776 Chapter 15

S15-2 Trend analysis [5-10 min]

Mariner, Corp., reported the following revenues and net income amounts:

I (In millions) I 2013 ·2012 I 2011 Il 2010 I

I Rcvenuc .............................. $9,910 $9,700 Il $9,210 Il $9, 110 I
I ~et incornc .......................... 7,475 7,400 Il 5,495 Il 4,690 I
li
Requirements
A
1. Calculate Mariner's trend analysis for revenues ami net income. Use 20 I O as the
lr
base year, and round to the nearest percent.
2. Which measure increased faster during 2011-2013?
T
S15-3 Vertical analysis [10-15 min]
Tri-State Optical Company reported the following amounts on its balance sheet at
December 31, 2012 and 2011:

2012 2011
R
Cash ,md receiva bles $ 54,530 $ 46,860
lnvcmory 42,435 32,670
l'roperty, pbnt, and cquiprncnr, net 108,035 85,470
·1()tal assets $ 205,000 $ 165,000
s
Requirement
1. Prepare a vertical analysis of Tri-State assets for 2012 and 2011.

S15-4 Common-size income statement [10 min]

Data for Martinez, !ne., and Rosado, Corp., follow:

Martincz Rosado

Net sales ......................... . $ 10,600 s 18,600

Cost of goods rnld ................. . 6,455 13,522
Othcr cxpenses .................... . 3,541 4,185
Net income ....................... . $ 604 $ 893

Requirements
1. Prepare common-size income statements.
2. Which company earns more net income?
3. Which company's net income is a higher percentage of its net sales?

S15-5 Evaluating current ratio [5-1 O min]

Win's Companies, a home improvement store chain, reported the following
summarized figures:

WIN'S COMPANIES
Income Statement
Years Ended May 31, 2012 and 2011
2012 2011
Net sales $ 50,200,000 $ 43,800,000
------
C:ost of goods sold 28,400,000 29,300,000
lntcrest cxpense 500,000 140,000
A 11 other expenses 5,800,000 8,400,000
Net income $ 15,500,000 ='$===c====5C,,,9=6=0"",0=0==()
 Financial Statement Analysis 777

WIN'S COMPANIES
Balance Sheet
31, 2012 and 2011
Assets 2012 2011 Liabilities 2012 2011
C:ash $ 2,000,000 $ $ 33,000,000 $ 13,100,000
Short-term investments 28,000,000 Long-term liabilities 12,300,000 :: 10,600,000
Accounts receivable 7,400,000 5,300,000 Tota! liabilities · $ 45,300,000 $ 23,700,000
lnventory 6,900,000 8,200,000 Stockholders' Equity
Other current assets 10,000,000 1,800,000 Common stock $ J 1,000,000 $ 11,000,000

Tota! current assets $ 54,300,000 . $ 25,200,000 Retained earnings 32,000,000 16,500,000

AIl other assets 34,000,000 26,000,000 Tota! equity $ 43,000,000 $ 27,500,000

Tota! assets $ 88,300,000 $ 51,200,000 Tota! liabilities and equity $ 88,300,000 $ 51,200,000
~= ,-,~~-,~» w,,~~~•u> ~~>M' -+~-"oo~=,~~

Requirements
1. Compute Win's Companies' current ratio at May 31, 2012 and 2011.
2. Did Win's Companies' current ratio improve, deteriorate, or hold steady
during 2012?
S15-6 O Computing inventory, gross profit, and receivables ratios [10-15 min]
Use the Win's Companies data in Short Exercise 15-5 to complete the following
requirements.
Requirements
1. Compute the rate of inventory rurnover, days in inventory, and gross profit per-
centage for 2012.
2. Compute days' sales in average receivables during 2012. Round dollar amounts
to three decimai places.
S15-7 O Measuring ability to pay liabilities [5 min]
Use the financial statements of Win's Companies in Short Exercise 15-5.
Requirements
1. Compute the debt ratio and the debt to equity ratio at May 31, 2012.
2. Is Win's ability to pay its liabilities strong or weak? Explain your reasoning.
S15-8 O Measuring profitability [10 min]
Use the financial statements of Win's Companies in Short Exercise 15-5 to complete
the following profitability measures for 2012.
Requirements
1. Compute the rate of return on net sales.
2. Compute the rate of return on tota! assets.
3. Compute the asset turnover ratio.
4. Compute the rate of return on common stockholders' equity.
5. Are these rates of return strong or weak? Explain your reasoning.
 Financial Statement Analysis 781

