San Sebastian College – Recoletos
Canlubang Campus MANAGEMENT ADVISORY SERVICES
BADILLA/TAN/URO
Notes 1. When analyzing financial statements, these are the major characteristi cs of a company that are evaluated:
Liquidity ratios — measures of the short-term debt-paying ability. Ratio Formula 1 Current ratio Current Assets ÷ Measures Current Liabilities ability 2 Acid Test or Cash + Marketable Securities + Measures Quick ratio Accounts Receivable ÷ liquidity. Current Liabilities
Purpose Or Use the short-term debt-paying the
immediate
short-term
Activity ratios — measures the efficiency of t he conduct of business activity. Ratio Formula Purpose Or Use 1 Accounts Net Credit Sales ÷ Measures the number of times in a year Receivable Average Net Accounts Receivable that receivables were collected Turnover 2 Average 365 days ÷ Accounts receivable Measures the average number of days collection turnover that receivables were collected period OR Accounts receivable Net ÷ Net Credit Sales ÷ 365 days 3 4
Inventory Turnover Average sales period
Cost of Goods Sold ÷ Average Inventory 365 days ÷ Inventory turnover OR
Measures the number of times in a year that inventories were sold Measures the average number of days that inventories were sold
Accounts Payable ÷ Cost of Goods Sold ÷ 365 days Profitability ratios—measures of the income or operating success of an enterprise for a given period of time. Ratio Formula Purpose Or Use 1 Profit margin Net Income ÷ Sales Measures the net income generated by each peso sales 2 Asset Turnover Net Sales ÷ Average Total Assets Measures how assets are efficiently used to generate sales 3 Return On Assets Net Income ÷ Total Assets Measures overall profitability of assets 4
Return On Equity
5
Earnings Per Share
Net Income ÷ Average Common Stockholder’s Equity et Income Or Earningsafter tax − Preferred Dividends) ÷ Average number of common shares outstanding Or
Measures investment
profitability
of
owner’s
Measures net income per common share outstanding
Earnings available to common stockholder ÷ Average number of common shares outstanding 6
Price Earnings Ratio
Market Value of common Stock ÷ Earnings Per Share
Measures the value investors are willing to give up for every peso earnings they earn
7
Payout Ratio
Common Cash Dividends ÷ Earnings Available To Common Stockholders
Measures the percentage of distributed as cash dividends
8
Dividend Yield
Common Cash Dividends ÷ Market Value of common Stock
9
Book value per share
Common stockholders' equity ÷ Number of common shares outstanding
Measures the percentage of cash dividends received over the cash investment per share of common stockholders Book value per common share
10
Book value to Market
Book value per share ÷ Market Value of common Stock
earnings
Measures the book value per share against perceived market value of common stock
Solvency ratios— measures of the ability of t he enterprise to survive over a long period of ti me. Ratio Formula Purpose Or Use
1
Times interest earned ratio
Operating income ÷ Interest expense
Measures the ability to meets payments as they become due
interest
2
Debt-to-equity ratio
Liabilities ÷ Stockholders' equity
Measures size of total debt to total capital
3
Debt ratio
Liabilities ÷ Total Assets
4
Equity ratio
Total Equity ÷ Total Assets
Measures the percentage of total assets provided by creditors Measures the percentage of total assets provided by owners
PROBLEMS
1 The comparative balance sheet of Greer Company appears below: GREER COMPANY Comparative Balance Sheet December 31, —————————————————— ——————————————————————————— ————————————————— ———————————————— ———————— Assets Current assets ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ...... Plant assets .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .................... .......... .......... Total assets ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .................... .......... ..........
2009 $ 330 670 $1,000
2008 $280 520 $800
Liabilities and stockholders' equity Current liabilities .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............. .......... ... $ 160 $120 Long-term debt ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............... .......... ..... 240 160 Common stock ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............... .......... ..... 340 320 Retained earnings .................... ......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... . 260 200 Total liabilities and stockholders' equity .................... .......... ..................... ........... ..................... .......... ........... ............. .......... ... $1,000 $800 Instructions (a) Using horizontal analysis, show the percentage change for each balance sheet item using 2008 as a base year. (b)
Using vertical analysis, prepare a common size comparative balance sheet.
