Exercises 695

Instructions
(a) Compute the four liquidity ratios at the end of the year.
(b) Using the data in the chapter, compare Nordstrom's liquidity with (1) that of Park Street,
and (2) the industry averages for department stores. .

E14-6 Leach Incorporated had the following transactions occur involving current assets and Perform CL/rrent and acid-tesl
current liabilities during February 2011. ralio ana/ysis.

Feb. 3 Accounts receivable of R$15,000 are collected. (SO 5)

7 Equipment is purchased for R$28,000 cash.
11 Paid R$3,000 for a 3-year insurance policy.
14 Accounts payable of R$12,000 are paid.
18 Cash dividends of R$5,000 are declared.
Additional information:
1. As of February 1,2011, current assets were R$130,000, and current liabilities were R$50,000.
2. As of February 1,2011, current assets included R$15,000 of inventory and R$2,000 of pre­
paid expenses.

Instructions
(a) Compute the current ratio as of the beginning of the month and after each transaction.
(b) Compute the acid-test ratio as of the beginning of the month and after each transaction.

E14-7 Bennis Company has the following comparative statements of financial position data. CompUle se/ected ratios.
(SO 5)
BENNI5 COMPANY
Statements of Financial Position
December 31

2012 2011
Plant assets (net) $200,000 $180,000
Inventories 60,000 50,000
Receivable (net) 70,000 60,000
Cash 15,000 30,000
$345,000 $320,000
Share capital-ordinary, $10 par $140,000 $120,000
Retained earnings 55,000 40,000
Mortgage payable (15%) 100,000 100,000
Accounts payable 50,000 60,000
$345,000 $320,000

Additional information for 2012:

1. Net income was $25,000.
2. Sales on account were $410,000. Sales returns and allowances were $20,000.
3. Cost of goods sold was $198,000.
4. The allowance for doubtful accounts was $2,500 on December 31, 2012, and $2,000 on
December 31, 2011.

Instructions
Compute the following ratios at December 31,2012.
(a) Current.
(b) Acid-test.
(c) Receivables turnover.
(d) Inventory turnover.

E14-S Selected comparative financial statement data for Willingham Products Company are Compule se/ecled ralios.
presented on the next page. Ali statement of financial position data are as of December 31. (SO 5)
696 Chapter 14 Financial Statement Analysis

2012 2011
Net sales f760,000 f720,000
Cost of goods sold 480,000 440,000
Interest expense 7,000 5,000
et ineorne 50,000 42,000
Aeeounts reeeivable 120,000 100,000
Inventory 85,000 75,000
Total assets 580,000 500,000
Total ordinary shareholders' equity 430,000 325,000

Instructions
Cornpute the following ratios for 2012.
(a) Profit rnargin.
(b) Asset turnover.
(c) Return on assets.
(d) Return on ordinary shareholders' equity.

CompLlte selected ratios. E14-9 The ineorne staternent for Christensen, Ine., appears below.
(SO 5)
CHRISTENSEN, INe.
Incame Statement
Far the Year Ended December 31,2011
Sales $400,000
Cost of goods sold 230,000
Grass profit 170,000
Expenses (including $16,000 interest and $24,000 ineorne taxes) 105,000
et ineorne $ 65,000
Additional inforrnation:
1. The weighted-average ordinary shares outstanding in 2011 were 30,000 shares.
2. The rnarket priee of Christensen, Ine. was $13 per share in 2011.
3. Cash dividends of $26,000 were paid, $5,000 of whieh were to preferenee shareholders.
Instructions
Cornpute the following ratios for 2011.
(a) Earnings per share.
(b) Priee-earnings.
(c) Payout.
(d) Tirnes interest earned.

Compute amounts from ratios. E14·10 Rees Corporation experieneed a fire on Deeernber 31,2012, in whieh its financial
(SO 5) reeords were partially destroyed. It has been able to salvage some of the reeords and has ascer­
tained the following balanees.

