Exercise for Financial Statement Analysis and Ratios

1. The following are the year-end balances of Salter Corporation for 2005 and 2006:

31-Dec-06 31-Dec-05

Cash $ 70,000 $ 40,000

Accounts Receivable 80,000 50,000
Inventory 55,000 25,000
Property, Plant, and Equip 500,000 400,000
Total Assets $705,000 $515,000

Accounts Payable 75,000 60,000

Bonds Payable (due in 2009) 100,000 100,000
Paid-in Capital 300,000 200,000
Retained Earnings 230,000 155,000
Total Liabilities & Equity $705,000 $515,000

Required: If income for 2006 was $180,000, provide the following information as of December
31, 2006:

a. Dividends paid = $__________

b. Current ratio = ___________
c. Debt-to-equity ratio = __________
d. Debt ratio = __________

ANS: It's helpful first to classify the balance sheet:

31-Dec-06 31-Dec-05
Cash 70,000 $ 40,000
Accounts Receivable 80,000 50,000
Inventory 55,000 25,000
Total current assets $205,000 $115,000
Property, Plant, and Equip 500,000 400,000
Total Assets $705,000 $515,000

Accounts Payable $ 75,000 $ 60,000

Total Current Liabilities $ 75,000 $ 60,000
Bonds Payable (due in 2009) 100,000 100,000
Total Liabilities $175,000 $160,000
Paid-in Capital 300,000 200,000
Retained Earnings 230,000 155,000
Total Equity $530,000 $355,000
Total Liabilities & Equity $705,000 $515,000

a. Dividends paid = $105,000

Beginning retained earnings $155,000

Add: Income 180,000
Less: Dividends ( X )
Ending retained earnings $230,000

b. Current ratio = 2.73:1

c. Debt-to-equity ratio = 33%

d. Debt ratio = 24.8%

2. Cornfed Corporation reported the following information relating to its livestock division on
December 31, 2005:

1. Debt-to-equity ratio = 1:9

2. Debt ratio = 10%
3. Total liabilities = $11,000
4. Noncurrent assets are ten times current assets.
5. Noncurrent liabilities are $3,000 more than current liabilities.

Required: Find the following values relating to Cornfed Corporation on December 31,
2005:

a. Current ratio = __________

b. Total assets = $__________
c. Stockholders' equity = $__________
ANS: (Ratios)

The following information relates to Cornfed Corporation:

a. Current ratio = 2.5:1

 b. Total assets = $110,000

c. Stockholders' equity = $99,000

Total Assets = $110,000

Current Assets + Noncurrent Assets = Total Assets

X + 10X = $110,000

X = Current Assets = $10,000

Total
Current Liabilities + Noncurrent = Liabilities
Liabilities
Y + (Y + $3,000) = $11,000

Y = Current Liabilities = $4,000

Total Assets - Total Liabilities = Stockholders'

Equity
$110,000 - $11,000 = $99,000

3. Listed below are comparative statements for Turco Corporation:

December 31, 2006 December 31, 2005

Noncurrent Assets $ 4,800,000 $5,400,000
Total Assets 9,000,000 7,200,000
Noncurrent Liabilities 3,600,000 2,400,000
Total Liabilities 5,400,000 4,000,000
Total Sales 15,600,000 12,400,000
Total Expenses 14,000,000 12,000,000

Required:

a. Determine the return on sales for 2005

b. Determine the return on sales for 2006.

c. Determine the current ratio for 2005.
d. Determine the current ratio for 2006.
e. Determine the asset turnover for 2006.
f. Determine the return on equity for 2006.
4. The following financial data was taken from the records of the Bomer Corporation:

2006 2005
Current Assets $140,000 $120,000
Noncurrent Assets 80,000 60,000
Total Assets $220,000 $180,000

Current Liabilities $ 50,000 $ 40,000

Noncurrent Liabilities 20,000 35,000
Total Liabilities $ 70,000 $ 75,000

Paid-in Capital $ 5,000 $ 5,000

Retained Earnings (ending balance) 145,000 100,000
Total Stockholders' Equity $150,000 $105,000

Other data: Sales in 2006 = $300,000.

