Financial Accounting Answer Key for Chapter 15 PDF

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CHAPTER 15Financial Statement AnalysisSOLUTIONS TO EXERCISESEXERCISE 15.GALLUP SACondensed Statements of Financial Position December 31Increase or (Decrease) 2020 2019 Amount Percentage Assets Plant assets (net) Current assets Total assets€396,128,€524,€320,110,€430,(€76,( 18,€94,(23%)(16%)(21%)Equi...

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CHAPTER 15 Financial Statement Analysis SOLUTIONS TO EXERCISES EXERCISE 15.1 GALLUP SA Condensed Statements of Financial Position December 31 Increase or (Decrease) Amount Percentage

2020

2019

Assets Plant assets (net) Current assets Total assets

€396,000 128,000 €524,000

€320,000 110,000 €430,000

(€76,000 ( 18,000 €94,000

(23.8%) (16.4%) (21.9%)

Equity Share capital— ordinary, €1 par Retained earnings Total equity

€ 159,000 135,300 294,300

€ 115,000 150,000 265,000

( €44,000) ((14,700)) ( 29,300)

(38.3%) (((9.8%)) ( 11.1%)

138,700 91,000 229,700

95,000 70,000 165,000

€524,000

€430,000

Liabilities Non-current liabilities Current liabilities Total liabilities Total equity and liabilities

( 43,700 (15,000 ) 21,000 ( 64,700)

(46.0%) 30.0% ( 39.2%) 21.9%

(€94,000)

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15-1

EXERCISE 15.2 CONARD LIMITED Condensed Income Statements For the Years Ended December 31 2020 Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2019

Amount

Percent

Amount

Percent

£750,000 480,000 270,000 105,000 75,000 180,000 90,000 36,000 £ 54,000

100.0% 64.0% 36.0% 14.0% 10.0% 24.0% 12.0% 4.8% 7.2%

£600,000 408,000 192,000 84,000 54,000 138,000 54,000 18,000 £ 36,000

100.0% 68.0% 32.0% 14.0% 9.0% 23.0% 9.0% 3.0% 6.0%

EXERCISE 15.3 (a)

GARCIA SLU Condensed Statements of Financial Position December 31

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

15-2

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Percentage Increase Change (Decrease) from 2019

2020

2019

€ 24,000

€ 40,000

€ (16,000)

(40.0%)

92,000 100,000 82,000 76,000 €200,000 €214,000

( 8,000) (6,000) € (14,000)

( 8.7%) (7.3%)   (6.5%)

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EXERCISE 15.3 (Continued) GARCIA SLU Condensed Statements of Financial Position (Continued) December 31

2020 Equity and liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities

(b)

2019

€ 20,000 € 16,000 140,000 40,000

Percentage Change Increase (Decrease) from 2019 € 4,000

25.0%

150,000 48,000

(10,000) (8,000)

(6.7%) ((16.7%))

€200,000 €214,000

€(14,000)

  (6.5%)

GARCIA SLU Condensed Statements of Financial Position December 31, 2020 Amount

Percent

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

€ 24,000 100,000 76,000 €200,000

12.0% 50.0% 38.0% 100.0%

Equity and liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities

€ 20,000 140,000 40,000 €200,000

10% 70% 20% 100%

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15-3

EXERCISE 15.4 (a)

HENDI A.S. Condensed Income Statements For the Years Ended December 31 Increase or (Decrease) During 2019

Net sales Cost of goods sold Gross profit Operating expenses Net income

(b)

2020

2019

600,000 468,000 132,000 60,000 72,000

500,000 400,000 100,000 54,000 46,000

Amount

Percentage 20.0% 17.0% 32.0% 11.1% 56.5%

100,000 68,000 32,000 6,000 26,000

HENDI A.S. Condensed Income Statements For the Years Ended December 31 2020 Amount Net sales Cost of goods sold Gross profit Operating expenses Net income