December 31, 2012 December 31, 2011

Inventory €200,000 €I80,000
Reeeivables (net) 72,500 126,000
Cash 30,000 10,000
Share eapital-ordinary, €IOO par 400,000 400,000
Retained earnings 113,500 101,000
Aeeounts payable 50,000 90,000
Notes payable 30,000 60,000

Additional inforrnation:
1. The inventory turnover is 3.5 tirnes.
2. The return on ordinary shareholders' equity is 24%.
3. The reeeivables turnover is 8.8 tirnes.
4. The return on assets is 20%.
5. Total assets at Deeernber 31, 2011, were €605,000.
 Exercises 697

Instructions
Cornpute the following for Rees Corporation.
(a) Cost of goods soId for 2012.
(b) et sales (credit) for 2012.
(c) et incorne for 2012.
(d) Total assets at Decernber 31,2012.

E14-11 Scully Corporation's comparative staternents of financial position are presented Cornpule ralios.
below. (SO 5)

SCULLY CORPORATION
Statements of Financial Position
December 31
2011 2010
Land $ 20,000 $ 26,000
Building 70,000 70,000
Accurnulated depreciation (15,000) (10,000)
Inventory 10,000 7,000
Accounts receivable 21,200 23,400
Ca h 4,300 3,700
Total $110,500 $120,100
Share capital-ordinary $ 75,000 $ 69,000
Retained earnings 23,130 20,000
Accounts payable 12,370 31,100
Total $110,500 $120,100

Scully's 2011 incorne staternent included net sales of $100,000, cost of goods sold of $60,000, and
net incorne of $15,000.

Instructions
Cornpute the following ratios for 201 l.
(a) Current ratio.
(b) Acid-test ratio.
(c) Receivables turnover.
(d) Inventory turnover.
(e) Prafit rnargin.
(I) Asset turnover.
(g) Return on assets.
(h) Return on ordinary shareholders' equity.
(i) Debt to total assets ratio.

E14-12 For its fiscal year ending October 31,2011, Molini Corporation reports the following Prepare a correcl incorne
partial data. slalemenl.
(506)
Incorne before incorne taxes f540,000
Incorne tax expense (30% X f390,000) 117,000
Incorne before discontinued operations 423,000
Loss on discontinued division 150,000
Net incorne f273,000

The loss on discontinued division consists of f60,000 loss frorn operations of the division and
f90,000 loss on disposal of the division. The incorne tax rate is 30% on ali iterns.

Instructions
(a) Prepare a correct incorne staternent, beginning with incorne before incorne taxes.
(b) Explain in rnerno forrn why Molini's reported incorne staternent data are
incorrect.
698 Chapter 14 Financial Statement Analysis

Prepare income statement. E14-13 Yadier Corporation has income from continuing operations of $290,000 for the year
(506) ended December 31, 2011.It also has the following items (before considering income taxes).
1. A gain of $30,000 on the discontinuance of a division.
2. A correction of an error in last year's financial statements that resulted in a $20,000 under­
statement of 2010 net income.
Assume ali items are subject to income taxes at a 30% tax rate.
Instructions
(a) Prepare an income statement, beginning with income from continuing operations.
(b) Indicate the statement presentation of any item not included in (a) above.

PROBLEMS
Prepare verlicai anaiysis and
comment on profitabiiity.
(504,5)
Follow the rounding procedures used in the chapter.
P14-1 Comparative financial statement data for Douglas Company and Maulder Company,
two competitors, appear below. Ali statement of financial position data are as of December 31,
2012, and December 31, 2011.

Douglas Company Maulder Company

2012 2011 2012 2011
Net sales $1,549,035 $339,038
Cost of goods sold 1,080,490 241,000
Operating expenses 302,275 79,000
Interest expense 8,980 2,252
Income tax expense 54,500 6,650
Plant assets (net) 521,310 500,000 139,728 125,812
Current assets 325,975 312,410 83,336 79,467
Share capital-ordinary, $10 par 500,000 500,000 120,000 120,000
Retained earnings 173,460 146,595 38,096 29,998
Non-current liabilities 108,500 90,000 29,620 25,000
Current liabilities 65,325 75,815 35,348 30,281

Compute ratios [rom slalement
o[financiai posilion and
income slalement.
(505)
Instructions
(a) Prepare a vertical analysis of the 2012 income statement data for Douglas Company and
Maulder Company in columnar formo
(b) ~_ Comment on the relative profitability of the companies by computing the return
on assets and the return on ordinary shareholders' equity ratios for both companies.
P14-2 The comparative statements of Villa Tool Company are presented below and on the
next page.