Cost of goods sold in 2006 = $100,000.
Operating and other expenses in 2006 = $150,000.
Market value of shares in 2006 = $525,000

Required: For the year ending December 31, 2006, make the following calculations:

a. Current ratio
b. Asset turnover
c. Return on equity
d. Return on sales
e. Price-earnings ratio
f. Debt ratio
ANS:

a. Current Ratio = $140,000 / $50,000 = 2.8

b.

c.

d. Return on Sales = $50,000 / $300,000 = 16.67%

e. Price-Earnings Ratio = $525,000 / $50,000 = 10.5

f. Debt Ratio = $70,000 / $220,000 = 31.82%

5. The balance sheet for Noriuki Corporation is as follows:

Noriuki Corporation

Balance Sheet

as of 12/31/2006
Cash 18,000
ARs 22,000
Total current assets 40,000
LT investments 20,000
PP & E 64,000
Total assets 124,000

APs 24,000
Salaries payable 6,000
Total current liabilities 30,000
LT liabilities 11,000
Total liabilities 41,000

Paid-in capital 80,000

Retained Earnings 3,000
Total equity 83,000
Total liabilities & equity 124,000

In addition, the following information for 2006 has been assembled:

Sales 210,000
Net income 14,000
Market value at balance sheet date 315,000

Required: Compute the following ratios:

1. Debt ratio
2. Current ratio
3. Return on sales
4. Asset turnover
5. Return on equity
6. Price-earnings ratio

ANS:
Debt 41,000
Assets 124,000
Debt ratio = 0.331

Total liabilities / Total assets = $41,000 / $124,000

Current assets 40,000

Current liabilities 30,000
Current ratio = 1.333

Current liabilities / Current assets = $40,000 / $30,000

Net income 14,000

Sales 210,000
Return on sales = 0.067

Net income / Sales = $14,000 / $210,000

Sales 210,000
Assets 124,000
Asset turnover = 1.694

Sales / Assets = $210,000 / $124,000

Net income 14,000

Equity 83,000
Return on equity = 0.169

Net income / Equity = $14,000 / $83,000

Market value 315,000

Net income 14,000
P/E ratio = 22.500

Market value / Net income = $315,000 / $14,000

6. The following information is for the year 2005 for Leesville Company:

Current assets 48,000

LT assets 90,000
Current liabilities 34,000
Long-term liabilities 63,000
Sales 525,000
Net income 7,000
Market price per share 33
Number of shares outstanding 5,000

Required: Compute the following ratios:

1. Debt ratio
2. Current ratio
3. Return on sales
4. Asset turnover
5. Return on equity
6. Price-earnings ratio

ANS:

Current assets 48,000

LT assets 90,000
Total assets 138,000

Current liabilities 34,000

LT liabilities 63,000
Total liabilities 97,000
Total equity 41,000
Total liabilities & equity 138,000

Sales 525,000
Net income 7,000
Market price per share 33
Number of shares outstanding 5,000
Market value 165,000
Debt 97,000
Assets 138,000
Debt ratio = 0.703

Total liabilities / Total assets = $97,000 / $138,000

Current assets 48,000

Current liabilities 34,000
Current ratio = 1.412

Current liabilities / Current assets = $48,000 / $34,000

Net income 7,000

Sales 525,000
Return on sales = 0.013

Net income / Sales = $7,000 / $525,000

Sales 525,000
Assets 138,000
Asset turnover = 3.804

Sales / Assets = $525,000 / $138,000

Net income 7,000

Equity 41,000
Return on equity = 0.171

Net income / Equity = $7,000 / $41,000

Market value 165,000

Net income 7,000
P/E ratio = 23.571

Market value / Net income = $165,000 / $7,000

7. The following information has been assembled for Williams Company for 2006:

Price-earnings ratio 25.00

Stockholders' equity 120,000
Debt ratio 0.40
Net income 24,000
Asset turnover 1.50
Current liabilities 40,000
Long-term assets 90,000

