Chapter 6 Handout

Summary of Financial Statement Analysis

2013
Barnes
What it Borders &
Measure Formula tells you Amazon.com Group Noble eBay
Debt-to- Percentage
assets Total Liabilities of assets
148% 53% 64% 12%
ratio Total Assets financed by
debt.
Asset How well
turnover Sales Revenue assets are
ratio used to 1.54 1.56 1.83 0.44
Average Total Assets generate
sales
Net The ability
profit Net Income to generate
margin sales while 0.7% 3.2% 2.6% 20.4%
ratio Sales Revenue controlling
expenses

Hershey Ebook Corporation

Income Statement (Modified)
For the years ended December 31, 2013 and 2012

In thousands of dollars 2013 2012

Net Sales $4,172,551 $4,120,317
Costs and Expenses:
Cost of sales 2,544,726 2,561,052
Selling, marketing and administrative 816,442 833,426
Business realignment and asset impairments, net 23,357 27,552
Gain on sale of business (8,330)
Total costs and expenses 3,376,195 3,422,030
Income before Interest and Income Taxes 796,356 698,287
Interest expense, net 63,529 60,722
Income before Income Taxes 732,827 637,565
Provision for income taxes 267,875 233,987
Net Income $464,952 $403,578

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Hershey Ebook Corporation
Balance Sheet (Modified)
December 31, 2013 and 2012

In thousands of dollars 2013 2012

ASSETS
Current Assets:
Cash and cash equivalents $114,793 $297,743
Accounts receivable - trade 407,612 370,976
Inventories 492,859 503,291
Prepaid expenses and other 116,305 91,608
Total current assets 1,131,569 1,263,618
Property, Plant and Equipment, Net 1,661,939 1,486,055
Goodwill 388,960 378,453
Other Intangibles 38,511 39,898
Total assets $3,582,540 $3,480,551
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $132,222 $124,507
Accrued liabilities 416,181 356,716
Income taxes payable 24,898 37,499
Short-term debt 12,032 11,135
Current portion of long-term debt 477 16,989
Total current liabilities 585,810 546,846
Long-term Debt 968,499 851,800
Other Long-term Liabilities 748,365 710,202
Total liabilities 2,302,674 2,108,848
Stockholders’ Equity 1,279,866 1,371,703
Total liabilities and stockholders’ equity $3,582,540 $3,480,551

1. Compute Hershey Ebook’s debt-to assets ratios at the end of the 2013 and 2012 years.
Does this change in the debt-to-assets ratio reflect an increase or decrease in the
company’s risk? How do these ratios compare with other companies’ debt-to asset
ratios?

2. Compute Hershey Ebook’s asset turnover ratios for 2013 and 2012. (In thousands,
Hershey’s total assets on December 31, 2011 were $3,247,430.) What does this change
tell you about the company’s productive use of assets? How do these ratios compare
with other companies’ asset turnover ratios?

3. Compute Hershey Ebook’s net profit margin for 2013 and 2012 fiscal years. How has
Hershey’s profitability on sales changed? How does Hershey’s net profit margin
compare with other companies’ net profit margin ratios?
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Self-study quiz:
1. Which of the following is false?
A. Relevance is the qualitative characteristic of accounting information that says the information
would make a difference in a user's decision.
B. Trade receivables would normally be classified as a current asset.
C. Accumulated depreciation would normally appear in the income statement.
D. The matching principle holds that all expenses incurred in the earning of revenue should be
recognized in the same period as the revenue earned.
2. Which one of the following is not a qualitative characteristic of useful accounting
information?
A. Relevance.
B. Verifiability.
C. Going concern.
D. Comparability.

3. Which statement is false regarding the financial statements?

A. Current assets reported in the statement of financial position are generally reported in order of
their liquidity.
B. Distributions to owners (dividends) are reported in the income statement.
C. Expenses on the income statement are reported as incurred, not as paid.
D. The statement of cash flows reports the sources and uses of cash during the accounting period.

4. Which one of the following is a fundamental qualitative characteristic?

A. Relevance.
B. Timeliness.
C. Understandability.
D. Comparability.

5. If accounting information has predictive value, it is useful in making predictions about

A. future Canada Revenue Agency audits.
B. new accounting principles.
C. foreign currency exchange rates.
D. the potential effects of past, present, and future events of a company.

6) When the financial statements are so materially misstated that they do not presents fairly the
financial position of the company, the auditors must issue which of the following types of
opinion?
a) A qualified opinion
b) An unqualified opinion
c) A denial of opinion
d) An adverse opinion

7. In order for accounting information to be relevant, it must

A. have very little cost.

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B. help predict future economic events or confirm prior expectations.
C. be verifiable.
D. be used by a lot of different organizations.

8. The two qualitative characteristics that are defined in terms of what influences or makes a
difference to a decision maker are
A. faithful representation and materiality.
B. comparability and timeliness.
C. materiality and relevance.
D. relevance and understandability.

Match each qualitative characteristic of useful accounting information with the related definition
by entering the appropriate letter in the space provided.