Requirement
1. Compute the following ratios for the current year:
a. C:urrent ratio
b. :\cid-test ratio
c. lnventory turnover
d. Days in inventory
c. Day,;' sales in rcccivables
f. Gross profit pcrccntagc

E15-18 Analyzing the ability to pay liabilities [15-20 min]

Large Land Photo Shop has asked you to deterrnine whether the cornpany's ability to
paY current liabilities and tota! liabilities improved or deteriorateci during 2012. To
answer this question, you gather thc following data:

2012 2011

C:ash ...................... . $ 58,000 $ 57,000

Short-tcrm investlllcnts ........ . 31,000
>Jet reccivablcs .............. . 110,000 I 32,000
lnventory .................. . 247,000 297,000
Tota! asscts ................. . 585,000 'ì.15,000
Tota! currcnt liahilities ........ . 255,0()() 222,000
l.ong-tcnn note pavahle 46,000 48,000
lncolllc from operations ....... . 180,000 153,000
lnterest expcnsc ............. . 52,000 39,000

Requirement
1. Compute the following ratios for 2012 and 2011:
a. C:urrcnt ratio
b. Acid-tcst ratio
c. Dcbt ratio
d. Dcbt to equity ratio

E15-19 Analyzing profitability [10-15 min]

The C:J, lnc., comparative income statement follows. The 20 I O data are given
as needcd.

CJ, INC.
Comparative lncome Statement
Years Ended December 31, 2012 and 2011
(Dollars in thousands) 2012 2011
Net sales
C:ost of goods sold 93,400
Selling and genera! expenses 46,000
Interest cxpensc 9,000
Income tax expense 10,200

!\:et income 17,400 $

Additional data:
Tota\ asser-
Colllmon stockholders' equity 96,600
Prefrrrcd dividends 3,500 $
Colllmon shares outstanding during the ycar 20,500
782 Chapter 1 5

Requirements
1. Calculate the rate of return on net sales.
2. Calculate the rate of return on tota! assets.
3. Calculate the asset turnover ratio.
4. Calculate the rate of return on common stockholders' equity.
5. Calculate the EPS.
6. Calculate the 2012 dividend payout on common stock.
7. Did the company's operating performance improve or deteriorate during 2012?

E15-20 O Evaluating a stock as an investment [10-15 min]

Data for Shamrock State Bank follows:

2012 2011
Net income .............................. . $ 61,000 $ 52,000
Dividends-comrnon ...................... . 26,000 26,000
Dividends-preferrcd ...................... . 12,600 12,600
Tota! stockholders' equity at year-end
(includes 80,000 sharcs of cornrnon stock) ....
. 760,000 610,000
Preferrcd stock, 6'¼, ....................... . 210,000 210,000
Market price per share of common stock ....... . $ 19.50 $ 14

Requirement
1. Evaluate the common stock of Shamrock State Bank as an investment.
Specifically, use the four stock ratios to determine whether the common stock has
increased or _decreased in attractiveness during the past year.
E15-21 O Using ratios to reconstruct a balance sheet [20-30 min]
The following data are adapted from the financial statements of Betty's Shops, !ne.:

Tota! currcnt asscts ........... . $ 1,200,000

Accumulated dcprcciation ...... . $ 2,400,000
Total liabilities ............... . $ 1,400,000
Prefcrred stock ............... . $ o
Deht ratio ................... . 64'¼,
Current ratio ................ . 1.50

Requirement
1. Complete Betty's condensed balance sheet.

Current assets ....................... .

Property, plant, and equipment ......... .
Less: Accurnulated deprecicition ....... .
Ì l)Ial a~~èI~ . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities .................... .
Long-term liabilities .................. .
Stockholders' equity .................. .
Total liabilities and stockholders' equity ... .
 Financial Statement Analysis 783

(Group A)

P15-22A O Trend analysis and return on common equity [20-30 min] ,Accounting
Net sales revenue, net incarne, and common stockho!aers' equity for Azbel Mission
Corporation, a manufacturer of contact lenses, follow for a four-year period.