VILLA TOOL COMPANY

Incame Statements
Far the Years Ended December 31

2012 2011
Net sales R$1,818,500 R$1,750,500
Cost of goods sold 1,011,500 996,000
Gross profit 807,000 754,500
Selling and administrative expense 516,000 479,000
Income from operations 291,000 275,500
Interest expense 18,000 14,000
Income before income taxes 273,000 261,500
Income tax expense 81,000 77,000
Net income R$ 192,000 R$ 184,500
 Problems 699

VILLA TOOL COMPANY

Statements of Financial Position
December 31

Assets 2012 2011

Plant assets (net) R$600,300 R$520,3oo
Current assets
Inventory 123,000 115,500
Accounts receivable (net) 117,800 102,800
Short-terrn investrnents 69,000 50,000
Cash 60,100 64,200
Total current assets 369,900 332,500
Total assets R$970,200 R$852,800
Equity and Liabilities
Equity
Share capital-ordinary (R$5 par) R$280,000 R$300,000
Retained earnings 286,700 165,400
Total equity 566,700 465,400
Bonds payable 200,000 200,000
Current liabilities
Accounts payable 160,000 145,400
Incorne taxes payable 43,500 42,000
Total current liabilities 203,500 187,400
Totalliabilities 403,500 387,400
Total equity and liabilities R$970,200 R$852,8oo

Instructions
Compute the following ratios for 2012. (Weighted-average ordinary shares in 2012 were 57,000,
and all sales were on account.)
(a) Earnings per share. (I) Receivables turnover.
(b) Return on ordinary shareholders' equity. (g) Inventory turnover.
(c) Return on assets. (h) Tirnes interest earned.
(d) Current. (i) Asset turnover.
(e) Acid-test. (j) Debt to total assets.
P14·3 Condensed staternent of financial position and incorne staternent data for Kersenbrock Perform ratio analysis, and
Corporation appear below and on the next page. evaluate financial position and
operating results.
KERSENBROCK CORPORATION (SO 5)
Statements of Financial Position
December 31

2012 2011 2010

Plant and equiprnent (net) $400,000 $370,000 $358,000
Investrnents 75,000 70,000 45,000
Other current assets 90,000 95,000 64,000
Receivables (net) 50,000 45,000 48,000
Cash 25,000 20,000 18,000
$640,000 $600,000 $533,000
Share capital-ordinary, $10 par $340,000 $310,000 $300,000
Retained earnings 145,000 125,000 113,000
Non-current liabilities 80,000 85,000 50,000
Current Iiabilities 75,000 80,000 70,000
$640,000 $600,000 $533,000
700 Chapter 14 Financial Statement Analysis

KERSENBROCK CORPORATION
Income Statements
For the Years Ended December 31

2012 2011
Sales $740,000 $700,000
Less: Sales returns and allowances 40,000 50,000
Net sales 700,000 650,000
Cost of goods sold 420,000 400,000
Gross profit 280,000 250,000
Operating expenses (including income taxes) 235,000 220,000
Net income $ 45,000 $ 30,000

Additional information:
1. 'l'he market price of Kersenbrock's ordinary shares was $4.00, $5.00, and $8.00 for 2010, 2011,
and 2012, respectively.
2. Ali dividends were paid in cash.

Instructions
(a) Compute the following ratios for 2011 and 2012.
(1) Profit margino
(2) Asset turnover.
(3) Earnings per share. (Weighted-average ordinary shares in 2012 were 32,000 and in 2011
were 31,000.)
(4) Price-earnings.
(5) Payout.
(6) Debt to total assets.
(b) Based on the ratios calculated, discuss briefly the improvement or lack
thereof in financial position and operating results from 2011 to 2012 of Kersenbrock
Corporation.