600,000 468,000 132,000 60,000 72,000

2019 Percent 100.0% 78.0% 22.0% 10.0% 12.0%

Amount

Percent

500,000 400,000 100,000 54,000 46,000

100.0% 80.0% 20.0% 10.8% 9.2%

EXERCISE 15.5 (a) Current ratio = 2.1:1 ($5,228 ÷ $2,541) Acid-test ratio = 1.3:1 ($3,371 ÷ $2,541) Accounts receivable turnover = 5.7 times ($12,166 ÷ $2,153)* Inventory turnover = 5.4 times ($7,737 ÷ $1,445.5)** *($2,177 + $2,129) ÷ 2 **($1,531 + $1,360) ÷ 2

15-4

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EXERCISE 15.5 (Continued) (b)

Ratio Current Acid-test Accounts receivable turnover Inventory turnover

Nordstrom

Park Street

Industry

2.1:1 1.3:1

2.05:1 1.05:1

1.70:1 .70:1

5.7 5.4

37.2 3.1

46.4 4.3

Nordstrom is similar to Park Street for the current and acid-test ratios but significantly below for the accounts receivable turnover. Nordstrom is much better than Park Street for the inventory turnover. Nordstrom is better than the industry average for the current and acidtest ratios but below the industry average for the accounts receivable turnover. Its inventory turnover ratio however is higher than the industry average.

EXERCISE 15.6 (a) Current ratio as of February 1, 2020 = 2.8:1 (R$140,000 ÷ R$50,000). Feb. 3 7 11 14 18

2.8:1 2.2:1 2.2:1 2.6:1 2.3:1

No change in total current assets or liabilities. (R$112,000 ÷ R$50,000). No change in total current assets or liabilities. (R$100,000 ÷ R$38,000). (R$100,000 ÷ R$43,000).

(b) Acid-test ratio as of February 1, 2020 = 2.5:1 (R$125,000* ÷ R$50,000). * R$140,000 – R$10,000 – R$5,000 Feb. 3 7 11 14 18

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2.5:1 1.9:1 1.9:1 2.2:1 1.9:1

No change in total quick assets or current liabilities. (R$97,000 ÷ R$50,000). (R$94,000 ÷ R$50,000). (R$82,000 ÷ R$38,000). (R$82,000 ÷ R$43,000).

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15-5

EXERCISE 15.7 (a)

£140,000 = 2.8:1. £50,000

(b)

£80,000 = 1.6:1. £50,000

(c)

£396,000 £60,000 (1)

(d)

£190,000 = 3.5 times. £55,000 (2) (1)

£70,000 + £50,000 2

(2)

£60,000 + £50,000 2

= 6.6 times.

EXERCISE 15.8 (a) Profit margin

£42,000 = 6.0%. £700,000

(b) Asset turnover

£700,000  £540,000 + £580,000  = 1.25 times.   2  

(c) Return on assets

£42,000 = 7.5%. £560,000

(d) Return on ordinary shareholders’ equity

15-6

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£42,000  £325,000 + £425,000  = 11.2%.   2  

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EXERCISE 15.9 (a)

€ 60,000 – € 5,000 = €1.72. 32,000 shares

(b)

€ 10.80 = 6.3 times. €1.72

(c)

€ 15,000 = 25%. € 60,000

(d)

€60,000 + €14,000 + €17,000 € 91,000 = = 6.5 times. € 14,000 €14 ,000

EXERCISE 15.10 Cost of goods sold (a) Inventory turnover = 3.4 =  €200,000 + €180,000    2   3.4 X €190,000 = Cost of goods sold Cost of goods sold = €646,000. Net sales (credit) (b) Accounts receivable turnover = 8.8 =  €73,000 + €126,000    2   8.8 X €99,500 = Net sales (credit) = €875,600. (c) Return on ordinary shareholders’ equity = 25% = Net income  €400,000 + €134,000 + €400,000 + €122,000    2 .25 X €528,000 = Net income = €132,000.