2013 2012 2011 2010

Net sales revenue ....... $ 762,000 $ 706,000 $ 637,000 $ 665,000
Net income ............ 58,000 44,000 37,000 43,000
Ending common
stockholders' equity ... 376,000 358,000 330,000 304,000

Requirements
1. Compute trend analyses for each item for 2011-2013. Use 2010 as the base year,
and round to the nearest whole percent.
2. Compute the rate of return on common stockholders' equity for 2011-2013,
rounding to three decimai places.

P15-23A O Vertical analysis [20-30 min]

The McConnell Department Stores, Inc., chief executive officer (CEO) has asked you
to compare the company's profit performance and financial position with the average
for the industry. The CEO has given you the company's incarne statement and balance
sheet, as well as the industry average data for retailers.

MCCONNELL DEPARTMENT STORES, INC.

Income Statement Compared with Industry Average
Year Ended December 31, 2012
' Industry
i McConnell Average

ì Net sales $ 778,000 100.0%

Cost of goods sold 522,816 65.8
Gross profit $ 255,184 34.2
Operating expenses 161,046 19.7
Operating income $ 94,138 14.5
Other expenses 4,668 0.4

INet income $ 89,470 14.1%

- ,~
784 Chapter 15

MCCONNELL DEPARTMENT STORES, INC.

Balance Sheet Compared with Industry Average
December 31, 2012
Industry

70.9(~{)
hxed asscts, net 23.6
lntangible assets, net 0.8
Other assets 4.7

Total asscts 480,000 100.0%

C:urrent liahilitics 222,720 48.1 °1i)

Long-tcrm liabilitics 107,520 16.6
Stockholders' equity 149,760 35.'l

Tota! liabilities and stockholders' equity $ 480,000 100.0'¼,

Requirement
1. Prcparc a vertical analysis for McC:onncll for both its incomc statement ami hai-
ance shcct.

Note: Pro!Jlcm 15-24A should /Jc used only aftcr complcting Problcm 1S-23A.

P15-24A Common-size statements, analysis of profitability and financial position,

comparison with the industry, and using ratios to evaluate a company
[20-30 min]
Consider the data for McC:onnell Department Stores presentcd in P15-23A.

Requirements
1. Prepare a common-size income statement and balance sheet for McC:onnell. The
first column of each statement should present McC:onnell's comrnon-size statc-
ment, and the second column, the industry averages.
2. For the profitability analysis, compute McConnell's (a) gross profit percentagc aml
(b) rate of return on net sales. Compare these figures with the industry averagcs. ls
McC:onnell's profit performance better or worse than the industry average?
3. For the analysis of financial position, compute McC:onnell's (a) current ratio and
(b) debt to equity ratio. Compare these ratios with the industry averages. ls
McC:onnell's financial position better or worsc than the industry averages?

P15-25A Effects of business transactions on selected ratios [30-40 min]

Fina11cial statement data of Anzcrican Travcler Magazine include the following iterns:

C:ash ..................... . $ 23,000

i\ccounts rcceivahle, net ...... . 79,000
lnvcntorìcs . . . . . . . . . . . . . . . . . 184,000
Toral asscts ................ . 614,000
Accounts pa, ahle ........... . 104,000
Accrued liabilitics ........... . 40,000
Short-tenn notes pay,1blc ..... . 47,000
l.ong-tcrm liabilitics ......... . 221,000
~et incon1t' . . . . . . . . . . . . . . . . . 74,000
C:omrnon shares ontstanding .. . 60,000
788 Chapter 15

Requirement
1. Compute the following ratios for both companies far the current year, and
decide which company's stock better fits your investment strategy.

a. Acid-tcst ratio
b. lnvcntory turnovcr
c. Days' sales in reccivahles
d. Dcht ratio
c. Earnings per share of common stock
f. Pricc/carnings ratio
g. Dividcnd payout

(Group B)

llccounting P15-28B O Trend analyses and return on common equity [20-30 min]
Net sales revenue, net income, and common stockholders' equity for Shawnee
Mission Corpora ti on, a manufacturer of contact lenses, follow far a four-year period.

2013 2012 2011 2010

Net sa Ics reven ue . . . . . . . $ 759,000 $ 701,000 $ 639,000 $ 659,000
Net income ............ 56,000 43,000 38,000 48,000
Ending common
stockholdcrs' equity ... 364,000 356,000 328,000 300,000

Requirements
1. Compute trend analyses for each item for 2011-2013. Use 2010 as the base year,
.:md round to the nearest whole percent.
2. Compute the rate of return on common stockholders' equity for 2011-20 I 3,
rounding to threc decimai places.