Required: Compute the following:

1. Return on equity
2. Total assets
3. Sales
4. Return on sales
5. Current ratio
6. Total market value of shares
ANS:

Net income (given) 24,000

Stockholders' equity (given) 120,000
Return on equity 0.20

Because the debt ratio is given as 0.40

We know that the balance sheet in common size is

Assets 1.00

Liabilities 0.40
Equity 0.60
Total liabilities & equity 1.00

Because stockholders' equity is given as 120,000

We know that the balance sheet is

Assets 200,000

Liabilities 80,000
Equity 120,000
Total liabilities & equity 200,000

Total assets (derived above) 200,000

Asset turnover (given) 1.50
Sales 300,000
Net income (given) 24,000
Sales (derived above) 300,000
Return on sales 0.08

Total assets (derived above) 200,000

Long-term assets (given) 90,000
Current assets 110,000

Current liabilities (given) 40,000

Current ratio 2.75

Price-earnings ratio (given) 25.00

Net income (given) 24,000
Total Market value of shares 600,000

8. Comparative income statements for North Side Company are given below:
2006 2005
Sales $2,000,000 $1,130,000
Cost of goods sold (1,020,000) (480,000)
Gross profit on sales $ 980,000 $ 650,000
Selling and general expenses (250,000) (200,000)
Operating income $ 730,000 $ 450,000
Interest expense (100,000) (80,000)
Income before income tax $ 630,000 $ 370,000
Income tax expense (220,000) (130,000)
Net income $ 410,000 $ 240,000

Required:
1. Prepare common size income statements for the two years shown. (Round to 2
decimal places.)
2. In absolute terms, net income rose from $240,000 to $410,000, but in percentage
terms it remained nearly constant at about 21% of sales. Analyze those items that
did not remain constant or almost constant. What are the likely reasons for the
changes?

ANS:

1. Common size income statements:

2006 2005
Sales 1.00 1.00
Cost of goods sold (0.51) (0.42)
Gross profit on sales 0.49 0.58
Selling and general expenses (0.13) (0.18)
Operating income 0.37 0.40
Interest expense (0.05) (0.07)
Income before income tax 0.32 0.33
Income tax expense (0.11) (0.12)
Net income 0.21 0.21

2. As shown above, cost of goods sold rose as a percentage of sales and selling and
general expenses fell. It appears that the firm has decided to cut its prices in order
to increase sales volume, with economies of scale resulting in less expense per
dollar of sales.

9. The asset sections of comparative balance sheets for South Side Company are given
below, along with data on sales for each year:

2006 2005
Cash $ 160,000 $ 100,000
Accounts receivable 250,000 160,000
Inventories 230,000 240,000
Property, plant, and equipment 340,000 220,000
Total assets $ 980,000 $ 720,000
Sales for the year $5,000,000 $3,200,000

Required:
1. Prepare the asset section of common size balance sheets for the two years shown.
(Round to 2 decimal places.)
2. Is the firm more or less efficient in using its assets to generate sales in 2006 than in
2005? What particular asset or assets are responsible for the difference, if there is
one?
ANS:

1. Asset section of common size balance sheets:

2006 2005
Cash 0.03 0.03
Accounts receivable 0.05 0.05
Inventories 0.05 0.08
Property, plant, and equipment 0.07 0.07
Total assets 0.20 0.23
2. They're doing better, using only $.20 of assets to generate $1.00 of sales compared
to $.23 in the prior year. In particular, they're managing their inventory better.

10. LoneStar Company reported the following financial data at its directors' meeting in
Monument, Colorado, on December 31, 2005:

Total sales revenue for 2005 $ 6,300,000

Total expenses for 2005 $ 4,750,000
Total liabilities on January 1, 2005 $12,500,000
Total liabilities on December 31, 2005 $14,000,000
Total stockholders' equity on January 1, 2005 $ 9,800,000
Total stockholders' equity on December 31, 2005 $16,000,000

Required:
a. Calculate LoneStar's 2005 return on sales.
b. Calculate LoneStar's 2005 return on assets.
c. Calculate LoneStar's 2005 return on stockholders' equity.

