Accounting Principles Solution Chapter (18) PDF

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CHAPTER 18Financial Statement AnalysisASSIGNMENT CLASSIFICATION TABLELearning Objectives Do It! Exercises Problems Apply horizontal and vertical analysis to financial statements. 1 1, 2, 3, 4 1 Analyze a company’s performance using ratio analysis. 2 5, 6, 7, 8, 9, 10, 111, 2, 3, 4, 5, 6, 7 Apply the...

Description

CHAPTER 18 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Do It!

Exercises

Problems

1.

Apply horizontal and vertical analysis to financial statements.

1

1, 2, 3, 4

1

2.

Analyze a company’s performance using ratio analysis.

2

5, 6, 7, 8, 9, 10, 11

1, 2, 3, 4, 5, 6, 7

3.

Apply the concept of sustainable income.

3

12, 13

8, 9

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18-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

18-2

Description

Difficulty Level

Time Allotted (min.)

1

Prepare vertical analysis and comment on profitability.

Simple

20–30

2

Compute ratios from balance sheet and income statement.

Simple

20–30

3

Perform ratio analysis, and evaluate financial position and operating results.

Simple

20–30

4

Compute ratios, and comment on overall liquidity and profitability.

Moderate

30–40

5

Compute selected ratios, and compare liquidity, profitability, and solvency for two companies.

Moderate

50–60

6

Compute numerous ratios.

Simple

30–40

7

Compute missing information given a set of ratios.

Complex

30–40

8

Prepare a statement of comprehensive income.

Moderate

30–40

9

Prepare a statement of comprehensive income.

Moderate

30–40

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WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 18 FINANCIAL STATEMENT ANALYSIS Number

LO

BT

Difficulty

DI1

1

AP

Simple

6–8

DI2

2

AP

Simple

10–12

Time (min.)

DI3

3

AP

Simple

6–8

EX1

1

AP

Simple

10–12

EX2

1

AP

Simple

10–12

EX3

1

AP

Simple

12–15

EX4

1

AP

Simple

10–12

EX5

2

AN

Simple

8–10

EX6

2

AP

Simple

8–10

EX7

2

AP

Simple

6–8

EX8

2

AP

Simple

6–8

EX9

2

AP

Simple

6–8

EX10

2

AP

Moderate

8–10

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18-3

FINANCIAL STATEMENT ANALYSIS (Continued) Number

LO

BT

Difficulty

Time (min.)

EX11

2

AP

Simple

10–12

EX12

3

AP

Moderate

8–10

EX13

3

AP

Simple

6–8

P1

1, 2

AN

Simple

20–30

P2

2

AP, AN

Simple

20–30

P3

2

AP, AN

Simple

20–30

P4

2

AN

Moderate

30–40

P5

2

AP

Moderate

50–60

P6

2

AP

Simple

30–40

P7

2

AN

Complex

30–40

P8

3

AP

Moderate

30–40

P9

3

AP

Moderate

30–40

BYP1

1, 2

AN, E

Moderate

20–25

BYP2

1, 2

AN, E

Simple

15–20

BYP3

1, 2

AN, E

Simple

15–20

BYP4

—

AN

Simple

15–20

BYP5

2

C, E

Moderate

15–20

BYP6

1, 3

C

Simple

15–20

BYP7

2

E

Simple

10–15

BYP8

—

E

Simple

15–20

BYP9

3

AP

Simple

5–10

18-4

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Learning Objective

Knowledge

Comprehension

Application

1. Apply horizontal and vertical analysis to financial statements.

Analysis

Weygandt, Accounting Principles, 12/e, Solutions Manual

2. Analyze a company’s performance using ratio analysis.

DI18-2 E18-6 E18-7

E18-8 E18-5 E18-9 E18-11 E18-10 P18-1 P18-2 P18-3 P18-5 P18-6

3. Apply the concept of sustainable income.

DI18-3 E18-12

E18-13 P18-8 P18-9

Broadening Your Perspective

Synthesis

Evaluation

DI18-1 E18-1 E18-2 E18-3 E18-4 P18-1 P18-2 P18-3 P18-4 P18-7

Decision Making FASB Codification Financial Reporting Comp. Analysis Across the Real-World Focus Organization Communication

