Ex.
189
Selected financial statement data for Morton Company are presented below.
December 31, 2014 December 31, 2013
Inventories $ 85,000 $65,000
Accounts receivable (net) 100,000 80,000
Short-term investments 25,000 18,000
Cash 20,000 30,000
Total current liabilities 100,000 90,000
During 2014, net sales were ¥810,000, and cost of goods sold was ¥615,000.
Instructions
Compute the following ratios at December 31, 2014:
(a) Current.
(b) Acid-test.
(c) Accounts receivable turnover.
(d) Inventory turnover.
Solution 189 (10 min.)
(a) Current = 2.3:1 ($230,000 $100,000)
(b) Acid-test = 1.45:1 ($145,000 $100,000)
(c) Accounts receivable turnover = 9 times $810,000 [($100,000 + $80,000) 2]
(d) Inventory turnover = 8.2 times [$615,000 ($85,000 + $65,000) 2]
Ex. 190
Selected information from the comparative financial statements of Fryman Company for
the year
ended December 31, appears below:
2014 2013
Inventory $ 140,000 $160,000
Accounts receivable (net) 180,000 200,000
Total assets 1,200,000 800,000
Non-current liabilities 340,000 300,000
Current liabilities 140,000 110,000
Net credit sales 1,520,000 1,200,000
Cost of goods sold 750,000 630,000
Interest expense 40,000 25,000
Income tax expense 60,000 29,000
Net income 160,000 85,000
Instructions
Answer the following questions relating to the year ended December 31, 2014. Show
computations.
1. Inventory turnover for 2014 is __________.
2. Times interest earned in 2014 is __________.
3. The debt to total assets ratio for 2014 is __________.
4. Accounts receivable turnover for 2014 is __________.
5. Return on assets for 2014 is __________.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA
PC: Problem
Solving, IMA: Business Economics
14 - 51 Financial Statement Analysis
Solution 190 (9–14 min.)
$750,000
1. Inventory turnover for 2014 is 5 times. ———————————— = 5 times.
($140,000 + $160,000) ÷ 2
$160,000 + $60,000 + $40,000
2. Times interest earned in 2014 is 6.5 times. —————————————— = 6.5
times.
$40,000
$140,000 + $340,000
3. The debt to total assets ratio for 2014 is 40%. —————————— = 40%.
$1,200,000
$1,520,000
4. Accounts receivable turnover for 2014 is 8 times. ———————————— = 8
times.
($180,000 + $200,000) ÷ 2
$160,000
5. Return on assets for 2014 is 16%. ————————————— =
Selected data for Nancy's Store appear below.
2014 2013
Net sales €640,000 €520,000
Cost of goods sold 525,000 400,000
Net income 64,000 35,000
Inventory at end of year 65,000 85,000
Accounts receivable at end of year 90,000 70,000
Instructions
Compute the following for 2014:
(a) Profit margin.
(b) Inventory turnover.
(c) Accounts receivable turnover.
Solution 193 (6–10 min.)
(a) Profit margin= Net income ÷ Net sales
= €64,000 ÷ €640,000
= 10%
(b) Inventory turnover = Cost of goods sold ÷ Average inventory
= €525,000 ÷ [(€65,000 + €85,000) ÷ 2]
= 7 times
(c) Accounts receivables turnover = Net credit sales ÷ Average accounts receivable
= €640,000 ÷ [(€90,000 + €70,000) ÷ 2]
= €640,000 ÷ €80,000
= 8 times
Ex. 194
Selected financial statement data for Holmes Company are presented below.
Net sales $1,200,000
Cost of goods sold 700,000
Interest expense 10,000
Net income 180,000
Total assets (ending) 850,000
Total ordinary shareholders' equity (ending) 650,000
Total assets at the beginning of the year were $750,000; total ordinary shareholders'
equity was
$550,000 at the beginning of the period.
Instructions
Compute each of the following:
(a) Asset turnover
(b) Profit margin
(c) Return on assets
(d) Return on ordinary shareholders' equity
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA
PC: Problem
Solving, IMA: Business Economics
Solution 194 (10 min.)
(a) Asset turnover = 1.5 $1,200,000 [($750,000 + $850,000) 2]
(b) Profit margin = 15% ($180,000 $1,200,000)
(c) Return on assets = 22.5% $180,000 [($750,000 + $850,000) 2]
(d) Return on ordinary shareholders' equity = 30% $180,000 [($550,000 + $650,000)
2]
Ex. 196
Boyle Corporation had the following comparative current assets and current liabilities:
Dec. 31, 2014 Dec. 31, 2013
Current assets
Prepaid expenses $ 35,000 $ 20,000
Inventory 110,000 90,000
Accounts receivable 55,000 95,000
Short-term investments 40,000 10,000
Cash 20,000 30,000
Total current assets $260,000 $245,000
Current liabilities
Accounts payable $140,000 $110,000
Salaries and wages payable 40,000 30,000
Income tax payable 20,000 15,000
Total current liabilities $200,000 $155,000
During 2014, credit sales and cost of goods sold were $600,000 and $350,000,
respectively.
14 - 61 Financial Statement Analysis
Ex.196 (Cont.)
Instructions
Compute the following liquidity measures for 2014:
1. Current ratio.
2. Working capital.
3. Acid-test ratio.
4. Accounts receivable turnover.
5. Inventory turnover.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA
PC: Problem
Solving, IMA: Business Economics
Solution 196 (10–15 min.)
1. Current ratio = Current assets ÷ Current liabilities
= $260,000 ÷ $200,000 = 1.3 : 1
2. Working capital = $260,000 – $200,000
= $60,000
Cash + Short-term investments + Accounts receivable
3. Acid-test ratio = ————————————————————————
Current liabilities
$20,000 + $40,000 + $55,000
= ————————————— = .58 : 1
$200,000
Net credit sales
4. Accounts Receivable turnover = —————————————
Average accounts receivable
$600,000
= ———— = 8 times
$75,000
Cost of goods sold
5. Inventory turnover = —————————
Average inventory
$350,000
= ———— = 3.5 times
$100,000
Ex. 197
Selected data from Oates Company are presented below:
Total assets $1,600,000
Average assets 1,750,000
Net income 175,000
Net sales 1,225,000
Average ordinary shareholders' equity 1,000,000
Instructions
Calculate the profitability ratios that can be computed from the above information.
With the information provided, the profitability ratios that can be calculated are as
follows:
1. Profit margin = Net income ÷ Net sales
= $175,000 ÷ $1,225,000
= 14.3%
2. Asset turnover = Net sales ÷ Average assets
= $1,225,000 ÷ $1,750,000
= 70%
3. Return on assets = Net income ÷ Average assets
= $175,000 ÷ $1,750,000
= 10%
Net income
4. Return on ordinary shareholders' equity = —————————————————
Average ordinary shareholders' equity
= $175,000 ÷ $1,000,000
= 17.5%