P15-29B O Vertical analysis [20-30 min]

The Specialty Department Stores, Inc., chief executive officer (CEO) has askecl you
to compare the company's profit performance and financial position with the aver-
age for the industry. The CEO has given you the company's incarne statement ami
balance sheet, as well as the industry average data far retailers.

SPECIALTY DEPARTMENT STORES, INC.

Income Statement Compared with Industry Average
Year Ended December 31, 2012
Industry
Specialty Avcrage
$ 782,000 100.0%
: Cost of goods sold 528,632 65.8
Gross profit $ 253,368 i 34.2
Operating expenses 163,438 19.7
Operating income $ 89,930 14.5
Other expenses 4,692 i 0.4
I
Net income $ s5,23s I 14.1%
 Financial Statement Analysis 789

SPECIALTY DEPARTMENT STORES, INC.

Balance Sheet Compared with Industry Average

r-~--·-·__
, _ ·--·
. . ., __,·--· December 31, 2012 •
Industry
Specialty Average
Current assets $ 303,750 70.9%
Fixed assets, net 117,000 23.6
lntangible assets, net 5,850 0.8
Other assets 23,400 4.7

Tota! assets $ 450,000 100.0%

Current liabilities $ 208,800 48.1%

Long-term liabilities 102,600 16.6

! I.
Stockholders' equity 138,600 35.3

Tota! liabilities and stockholders' equity $ 450,000 100.0%

'-----t------------------J-=====l-====-

Requirement
1. Prepare a vertical analysis for Specialty for both its incarne statement and bai-
ance sheet.

Note: Problem 15-30B should be used only after completing Problem 15-29B.

P15-30B O O Common-size statements, analysis of profitability and financial position,

comparison with the industry, and using ratios to evaluate a company
[20-30 min]
Consider the data for Specialty Department Stores presented in P15-29B.

Requirements
1. Prepare a common-size incarne statement and balance sheet for Specialty. The
first column of each statement should present Specialty's common-size state-
ment, and the second column, the industry averages.
2. For the profitability analysis, compute Specialty's (a) gross profit percentage and
(b) rate of return on net sales. Compare these figures with the industry averages.
Is Specialty's profit performance better or worse than the industry average?
3. For the analysis of financial position, compute Specialty's (a) current ratio and
(b) debt to equity. Compare these ratios with the industry averages. Is Specialty's
financial position better or worse than the industry averages?

P15-31 B O Effects of business transactions on selected ratios [30-40 min]

Financial statement data of Road Trip Magazine include the following items:

Cash ..................... . $ 24,000

Accounts receivable, net ...... . 82,000
Inventories ................ . I 88,000
Tota! assets ................ . 638,000
Accounts payable ........... . 99,000
Accrued liahilities ........... . 39,000
Short-term notes payahle ..... . 51,000
Long-tenn liabilities ......... . 223,000
Net income ................ . 72,000
Common shares outstanding .. . 20,000
 Exercises 721

Instructions
(al Compute thc currcnt ratio as of the beginning of the month and artcr each transaction.
(b) Com pule thc acid-tesl ratio as of the beginning of the month and after cach transaction.
Willingham Com pan\' has the following comparative statements of fìnancial position Co111pllle sl'i<'ctcd mtios.

Willingham Company
Statements of Financial Position
December 31
2014 2013
Pla111 asscts (net) $205,000 $190,000
I m·cn ton· 60,000 50,000
Accounts recei,·able (net) 70,000 50,000
Cash 10,000 30,000
$345,000 $320,000
Sh~11·c capital-ordinarv, $1 O par $140,000 $120,000
Rctaincd carnings 55,000 40,000
Mortgage parnble (6%) 100,000 100,000
Accounts paYable 50,000 60,000
$345,000 $320,000
Additional information lor 2014:
1. Net incomc ,, as S25 ,000.
2. Sales on account ,,ere S410,000. Sales returns and allowances we1·e $20,000.
3. Cost or goods sold was S187,000.
Instructions
Compute the rollowing ratios at December 31, 2014.
la) Current. (c) Accounts receivable turnovcr.
lb) Acid-test. (d) lnventory turnove,~
Sclected comparati,·c statement data for Molini Products Companv are presented Co111p11te selected mtim.
belo11. Ali slatcmenl of fìnancial position data are as of December 31.
2014 2013
Net sales f700,000 [680,000
Cost or goods sold 480,000 400,000
Interesl expense 7,000 5,000
Net income 42,000 34,000
Accounts receiYable 120,000 100,000
lnH'nlon· 85,000 75,000
Tota! assets 580,000 540,000
Tota! ordinan shareholders' equitv 425,000 325,000
lnstructions
Compute the following ratios for 2014.
la) Profìt margin.
lbi Asset turnm·er.
le) Return on asscts.
id) Return on ordinan shareholders' equity.