Financial Reporting Comp. Analysis Decision Making Across the Organization Ethics Case All About You

BLOOM’S TAXONOMY TABLE

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Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

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18-5

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 18-1

Current assets Plant assets Total assets

Increase (Decrease) in 2017 Percent (9.5)% [($199,000 – $220,000) ÷ $220,000] 5.3% [($821,000 – $780,000) ÷ $780,000] 2.0% [($1,020,000 – $1,000,000) ÷ $1,000,000]

Amount $(21,000) 41,000 $ 20,000

DO IT! 18-2 2017 (a) Current ratio: $1,380 ÷ $900 = $1,310 ÷ $790 =

1.53:1

(b) Inventory turnover: $955/[($460 + $390) ÷ 2)] = $890/[($390 + $340) ÷ 2)]=

2.25 times

1.66:1

(c) Profit margin ratio: $294 ÷ $3,800 = $154 ÷ $3,460 =

2.44 times 7.7% 4.5%

(d) Return on assets: $294/[($2,340 + $2,210) ÷ 2)] = $154/[($2,210 + $1,900) ÷ 2)] =

12.9%

(e) Return on common stockholders’ equity: $294/[($1,030 + $1,040) ÷ 2)] = $154/[$1,040 + $900) ÷ 2)] =

28.4%

(f)

Debt to assets ratio: $1,310 ÷ $2,340 = $1,170 ÷ $2,210 =

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7.5%

15.9% 56.0% 52.9%

(g) Times interest earned: ($294 + $126 + $25) ÷ $25 = ($154 + $66 + $20) ÷ $20 =

18-6

2016

17.8 times

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12.0 times

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DO IT! 18-3 HRABIK CORPORATION Statement of Comprehensive Income (Partial) Income before income taxes......................................... Income tax expense........................................................ Income from continuing operations............................. Discontinued operations Loss from operations of discontinued division, net of $12,000 income tax saving......... $48,000 Gain from disposal of discontinued division, net of $8,000, taxes............................... 32,000 Net income...................................................................... Unrealized loss on available for sale securities, net of $30,000 income taxes ($150,000  20%)......... Comprehensive income.................................................

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$500,000 100,000 400,000

16,000 384,000 120,000 $264,000

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18-7

SOLUTIONS TO EXERCISES EXERCISE 18-1 KURZEN INC. Condensed Balance Sheets December 31 Increase or (Decrease) Amount Percentage

2017

2016

Current assets Plant assets (net) Total assets

$125,000 396,000 $521,000

$100,000 330,000 $430,000

($25,000 ( 66,000 91,000

(25.0%) (20.0%) (21.2%)

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 91,000 133,000 224,000

$ 70,000 95,000 165,000

($21,000) ( 38,000) ( 59,000)

(30.0%) (40.0%) (35.8%)

161,000 136,000

115,000 150,000

( 46,000 (15,000 (14,000)

(40.0%) (9.3%)

297,000

265,000

Assets

Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

( 12.1%) ( 32,000)

$521,000

21.2%

$430,000 ($91,000)

18-8

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EXERCISE 18-2 NAVARRO CORPORATION Condensed Income Statements For the Years Ended December 31 2017 Amount Percent Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

$750,000 465,000 285,000 105,000 60,000 165,000 120,000 36,000 $ 84,000

2016 Amount Percent $600,000 390,000 210,000 66,000 54,000 120,000 90,000 27,000 $ 63,000

100.0% 62.0% 38.0% 14.0% 8.0% 22.0% 16.0% 4.8% 11.2%

100.0% 65.0% 35.0% 11.0% 9.0% 20.0% 15.0% 4.5% 10.5%

EXERCISE 18-3 (a)