Compute ratios, and comment P14·4 Financial information for Hanshew Company is presented below and on the next page.
on overallliquidity and
profitability.
(SO 5)
HANSHEW COMPANY
Statements of Financial Position
December 31
Assets 2012 2011
Land €130,000 €130,000
Building and equipment (net) 180,000 175,000
Prepaid expenses 29,000 23,000
Inventories 125,000 135,000
Receivables (net) 98,000 80,000
Short-term investments 52,000 40,000
Cash 70,000 65,000
€684,000 €648,000

Equity and Liabilities

Share capital-ordinary, € l O par €200,000 €200,000
Retained earnings 136,000 116,000
Bonds payable, due 2015 150,000 150,000
Notes payable 100,000 100,000
Accounts payable 48,000 42,000
Accrued liabilities 50,000 40,000
€684,000 €648,000
 Problems 701

HANSHEW COMPANY
Incame Statements
Far the Years Ended December 31
2012 2011
Sales €850,000 €790,000
Cast of goods sold 620,000 575,000
Gross profit 230,000 215,000
Operating expenses 187,000 173,000
Net incorne € 43,000 € 42,000

Additional inforrnation:
1. Inventory at the beginning of 2011 was €118,000.
2. Receivables (net) at the beginning of 2011 were €88,000.
3. Total assets at the beginning of 2011 were €630,000.
4. No ordinary share transactions occurred during 2011 or 2012.
5. Ali sales were on account.
Instructions
(a) Indicate, by using ratios, the change in liquidity and profitability of Hanshew Cornpany frorn
2011 to 2012. (Note: Not ali profitability ratios can be cornputed.)
(b) Given below are three independent situations and a ratio that rnay be affected. For each
situation, cornpute the affected ratio (1) as of Decernber 31,2012, and (2) as of Decernber 31,
2013, after giving effect to the situation. Net incorne for 2013 was €50,000. Total assets on
Decernber 31, 2013, were €700,000.
Situation Ratio
(1) 18,000 ordinary shares were sold Return on ordinary shareholders'
at par on July 1,2013. equity
(2) Ali of the notes payable were paid in 2013. Debt to total assets
The only change in liabilities was that the
notes payable were paid.
(3) Market price of ordinary shares was €9 Price-earnings ratio
on Decernber 31,2012, and €I2.80 on
Decernber 31,2013.
P14-S Selected financial data ofTarget (USA) and Wal-Mart (USA) for a recent year are pre- Compute selected ratios, and
sented here and on the next page (in rnillions). compare liquidity, profitability,
and solvency for two
companies.
Target Wal-Mart
Corporation Stores, Inc. (505)

Income Statement Data for Year

Net sales $61,471 $374,526
Cost of goods sold 41,895 286,515
Selling and adrninistrative expenses 16,200 70,847
Interest expense 647 1,798
Other income (expense) 1,896 4,273
Incorne tax expense 1,776 6,908
Net income $ 2,849 $ 12,731

Statement of Financial Position Data (End ofYear)

Non-current assets $25,654 $115,929
Current assets 18,906 47,585
Total assets $44,560 $163,514
Total equity $15,307 $ 64,608
Non-current liabilities 17,471 40,452
Current liabilities 11,782 58,454
Total equity and liabilities $44,560 $163,514
702 Chapter 14 Financial Statement Analysis

Beginning-of-Year Balances
Total assets $37,349 $151,587
Total equity 15,633 61,573
Current liabilities 11,117 52,148
Totalliabilities 21,716 90,014
Other Data
Average net receivables $ 7,124 $ 3,247
Average inventory 6,517 . 34,433
Net cash provided by operating activities 4,125 20,354

Instructions
(a) For each company, compute the following ratios.
(1) Current. (7) Asset turnover.
(2) Receivables turnover. (8) Return on assets.
(3) Average collection periodo (9) Return on ordinary shareholders' equity.
(4) Inventory turnover. (lO) Debt to total assets.
(5) Days in inventory. (11) Times interest earned.
(6) Profit margino
(b) Compare the liquidity, profitability, and solvency of the two companies.

CompUle numerous ralios. P14·6 The comparative statements of Dillon Company are presented below and on the next
(SO 5) page.