The income statement for Christiansen, Inc., appears below. Compute selected mtios.
Christiansen, Inc.
Income Statement
For the Year Ended December 31, 2014
Net sales $400,000
Cost or goods sold 235,000
Gross profìt 165,000
Expenses (including $14,000 interesl and $17,000 incarne taxes) 105,000
Net incomc $ 60,000
722 Financial Statement Analysis

Additional information:
1. The weighted-average ordinary shares outstanding in 2014 were 30,000 shares.
2. The market price of Christiansen, Inc. was $1 O.SO per share in 2014.
3. Cash dividends of $21,000 were paid, $6,000 of which were to preference shareholders.
Instructions
Compute the following ratios for 2014.
(a) Earnings per share.
(b) Price-earnings.
(c) Payout.
(d) Times interest earned.
Co1111111/c a111011111s fì-0111 Rees Corporation experienced a fire on December 31, 2014, in which its fìnancial
rtl/ÙJ.";. records were partially destroyed. lt has been able lo salvage some of the records and has
ascertained the following balances.
December 31, 2014 December 31, 2013
lnventory €200,000 €180,000
Accounts receivable (net) 73,000 126,000
Cash 30,000 10,000
Share capital-ordinary, € l 00 par 400,000 400,000
Retained earnings 134,000 122,000
Accounts payable 50,000 90,000
Notes payable 30,000 60,000

Additional information:
1. The inventory turnover is 3.4 times.
2. The return on ordinary shareholders' equity is 25%.
3. The accounts receivable turnover is 8.8 times.
4. The return on asset-s is 20%.
5. Tota] assets at December 31, 2013, were €650,000.
lnstructions
Compute the following for Rees Corporation.
(a) Cost of goods sold for 2014.
(b) Net sales (credit) for 2014.
(e) Net incarne for 2014.
(d) Tota] assets al December 31, 2014.
Co11111u1e m1ios. Yadier Corporation's comparative statements of financial position are presented
below.
Yadier Corporation
Statements of Financial Position
December 31
2014 2013
Land $ 20,000 $ 26,000
Buildings 70,000 70,000
Accumulateci depreciation-buildings (15,000) (10,000)
lnventory 10,000 7,000
Accounts receivable 22,000 24,000
Cash 4,300 3,700
Tota] $111,300 $120,700
Share capital-ordinary $ 75,000 $ 69,000
Retained earnings 24,300 20,600
Accounts payable 12,000 31,100
Tota] $111,300 $120,700

Yadier's 2014 incarne statement included net sales of $100,000, cost of goods sold of
$60,350, and net incarne of $14,000.
 Problems 723

lnstructions
Compute the follm\'ing ratios for 2014.
la) Current.
16) Acid-test.
le) Accounts recei\'ablc turno\'er.
id) ln\'entorv turnm·er.
le) Profìt margin.
1f) Asset tLirnm·er.
1g) Rcturn on asscts.
ihl Return on ordina1·v shareholders' equity.
1i) Dcbt to tota! asscts.

EM For its fìscal \'ear ending October 31, 2014, Douglas Corporntion reports the ld- Prepare a corree! inco111e
lo11ing partial data shown belm,·. slateme11I.

Income before income taxes f550,000

Income tax expense (30% X f400,000) 120,000
lncomc before discontinued operations 430,000
Loss on discontinued division 150,000
Net income f280,000

The loss on discontinued di\'ision consists of f60,000 loss from operations of the division
and [90,000 loss on disposal of the division. The income tax rate is 30% on ali items.
lnstructions
la) Prepare a corrcct income statement, beginning with income before income taxes.
ib) I 1111====1> Explain in memo form why the income statement data are misleading.
E14- 1 Maulder Corporation has income from continuing operations of $290,000 for the year Prepare i11co111e s/(/fe111e11/.
ended December 31, 2014. It also has the following items (before considering income taxes).
I. A gain of $35,000 on the discontinuance of a division.
2. A correction of an error in last year's financial statements that resulted in a $25,000
understatemcnt of 2013 net income .
.-1.ssume all items are subject to income taxes at a 30% tax rate.
lnstructions
la) Prepare an income statement, beginning with income from continuing operations.
ib) Indicate the statement presentation of any item not included in (a) above.

