Current ratio...................
$1,999,000
3. Acid-test ratio................
$1,473,000
4. Accounts receivable
turnover..........................
$6,100,000
5. Number of days' sales
in receivables.................
$350,000
6. Inventory turnover.........
$2,800,000
7. Number of days' sales
in inventory....................
$500,000
8. Fixed assets to longterm liabilities................
$3,100,000
9. Liabilities to stockholders' equity...............
$2,400,000
10. Number of times
interest charges
earned............................. $733,000 + $157,000
11. Number of times
preferred dividends
earned.............................
$503,000
12. Ratio of net sales to
assets.............................
$6,100,000
13. Rate earned on total
assets............................. $503,000 + $157,000
14. Rate earned on stockholders' equity...............
$503,000
15. Rate earned on
common stockholders' equity............... ($503,000 $48,000)
16. Earnings per share
on common stock.......... ($503,000 $48,000)
17. Price-earnings ratio.......
$80.00
18. Dividends per share
of common stock...........
$120,000
19. Dividend yield................
$0.80
Denominator
Value
$600,000
$600,000
3.3
2.5
($350,000 + $365,000)/2
17.1
($6,100,000/365)
($500,000 + $480,000)/2
20.9
5.7
($2,800,000/365)
65.2
$1,800,000
1.7
$3,399,000
0.7
$157,000
5.7
$48,000
10.5
($5,099,000 + $3,864,000)/2
1.4
($5,799,000 + $4,364,000)/2
13.0%
($3,399,000 + $2,964,000)/2
15.8%
($2,799,000 + $2,464,000)/2
17.3%
150,000
$3.03
$3.03
26.4
150,000
$80.00
$0.80
1.0%
Problem 95
a.
0.30
0.25
Rate Earned on Total Assets
1.
0.20
0.15
0.10
0.05
0.00
2000
2001
2002
2003
2004
Years
Industry
$244,000
$326,000
2000: $1,500,000
= 0.25
Problem 95
b.
0.60
Rate Earned on Stockholders' Equity
1.
(Continued)
0.50
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
Years
Industry
$100,000
2002: $850,000
= 0.18
$200,000
Problem 95
c.
4
Num ber of Tim es Interest Charges Earned
1.
(Continued)
3.5
3
2.5
2
1.5
1
0.5
0
2000
2001
2002
2003
2004
Years
Industry
$274,000
$386,000
Problem 95
(Continued)
1. d.
2.50
2.00
1.50
1.00
0.50
2000
2001
2002
2003
2004
Years
Industry
$1,200,000
$1,050,000
Problem 95
2.
(Concluded)
Both the rate earned on total assets and the rate earned on stockholders'
equity have been moving in a negative direction in the last five years. Both
measures have moved below the industry average within the last year. The
rate earned on stockholders' equity has been moving down at a faster rate
because of the increasing use of leverage over the time period. The use of
leverage (debt) can be seen from the ratio of liabilities to stockholders'
equity. This ratio has fallen below the industry average, indicating that the
company has more debt relative to stockholders' equity. Since the rate
earned on assets has been below the interest cost of the debt in the last
year, the rate earned on stockholders' equity has been below the rate earned
on assets (the use of leverage has had a negative impact). The number of
times interest charges have been earned has been falling below the industry
average for several years. This is the combined result of an increasing use of
leverage and low profitability. The number of times interest is earned has
fallen to a dangerously low level in 2004. The low profitability and times
interest charges are earned in 2004, as well as the five-year trend, should be
a major concern to the company's management, stockholders, and creditors.
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