DILLON COMPANY
Income Statements
For the Years Ended December 31

2012 2011
Net sales (ali on account) 1:600,000 1:520,000
Expenses
Cost of goods sold 415,000 354,000
Selling and administrative 120,800 114,800
Interest expense 7,800 6,000
Incorne tax expense 18,000 14,000
Total expenses 561,600 488,800
Net income 1: 38,400 f 31,200

DILLON COMPANY
Statements of Financial Position
December 31

Assets 2012 2011

Plant assets (net) f423,000 f383,000
Current assets
Inventory 90,000 70,000
Accounts receivable (net) 86,000 74,000
Short-term investments 18,000 15,000
Cash 21,000 18,000
Total current assets 215,000 177,000
Total assets f638,000 f560,OOO

Equity and Liabilities

Equity
Share capital-ordinary (f5 par) fl50,000 fl50,000
Retained earnings 223,000 200,000
Total equity 373,000 350,000
 Problems 703
Non-current Iiabilities
Bonds payable 120,000 80,000
Current liabilities
Accounts payable 122,000 110,000
Income taxes payable 23,000 20,000
Total current liabilities 145,000 130,000
Totalliabilities 265,000 210,000
Total equity and liabilities ;(638,000 i560,000

Additional data:
The ordinary shares recently sold at il 9.50 per share.
The year-end baiance in the allowance for doubtful accounts was B,OOO for 2012 and iZ,4oo for
2011.
Instructions
Compute the following ratios for 2012.
(a) Current. (h) Return on ordinary shareholders' equity.
(b) Acid-test. (i) Earnings per share.
(e) Receivables turnover. (j) Price-earnings.
(d) Inventory turnover. (k) Payout.
(e) Profit margino (I) Debt to total assets.
(f) Asset turnover. (m) Times interest earned.
(g) Return on assets.

P14-7 Presented below and on the next page is an incomplete income statement and incom- Compute missing information
plete comparative statements of financial position of Cotte Corporation. given a set of ratios.
(505)

eonE CORPORATION
Income Statement
For the Year Ended December 31, 2012

Sales $11,000,000
Cost of goods sold ?
Gross profit ?
Operating expenses 1,665,000
Incorne frorn operations ?
Interest expense ?
Incarne before income taxes ?
Incorne tax expense 560,000
Netincorne $ ?

eonE CORPORATION
Statements of Financial Position
December 31

Assets 2012 2011

Plant assets (net) $4,620,000 $3,955,000
Current assets
Inventory ? 1,720,000
Accounts receivable (net) ? 950,000
Cash 450,000 375,000
Total current assets ? 3,045,000
Total assets $ ? $7,000,000
 1
EXERCISE 14-8

(a) Operating profit margin (instead of Profit margin) = NOPAT/ Sales =

[Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%

[(760,000 – 480,000) x (1-30%)] / 760,000 = 196,000 / 760,000 = 25.8%

(b) Operating asset turnover (instead of Asset turnover) = Sales / Average

NOA = Sales / [(Operating assets – Operating liabilities)/2]

Assume Total liabilities = (Total assets – Shareholders’ equity) and Total

assets as operating

Total liabilities2012 = 580,000 – 430,000 = 150,000

Total liabilities2011 = 500,000 – 325,000 = 175,000

760,000 / [(580,000+500,000-150,000-175,000)/2] = 760,000 / 377,500 = 2 times.

(c) Return on net operating assets (instead of Return on assets) = NOPAT /

Average NOA = [Operating income x (1-tax rate)] / [(Operating assets –
Operating liabilities)/2]

196,000 / 377,500 = 51.9%

(d) Return on common equity (instead of Return on ordinary shareholders’

equity) = (Net income – Preferred dividend) / Average Shareholders’ equity

50,000 / [(325,000+430,000)/2)] = 50,000 / 377,500 = 13.2%

FSA Course – Exercise session 3

 2
EXERCISE 14-11

(e) Operating profit margin (instead of Profit margin) = NOPAT/ Sales =

[Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%

[(100,000 – 60,000) x (1-30%)] / 100,000 = 28,000/100,000 = 28%

(f) Operating asset turnover (instead of Asset turnover) = Sales / Average

NOA = Sales / [(Operating assets – Operating liabilities)/2]

Assume total assets as operating.