Follm,· the ro1111cli11g procedures used i11 tlze chapte1:

P14-1 Comparati\'e statement data for Lionel Company and Barrymore Company, two Prepare verticol a1wl_nis (l}l//

competitors, appear belm,·. Ali statement of financial position data are as of December 31, COlll/111'/ll 017 profitahililv.
2014, and December 31, 2013.
Lionel Company Barrymore Company
2014 2013 2014 2013
\et sales $1,549,035 $339,038
Cost of goods solei 1,053,345 237,325
0perating expenses 278,825 77,979
Interest expense 7,745 2,034
Income tax expense 61,960 8,476
Plant assets (net) 596,920 $575,610 142,842 $128,927
Current assets 401,584 388,020 86,450 82,581
Share capi tal-ordinar_\', SS par 578,765 578,765 137,435 137,435
Retained earnings 252,224 225,358 55,528 47,430
\on-current liabilities 102,500 84,000 16,711 11,989
Current liabilities 65,015 75,507 19,618 14,654
 1

S 15-8
Req. 1
Operating profit margin (instead of rate of return on net sales) =
NOPAT/ Sales = [Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%

[(50.2-28.4) x (1-30%)] / 50.2 = 15.26 / 50.2 = 30.4%

Req. 2
Return on net operating assets (instead of rate of return on total
assets) = NOPAT / Average NOA = [Operating income x (1-tax rate)]
/ [(Operating assets – Operating liabilities)/2]

Assume Current liabilities and Total assets as operating

15.26 / [(88.3+51-2-33-13.1)/2] = 15.26 / 46.7 = 32.7%

Req. 3
Operating asset turnover (instead of asset turnover ratio) = Sales /
Average NOA = Sales / [(Operating assets – Operating liabilities)/2

50.2 / 46.7 = 1.07

Req. 4
Return on common equity (instead of rate of return on common
stockholders’ equity) = (Net income – Preferred dividend) / Average
Shareholders’ equity

15.5 / [(43+27.5)/2] = 15.5 / 35.25 = 44%

Req. 5
These rates of return are strong.

FSA Course – Tutorship session 5

 2

E 15-19
Req. 1
Operating profit margin (instead of rate of return on net sales) =
NOPAT/ Sales = [Operating income x (1-tax rate)] / Sales

Assume a tax rate of 30%

2012: [(176-93.4-46) x (1-30%)] / 176 = 25.62 / 176 = 14.5%

2011: [(160-86.5-41) x (1-30%)] / 160 = 22.75 / 160 = 14.2%

Req. 2
Return on net operating assets (instead of rate of return on total
assets) = NOPAT / Average NOA = [Operating income x (1-tax rate)]
/ [(Operating assets – Operating liabilities)/2]

Assume Total liabilities = (Total assets – Total shareholders’

equity) and Total assets as operating

Total liabilities2012 = 203-96.6-3.5 = 102.9

Total liabilities2011 = 190-90.1-3.5 = 96.4
Total liabilities2010 = 175-79.4 = 95.6

2012: 25.62 / [(203-102.9+190-96.4)/2] = 25.62 / 96.85 = 25.5%

2011: 22.75 / [(190-96.4+175-95.6)/2] = 22.75 / 86.5 = 26.3%

Req. 3
Operating asset turnover (instead of asset turnover ratio) = Sales /
Average NOA = Sales / [(Operating assets – Operating liabilities)/2

2012: 176 / 96.85 = 1.82

2011: 160 / 86.5 = 1.85

FSA Course – Tutorship session 5

 3

Req. 4
Return on common equity (instead of rate of return on common
stockholders’ equity) = (Net income – Preferred dividend) / Average
Shareholders’ equity

2012: 17.4 / [(96.6+3.5+90.1+3.5)/2] = 17.4 / 96.85 = 18%

2011: 12.6 / [(90.1+3.5+79.4)/2] = 12.6 / 86.5 = 14.6%

Req. 7
The company’s operating performance does not improve or
deteriorate during 2012.

FSA Course – Tutorship session 5

 4

P 15-24A
Req. 1

McConnell Department Stores, Inc.