2 Selected financial statement data for Morton Company are presented below. Cash Short-term investments Receivables (net) Inventories Total current liabilities
December 31, 2009 $ 20,000 25,000 100,000 85,000 100,000
December 31, 2008 $30,000 18,000 80,000 65,000 90,000
During 2009, net sales were $810,000, and cost of goods sold was $615,000. Instructions Compute the following ratios at December 31, 2009: (a) Current. (b) Acid-test. (c) Receivables turnover. (d) Inventory turnover. 3 Selected information from the comparative financial statements of Fryman Company for the year ended December 31, appears below: 2009 2008 Accounts receivable (net) $ 180,000 $200,000 Inventory 140,000 160,000 Total assets 1,200,000 800,000 Current liabilities 140,000 110,000 Long-term debt 340,000 300,000 Net credit sales 1,520,000 700,000 Cost of goods sold 750,000 530,000 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, 2009. Show computa-tions.
1. Inventory turnover for 2009 is __________. __________. 2. Times interest earned in 2009 is __________. __________. 3. The debt to total assets ratio for 2009 is __________. __________. 4. Receivables turnover for 2009 is __________. __________. 5. Return on assets for 2009 is __________. __________. 4 The financial statements of Dobson Company appear below:
DOBSON COMPANY Comparative Balance Sheet December 31, —————————————————— ——————————————————————————— ————————————————— ———————————————— ———————— Assets Cash ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .... Short-term investments .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... .................. .......... ........ Accounts receivable (net) ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .... Inventory ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .................. .......... ........ Property, plant and equipment (net) ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ......... Total assets .................... ......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .................. .......... ........
2009 $ 35,000 15,000 50,000 50,000 250,000 $400,000
2008 $ 40,000 60,000 30,000 70,000 300,000 $500,000
Liabilities and stockholders' equity Accounts payable ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ................ .......... ...... Short-term notes payable ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .... Bonds payable ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ......... Common stock ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ......... Retained earnings ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .... Total liabilities and stockholders' equity .................... ......... ........... ..................... .......... ........... .................. .......... ........
$ 10,000 40,000 88,000 160,000 102,000 $400,000
$ 30,000 90,000 160,000 145,000 75,000 $500,000
DOBSON COMPANY Income Statement For the Year Ended December 31, 2009 Net sales .......................... ........................................ ............................ ............................ ............................ ............................ ............................ ................. ... Cost of goods sold .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .... Gross profit ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .... Expenses Administrative expenses .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ......... Selling expenses .................... ......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........... .......... . Interest expense .................... ......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........... .......... . Total expenses .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ................ .......... ...... Income before income taxes ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ......... Income tax expense .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .. Net income............................ .......................................... ............................ ............................ ............................ ............................ .......................... ............
$360,000 $360,000 198,000 162,000 $59,000 40,000 12,000 111,000 51,000 15,000 $ 36,000
Additional information: a. Cash dividends of $9,000 were declared and paid in 2009. b. Weighted-average number of shares of common stock outstanding during 2009 was 30,000 shares. c. Market value of common stock on December 31, 2009, was $21 per share. Instructions Using the financial statements and additional information, compute the following ratios for Coulter Company for 2009. Show all computations. Computations 1. Current ratio _________. _________. 2. Return on common stockholders' equity _________. _________. 3. Price-earnings ratio _________. _________. 4. Acid-test ratio _________. _________. 5. Receivables turnover _________. _________. 6. Times interest earned _________. _________. 7. Profit margin _________. _________. 8. Days in inventory _________. _________. 9. Payout ratio _________. _________. 10. Return on assets _________. _________. 5 The following ratios have been computed for Pratt Company for 2009. Profit margin Times interest earned Receivables turnover Acid-test ratio Current ratio Debt to total assets ratio
20% 15 times 5 times 1.60 : 1 3:1 26%
Pratt Company’s 2009 financial statements with missing information follow: PRATT COMPANY Comparative Balance Sheet December 31, —————————————————— ——————————————————————————— ————————————————— ———————————————— ———————— Assets Cash ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .................. .......... ........ Short-term Investments .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ........... .......... . Accounts receivable (net) ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... .................. .......... ........ Inventory ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........... .......... . Property, plant, and equipment (net) ........... ..................... .......... ........... ..................... .......... ........... ........... .......... . Total assets .................... .......... ..................... ........... ........... ..................... .......... ........... ..................... .......... ........... .........
2009 $ 25,000 15,000 ? ? 200,000 $ ?