100,000 / [(110,500+120,100-12,370-31,100)/2] = 100,000 / 93,565 = 1.1

(g) Return on net operating assets (instead of Return on assets) = NOPAT /

Average NOA = [Operating income x (1-tax rate)] / [(Operating assets –
Operating liabilities)/2]

28,000 / 93,565 = 29.9%

(h) Return on common equity (instead of Return on ordinary shareholders’

equity) = (Net income – Preferred dividend) / Average Shareholders’ equity

15,000 / [(89,000 + 98,130)/2] = 15,000 / 93,565 = 16%

Shareholders’ equity2010 = 69,000 + 20,000= 89,000

Shareholders’ equity2011 = 75,000 + 23,130= 98,130

FSA Course – Exercise session 3

 3

PROBLEM 14-1

(a) Condensed Income Statement

For the Year Ended December 31, 2012

Douglas Company Maulder Company

Dollars Percent Dollars Percent

Net sales $1,549,035 100.0% $339,038 100.0%

Cost of goods sold 1,080,490 69.8% 241,000 71.1%
Gross profit 468,545 30.2% 98,038 28.9%
Operating expenses 302,275 19.5% 79,000 23.3%
Income from operations 166,270 10.7% 19,038 5.6%
Interest expense 8,980 .6% 2,252 .7%
Income before income taxes 157,290 10.1% 16,786 4.9%
Income tax expense 54,500 3.5% 6,650 1.9%
Net income $ 102,790 6.6% $ 10,136 3.0%

(b) Assume a tax rate of 30%. Assume current assets and plant assets, net
and current liabilities as operating.

Douglas Company appears to be more profitable. It has higher relative

gross profit, income from operations, income before taxes, and net income.
Douglas’s return on net operating assets (instead of return on assets) of
a
15.3% is higher than Maulder’s return on net operating assets (instead of
b
return on assets) of 7.2% . Also, Douglas’s return on ordinary shareholders’
c
equity of 15.6% is higher than Maulder’s return on shareholders’ equity of
d
6.6% .

FSA Course – Exercise session 3

 4
PROBLEM 14-1 (Continued)

a
$166,270 = (1,549,035-1,080,490-302,275) is Douglas’s 2012 operating income.

$829,848 is Douglas’s 2012 average assets:

2012 2011
Plant assets $521,310 $500,000
Current assets 325,975 312,410
Total assets $847,285 + $812,410

NOPAT = [Operating income x (1-tax rate)] = 166,270 x (1-30%) = 116,389

Average NOA = [(Operating assets – Operating liabilities)/2] =

(847,285+812,410-65,325-75,815)/2 = 758,777.5

RNOA = NOPAT / Average NOA = 15.3%

b
$19,038 = (339,038-241,000-79,000) is Maulder’s 2012 operating income.

$214,172 is Maulder’s 2012 average assets:

2012 2011
Plant assets $139,728 $125,812
Current assets 83,336 79,467
Total assets $223,064 + $205,279

NOPAT = 19,038 x (1-30%) = 13,327

Average NOA = (223,064+205,279-35,348-30,281)/2 = 186,357

RNOA = 7.2%

c
$102,790 = (1,549,035-1,080,490-302,275-8,980-54,500) is Douglas’s 2012 net
income.

$660,028 is Douglas’s 2012 average ordinary shareholders’ equity:

2012 2011
Share capital—ordinary $500,000 $500,000
Retained earnings 173,460 146,595
Shareholders’ equity $673,460 + $646,595
FSA Course – Exercise session 3
 5

Average shareholders’ equity = (673,460 + 646,595) /2 = 660,027.5

ROCE = (Net income – Preferred dividend) / Average shareholders’ equity =

15.6%

d
$10,136 = (339,038-241,000-79,000-2,252-6,650) is Maulder’s 2012 net income.

$154,047 is Maulder’s 2012 average ordinary shareholders’ equity:

2012 2011
Share capital—ordinary $120,000 $120,000
Retained earnings 38,096 29,998
Shareholders’ equity $158,096 + $149,998

Average shareholders’ equity = (158,096 + 149,998) /2 = 154,047

ROCE = 6.6%

FSA Course – Exercise session 3

 6

PROBLEM 14-2

(b) Return on common equity (instead of Return on ordinary shareholders’

equity) = (Net income – Preferred dividend) / [(Beginning equity + Ending
equity)/2)]

192,000 / [(465,400+566,700)/2)] = 50,000 / 516,050 = 37.2%

(c) Assume a tax rate of 30%. Assume total assets, except for short-term
investments, as operating.