Common-Size Income Statement Compared to Industry Average
Year Ended December 31, 2012
Industry
McConnell Average
Net sales……………………………………… 100.0% 100.0%
Cost of goods sold…………………………. 67.2 65.8
Gross profit…………………………….……. 32.8 34.2
Operating expenses……………………….. 20.7 19.7
Operating income………………………….. 12.1 14.5
Other expenses……………………………... 0.6 0.4
Net income…………………………………… 11.5% 14.1%

McConnell Department Stores, Inc.

Common-Size Balance Sheet Compared to Industry Average
December 31, 2012
Industry
McConnell Average
Current assets………………………………. 67.8% 70.9%
Fixed assets, net……………………………. 25.2 23.6
Intangible assets, net………………………. 1.8 0.8
Other assets…………………………………. 5.2 4.7
Total assets………………………………….. 100.0% 100.0%

Current liabilities……………………………. 46.4% 48.1%

Long-term liabilities……………………… 22.4 16.6
Stockholders’ equity………………………. 31.2 35.3
Total liabilities and stockholders’ equity 100.0% 100.0 %

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Req. 2

(a) Gross profit margin (instead of gross profit percentage)

= (Sales – Cost of goods sold) / Sales

255.184 / 778 = 32.8%

(b) Operating profit margin (instead of rate of return on net

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

Assume a tax rate of 30%

[94.138 x (1-30%)] / 778 = 65.90 / 778 = 8.5%

McConnell’s gross profit margin of 32.8% is worse than the

industry averages of 34.2% and Operating profit margin of 8.5%
is worse than the industry average of 10.15 = 14.5 x (1-30%).

FSA Course – Tutorship session 5

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P 15-30B

Req. 1

Specialty Department Stores, Inc.

Common-Size Income Statement Compared to Industry Average
Year Ended December 31, 2012
Industry
Specialty Average
Net sales 100.0% 100.0%
Cost of goods sold 67.6 65.8
Gross profit 32.4 34.2
Operating expenses 20.9 19.7
Operating income 11.5 14.5
Other expenses 0.6 0.4
Net income 10.9% 14.1%

Specialty Department Stores, Inc.

Common-Size Balance Sheet Compared to Industry Average
December 31, 2012
Industry
Specialty Average
Current assets 67.5% 70.9%
Fixed assets, net 26.0 23.6
Intangible assets, net 1.3 0.8
Other assets 5.2 4.7
Total assets 100.0% 100.0%

Current liabilities 46.4% 48.1%

Long-term liabilities 22.8 16.6
Stockholders’ equity 30.8 35.3
Total liabilities and stockholders’ equity 100.0% 100.0%

FSA Course – Tutorship session 5

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Req. 2

(a) Gross profit margin (instead of gross profit percentage)

= (Sales – Cost of goods sold) / Sales

253.368 / 782 = 32.4%

(b) Operating profit margin (instead of rate of return on net

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

Assume a tax rate of 30%

[89.930 x (1-30%)] / 782 = 62.95 / 778 = 8%

Specialty’s gross profit margin of 32.4% is worse than the

industry averages of 34.2% and operating profit margin of 8% is
worse than the industry average of 10.15 = 14.5 x (1-30%).

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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%

[(700,000 – 480,000) x (1-30%)] / 700,000 = 154,000 / 700,000 = 22%

(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 liabilities2014 = 580,000 – 425,000 = 155,000

Total liabilities2013 = 540,000 – 325,000 = 215,000

700,000 / [(580,000+540,000-155,000-215,000)/2] = 700,000 / 375,000

= 1.9 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]

154,000 / 375,000 = 41.1%

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

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

42,000 / [(425,000+325,000)/2)] = 42,000 / 375,000 = 11.2%

FSA Course – Tutorship session 5

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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 – 60,350) x (1-30%)] / 100,000 = 27,755/100,000 = 27.8%

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

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

Assume total assets as operating.

100,000 / [(111,300+120,700-12,000-31,100)/2] = 100,000 / 94,450 =

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]

27,755 / 94,450 = 29.4%

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

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

14,000 / [(99,300 + 89,600)/2] = 14,000 / 94,450 = 14.8%

Shareholders’ equity2014 = 75,000 + 24,300= 99,300

Shareholders’ equity2013 = 69,000 + 20,600= 89,600

FSA Course – Tutorship session 5