(6) (8) (9)
2008 $ 35,000 15,000 60,000 50,000 150,000 $310,000
Liabilities and stockholders' equity Accounts payable .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... .................... .......... .......... Short-term notes payable .................... .......... ..................... ........... ........... ..................... .......... ........... .................. .......... ........ Bonds payable ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............. .......... ... Common stock ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............. .......... ... Retained earnings ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........ Total liabilities and stockholders' equity ..................... .......... ........... ..................... .......... ........... ........
$
? (7) 35,000 ? (10) 200,000 59,000 $ ? (11)
$ 25,000 30,000 20,000 200,000 35,000 $310,000
PRATT COMPANY Income Statement For the Year Ended December 31, 2009 —————————————————— —————————————————————————— ————————————————— ————————————————— ———————— Net sales ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... . Cost of goods sold .................... ......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........ Gross profit .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........ Expenses: Depreciation expense .................... .......... ..................... ........... ..................... .......... ........... ..................... .......... ........... ...... Administrative expenses ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... . Selling expenses ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............. .......... ... Interest expense ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............. .......... ... Total expenses ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........ Income before income taxes ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ............. .......... ... Income tax expense ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........ Net income ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ..................... .......... ........... ........
$250,000 125,000 125,000 $ ? 15,000 10,000 5,000
(5)
$
? ? ? ?
(4) (2) (3) (1)
Instructions Use the above ratios and information from the Pratt Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers. 6 Selected financial statement data for Holmes Company are presented below. Net sales Cost of goods sold Interest expense Net income Total assets (ending) Total common stockholders' equity (ending)
$1,200,000 700,000 10,000 180,000 850,000 650,000
Total assets at the beginning of the year were $750,000; total common stockholders' 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 common stockholders' equity 7 Winter Corporation has issued common stock only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company's financial statements. Beginning inventory Purchases Ending inventory Average accounts receivable Average common stockholders' equity Sales (all on credit) Net income
$ 482,000 5,636,000 ? 700,000 3,500,000 7,000,000 525,000
Instructions Compute the following: (a) Receivables turnover and the average collection period. (b) Inventory turnover and the days in inventory. (c) Return on common stockholders' equity. 8 Boyle Corporation had the following comparative current assets and current liabilities: Current assets Cash Short-term investments Accounts receivable Inventory Prepaid expenses Total current assets
Dec. 31, 2009
Dec. 31, 2008
$ 20,000 40,000 55,000 110,000 35,000 $260,000
$ 30,000 10,000 95,000 90,000 20,000 $245,000
Current liabilities Accounts payable Salaries payable Income tax payable Total current liabilities
$140,000 40,000 20,000 $200,000
$110,000 30,000 15,000 $155,000
During 2009, credit sales and cost of goods sold were $600,000 and $350,000, respectively. Instructions Compute the following liquidity measures for 2009: 1. Current ratio. 2. Working capital. 3. Acid-test ratio. 4. Receivables turnover. 5. Inventory turnover.
9 Selected data from Oates Company are presented below: Total assets Average assets Net income Net sales Average common stockholders' equity
$1,600,000 1,750,000 175,000 1,225,000 1,000,000
Instructions Calculate the profitability ratios that can be computed from the above information. 10 The following data are taken from the financial statements of Doyle Company: 2009 $ 520,000 5,460,000
Monthly average accounts receivable Net sales on account Terms for all sales are 2/10, n/30
2008 $ 500,000 4,500,000
Instructions (a) Compute the receivables turnover and the average collection period for both years. years. (b) What conclusion can an analyst draw about the management of the the accounts receivable? 11 The income statement for Stoval Company for the year ended December 31, 2008 appears below. Sales Cost of goods sold Gross profit Expenses Net income
$610,000 380,000 230,000 170,000* $ 60,000
*Includes $30,000 of interest expense and $18,000 of income tax expense. Additional information: 1.
Common stock outstanding on January 1, 2008 was 40,000 shares. On July 1, 2008, 10,000 more shares were issued.
2.
The market price of Stoval's stock was $15 at the end of 2008.
3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred stockholders. Instructions Compute the following ratios for 2008: (a) earnings per share. (b) price-earnings. (c) times interest earned. (d) dividend yield
12 The President of Roque Company, which makes a single product, request an explanation for the gorss profit profit decline for 2014. The following following information is available: Increase (Decrease) 2013 2014 Sales P75,000 P66,000 (P 9,000) Cost of Good Sold 59,500 57,600 (1,900) Gross Profit P15,500 P57,600 (P7,100) Unit Sold 25,000 24,000 Required: Gross profit Analysis
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