11. Total liabilities and stockholders' equity of Hammonds Corporation is $600,000. Its
current assets are 30% of total assets and the current ratio is 1.25:1. Stockholders' equity exceeds
liabilities by 2 to 1.

Required:
a. Determine the amount of current liabilities.
b. Determine the debt-to-equity ratio.
c. Determine the debt ratio.

12. The numbers below are for Itchy Company and Scratchy Company for the year 2005:

Itchy Scratchy
Cash $ 3,000 $ 5,000
Accounts receivable 15,000 23,000
Inventory 10,000 30,000
Property, plant, and equipment 72,000 90,000
Total liabilities 80,000 91,000
Stockholders' equity 20,000 57,000
Sales 250,000 375,000
Cost of goods sold 221,000 334,000
Wage expense 21,000 26,000
Net income 8,000 15,000
 Required:
1. Compute return on sales, asset turnover, and the assets-to-equity ratio for each
company. (Round to 2 decimal places.)
2. Which company had the higher return on equity? Briefly explain why.

13. Data for Dierks Company are as follows:

Balance sheet data: Year 1 Year 2 Year 3

Inventory 280,000 340,000 520,000
Accounts Receivable 70,000 190,000 220,000

Income statement data:

Sales 880,000 980,000 1,280,000
Cost of Goods Sold 630,000 750,000 860,000
Gross profit 250,000 230,000 420,000

Required: Compute the following for years 2 and 3 and round to whole dollars when needed:
1. Average collection period (use the average balance in receivables) to the nearest
whole day.
2. Number of days' sales in inventory (use the average inventory balance) to the nearest
whole day.

14. The following data are taken from the records of Moose Corporation:

Balance Sheet
Cash 50,000
Accounts receivable 60,000
Inventory 150,000
Property, plant, and equipment 80,000
Total assets 340,000

Current liabilities 160,000

Noncurrent liabilities 100,000
Equity 80,000
Total liabilities & equity 340,000

Income Statement
Sales 740,000
Cost of Goods Sold 400,000
Gross margin 340,000
Operating expenses 200,000
Interest expense 18,000
Income tax expense 85,000
Net income 37,000

Required: Compute the following ratios: (Round to 2 decimal places and nearest whole dollars
and whole days.)

1. Current ratio
2. Debt-to-equity ratio
3. Debt ratio
4. Asset turnover
5. Average collection period (use the receivables balance at the end of the year).
6. Number of days' sales in inventory (use the inventory balance at the end of the
year).
7. Fixed asset turnover (use the property, plant, and equipment balance at the end
of the year).
8. Times interest earned
9. Return on sales
10. Return on assets
11. Return on equity

15. Data for Couture Company are as follows:

2005 2006
Net income $545,000 $260,000
Cash from operations 752,000 235,000
Cash paid for capital expenditures 850,000 280,000
Cash paid for interest 110,000 360,000
Cash paid for income taxes 190,000 156,000

Required: Compute the following for each year shown: (Round to 2 decimal places.)

1. Cash flow-to-net income ratio

2. Cash flow adequacy ratio
3. Cash times interest earned ratio

16. Data for Hill Company are as follows:

Year 1 Year 2
Sales $350,000 $300,000
Total assets 250,000 250,000
Stockholders' equity 100,000 90,000
Net income 30,000 20,000
Cash from operations 40,000 50,000
Cash paid for capital expenditures 10,000 13,000
Cash paid for acquisitions 6,000 5,000
Cash paid for interest 10,000 10,000
Cash paid for income taxes 11,000 7,000

Required: For each year shown, compute the: (Round to 2 decimal places.)
1. Return on sales
2. Return on assets
3. Return on equity
4. Cash flow-to-net income ratio
5. Cash flow adequacy ratio
6. Cash times interest earned ratio