GURLEY CORPORATION Condensed Balance Sheets December 31

Assets Current assets Property, plant & equipment (net) Intangibles Total assets

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Percentage Change from 2016

2017

2016

Increase (Decrease)

$ 74,000

$ 80,000

$ (6,000)

(7.5%)

90,000 99,000 40,000 27,000 $200,000 $210,000

( 9,000) (13,000) $(10,000)

(10.0%) (32.5%) (4.8%)

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18-9

EXERCISE 18-3 (Continued) GURLEY CORPORATION Condensed Balance Sheets (Continued) December 31

2017

2016

Liabilities and stockholders’ equity Current liabilities $ 42,000 $ 48,000 Long-term liabilities 143,000 150,000 Stockholders’ equity 15,000 12,000 Total liabilities and stockholders’ equity $200,000 $210,000

(b)

18-10

Increase (Decrease)

Percentage Change from 2016

$ (6,000)

(12.5%)

(7,000)

(4.7%)

3,000)

(25.0%)

$(10,000)

(4.8%)

GURLEY CORPORATION Condensed Balance Sheet December 31, 2017 Amount

Percent

Assets Current assets Property, plant, and equipment (net) Intangibles Total assets

$ 74,000 99,000 27,000 $200,000

37.0% 49.5% 13.5% 100.0%

Liabilities and stockholders’ equity Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity

$ 42,000 143,000 15,000 $200,000

21.0% 71.5% 7.5% 100.0%

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EXERCISE 18-4 (a)

EMLEY CORPORATION Condensed Income Statements For the Years Ended December 31 Increase or (Decrease) During 2017 Net sales Cost of goods sold Gross profit Operating expenses Net income

(b)

2017

2016

Amount

$660,000 483,000 177,000 125,000 $ 52,000

$600,000 420,000 180,000 120,000 $ 60,000

$60,000 63,000 (3,000) 5,000 $ (8,000)

Percentage 10.0% 15.0% (1.7)% 4.2% (13.3)%

EMLEY CORPORATION Condensed Income Statements For the Years Ended December 31 2017 Net sales Cost of goods sold Gross profit Operating expenses Net income

2016

Amount

Percent

Amount

Percent

$660,000 483,000 177,000 125,000 $ 52,000

100.0% 73.2% 26.8% 18.9% 7.9%

$600,000 420,000 180,000 120,000 $ 60,000

100.0% 70.0% 30.0% 20.0% 10.0%

EXERCISE 18-5 (a) Current ratio = 2.0:1 ($4,054 ÷ $2,014) Acid-test ratio = 1.4:1 ($2,830 ÷ $2,014) Accounts receivable turnover = 4.2 times ($8,258 ÷ $1,988.5)* Inventory turnover = 5.9 times ($5,328 ÷ $899)** *($2,035 + $1,942) ÷ 2 **(898 + 900) ÷ 2

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18-11

EXERCISE 18-5 (Continued) (b)

Ratio Current Acid-test Accounts Receivable Turnover Inventory turnover

Nordstrom

Macy’s

Industry

2.0:1 1.4:1

1.52:1 0.47:1

1.70:1 .70:1

4.2 5.9

69.1 3.1

46.4 4.3

Nordstrom is better than Macy’s for the current ratio and its acid-test ratio is significantly higher than Macy’s. It has a substantially lower accounts receivable turnover than Macy’s. Nordstrom is much better than Macy’s for the inventory turnover. Nordstrom is better than the industry average for the current and acidtest ratios but significantly below the industry average for the accounts receivable turnover. Its inventory turnover, however, is higher than the industry average.

EXERCISE 18-6 (a) Current ratio as of February 1, 2017 = 2.2:1 ($110,000 ÷ $50,000). Feb. 3 7 11 14 18

2.2:1 No change in total current assets or liabilities. 1.6:1 ($82,000 ÷ $50,000). 1.6:1 No change in total current assets or liabilities. 1.8:1 ($70,000 ÷ $38,000). 1.6:1 ($70,000 ÷ $43,000).