Return on net operating assets (instead of Return on assets) = =NOPAT /

Average NOA = [Operating income x (1-tax rate)] / [(Operating assets –
Operating liabilities)/2]

[291,000 x (1-30%)] / [(970,200-69,000+852,800-50,000-160,000-43,500-

145,400-42,000)/2] = 203,700 / 656,550 = 31.0%.

(i) Operating asset turnover (instead of Asset turnover) = Operating asset

turnover (instead of Asset turnover) = Sales / Average NOA = Sales /
[(Operating assets – Operating liabilities)/2]

1,818,500 / 656,550 = 2.7 times

FSA Course – Exercise session 3

 7

PROBLEM 14-3

(a)

(1) Operating profit margin (instead of Profit margin) = NOPAT/ Sales =

[Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%

(2) Operating asset turnover (instead of Asset turnover) = Sales / Average

NOA = Sales / [(Operating assets – Operating liabilities)/2]

Assume total assets, except for investments, and current liabilities as

operating.

2012 2011 Change

[45,000 (1-30%)] / [30,000 (1-30%)] / Increase

(1) Operating
740,000 = 31,500 / 700,000 = 21,000 /
profit margin
740,000 = 4.3% 700,000 = 3.0%

790,000/ 700,000 /
(2) Operating
[(640,000+600,000- [(600,000+533,000- Increase
asset
75,000-70,000-75,000- 70,000-45,000-80,000-
turnover
80,000) / 2] = 790,000 / 70,000) / 2] = 700,000 /
470,000 = 1.7 times 434,000 = 1.6 times

(b) Operating results show an increase.

FSA Course – Exercise session 3

 8

PROBLEM 14-5

(a) Ratio Target Wal-Mart

(6) Operating profit [(61,471-41,895- [(374,526-286,515-

margin 16,200)x(1-30%)] / 61,471 70,847)x(1-30%)] / 374,526
= 2,363.2 / 61,471 = 3.8% = 12,014.8 / 374,526 = 3.2%

(7) Operating asset 61,471 / (44,560-11,782) = 374,526 / (163,514-58,454) =

turnover 61,471 / 32,778 = 1.9 374,526 / 105,060
= 3.6

(8) Return on net 2,363.2 / 32,778 = 7.2% 12,014.8 / 105,060 = 11.4%

operating assets

(9) Return on common 2,849 / 15,307 = 18.6% 12,731 / 64,608 = 19.7%

equity

(6) Operating profit margin (instead of Profit margin) = NOPAT/ Sales =

[Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%

(7) Operating asset turnover (instead of Asset turnover) = Sales / Average

NOA = Sales / [(Operating assets – Operating liabilities)/2]

Assume total assets and current liabilities as operating

(8) Return on net operating assets (instead of Return on assets) = NOPAT /

Average NOA = [Operating income x (1-tax rate)] / [(Operating assets –
Operating liabilities)/2]

(9) Return on common equity (instead of Return on ordinary shareholders’

equity) = (Net income – Preferred dividend) / Average Shareholders’ equity

(b) The comparison of the two companies shows that with the exception of
operating profit margin, Wal-Mart betters Target in all of the profitability
ratios. Thus, it is more profitable than Target.

FSA Course – Exercise session 3

 9

PROBLEM 14-6

(e) Operating profit margin (instead of Profit margin) = NOPAT/ Sales =

[Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%.

[(600,000-415,000-120,800) x (1-30%)] / 600,000 = 44,940 / 600,000 = 7.5%

(f) Operating asset turnover (instead of Asset turnover) = Sales / Average

NOA = Sales / [(Operating assets – Operating liabilities)/2]

Assume total assets, except for short-term investments as operating.

600,000 / [(638,000+560,000-18,000-15,000-122,000-110,000-23,000-20,000)/2)
= 600,000 / 445,000 = 1.3 times.

(g) Return on net operating assets (instead of Return on assets) = NOPAT /

Average NOA = [Operating income x (1-tax rate)] / [(Operating assets –
Operating liabilities)/2]

44,940 / 445,000 = 10.0%

(h) Return on common equity (instead of Return on ordinary shareholders’

equity) = (Net income – Preferred dividend) / Average Shareholders’ equity

38,400 / [(373,000+350,000)/2] = 10.6%

FSA Course – Exercise session 3