(b) Acid-test ratio as of February 1, 2017 = 1.9:1 ($93,000* ÷ $50,000). *$110,000 – $15,000 – $2,000 Feb. 3 7 11 14 18

18-12

1.9:1 No change in total quick assets or current liabilities. 1.3:1 ($65,000 ÷ $50,000). 1.2:1 ($62,000 ÷ $50,000). 1.3:1 ($50,000 ÷ $38,000). 1.2:1 ($50,000 ÷ $43,000).

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EXERCISE 18-7 (a)

$145,000 = 2.9:1. $50,000

(b)

$85,000 = 1.7:1. $50,000

(c)

$390,000 $65,000 (1)

(d)

$198,000 = 3.6 times. $55,000 (2)

= 6.0 times.

(1)

$ 70 , 00 0+$6 0, 0 00 2

(2)

$ 60 , 00 0+$5 0, 0 00 2

EXERCISE 18-8 (a) Profit margin

$45,000 = 6.0%. $750,000

(b) Asset turnover

$750,000  $500,000 + $580,000  = 1.4 times.   2

(c) Return on assets

$45,000  $500,000 + $580,000  = 8.3%.   2

(d) Return on common stockholders’ equity

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$45,000  $325,000 + $430,000  = 11.9%.   2

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18-13

EXERCISE 18-9 (a)

$65,000 – $5,000 = $2.00. 30,000 shares

(b)

$13.00 = 6.5 times. $2.00

(c)

$21,000 = 32%. $65,000

(d)

$65,000 + $16,000 + $24,000 $105,000 = = 6.6 times. $16,000 $16,000

EXERCISE 18-10 Cost of goods sold (a) Inventory turnover = 4.5 =  $200,000 + $180,000    2 4.5 X $190,000 = Cost of goods sold Cost of goods sold = $855,000. Net sales (credit) (b) Accounts Receivable turnover = 8.8 =  $72,500 + $126,000    2 8.8 X $99,250 = Net sales (credit) = $873,400. (c) Return on common stockholders’ equity = 16% = Net income  $400,000 + $113,500 + $400,000 + $101,000    2 .16 X $507,250 = Net income = $81,160. 18-14

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EXERCISE 18-10 (Continued)

(d) Return on assets = 12.5% =

Average assets =

$81,160 [see (c) above] Average assets

$81,160 = $649,280 .125

Total assets (Dec. 31, 2017) + $655,000 = $649,280 2 Total assets (Dec. 31, 2017) = ($649,280 X 2) – $655,000 = $643,560. EXERCISE 18-11 (a)

($4,300 + $21,200+ $10,000)/$12,370 = 2.87:1

(b) ($4,300 + $21,200)/$12,370 = 2.06:1 (c)

$100,000/[($21,200 + $23,400)/2] = 4.48 times

(d) $60,000/[($10,000 + $7,000)/2] = 7.06 times (e)

$15,000/$100,000 = 15%

(f)

$100,000/[($110,500 + $120,100)/2] = .87 times

(g) $15,000/[($110,500 + $120,100)/2] = 13% (h) $15,000/[($98,130 + $89,000)/2] = 16% (i)

$12,370/$110,500 = 11.2%

EXERCISE 18-12 (a)

HAAS CORPORATION Partial Income Statement For the Year Ended October 31, 2017 Income before income taxes....................................... $540,000 Income tax expense ($540,000 X 20%)........................ 108,000 Income from continuing operations........................... 432,000 Loss from operations of discontinued division, net of $10,000 income tax saving ($50,000 X 20%)....... $40,000 Loss from disposal of discontinued division, net of $14,000 income tax saving ($70,000 X 20%)............ 56,000 96,000

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18-15

Net income....................................................................

18-16

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$336,000

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EXERCISE 18-12 (Continued) (b) To:

Chief Accountant

From: Yo...