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15-7

EXERCISE 15.10 (Continued)

(d) Return on assets = 20% =

Average assets =

€132,000 [see (c) above] Average assets

€132,000 = €660,000 .20

Total assets (Dec. 31, 2020) + €650,000 = €660,000 2 Total assets (Dec. 31, 2020) = (€660,000 X 2) – €650,000 = €670,000. EXERCISE 15.11 (a)

(€4,300 + €22,000 + €10,000)/€15,000 = 2.42:1

(b) (€4,300 + €22,000)/€15,000 = 1.75:1 (c)

€100,000/[(€22,000 + €24,000)/2] = 4.35 times

(d) €60,350/[(€10,000 + €7,000)/2] = 7.10 times (e)

€14,000/€100,000 = 14%

(f)

€100,000/[(€111,300 + €120,700)/2] = .86 times

(g) €14,000/[(€111,300 + €120,700)/2] = 12.1% (h) €14,000/[(€96,300 + €89,600)/2] = 15.1% (i)

15-8

€15,000/€111,300 = 13.5%

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EXERCISE 15.12 (a) DOUGLAS LIMITED Partial Income Statement For the Year Ended October 31, 2020 Income before income taxes...................................... £550,000 Income tax expense (£550,000 X 30%)...................... 165,000 Income from continuing operations…………………. 385,000 Discontinued operations Loss from operations of discontinued division, net of £18,000 tax savings……………………………………………. £42,000 Loss from disposal of discontinued division, net of £27,000 tax savings………………………………………… 63,000 (105,000) Net income.................................................................... £280,000

(b) To:

Ch ief Accountant

From: Your name, Independent Auditor After reviewing your income statement for the year ended 10/31/20, we believe it is misleading for the following reasons: The amount reported for income before discontinued operations is overstated by £45,000. The income tax expense should be 30% of £550,000, or £165,000, not £120,000. Also, the effect of the loss from the discontinued division on net income is only £105,000, not £150,000. An income tax savings of £45,000 should be netted against the loss on the discontinued division.

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15-9

EXERCISE 15.13 TRAYER PLC Partial Statement of Comprehensive Income For the Year Ended December 31, 2020 Income from continuing operations....................................... Discontinued operations Loss from operations, net of ₤2,000 taxes................................................................. ₤8,000 Gain from disposal, net of ₤8,000 taxes..................................................................32,000 Net income................................................................................ Other comprehensive income Unrealized loss on non-trading securities, net of ₤16,000 taxes......................................................... Comprehensive income...........................................................

15-10

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₤290,000

24,000 ₤314,000 64,000 ₤250,000

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SOLUTIONS TO PROBLEMS PROBLEM 15.1

(a)

Condensed Income Statement For the Year Ended December 31, 2020

Lionel Company Pounds Percent

Barrymore Company Pounds Percent

₤1,549,035 100.0% Net sales 1,053,345 68.0% Cost of goods sold 32.0% 495,690 Gross profit 263,336 17.0% Operating expenses 15.0% 232,354 Income from operations .5% 7,745 Interest expense 14.5% 224,609 Income before income taxes 4.0% 61,960 Income tax expense   10.5%     ₤  162,649 Net income

₤339,038 100.0% 70.0% 237,325 30.0% 101,713 23.0% 77,979 7.0% 23,734 .6% 2,034 6.4% 21,700 2.5% 8,476      ₤    13,224  3.9%

(b) Lionel Company appears to be more profitable. It has higher relative gross profit, income from operations, income before taxes, and net income.  £162,649 a Lionel’s return on assets of 16.6%   is higher than Barrymore’s  £981,067   £13,224  b return on assets of 6.0%   . Also, Lionel’s return on ordinary  £220,400   £162,649 c shareholders’ equity of 19.9%   is higher than Barrymore’s  £817,556   £13,224  d return on ordinary shareholders’ equity of 7.0%   .  £188,914 

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PROBLEM 15.1 (Continued) a

₤162,649 is Lionel’s 2020 net income. ₤981,067 is Lionel’s 2020 average assets: 2020 ₤596,920

2019 ₤575,610 388,020 401,584 + ₤963,630 = ₤998,504

Plant assets Current assets Total assets

£1, 962, 134 2

b

₤13 ,224 is Barrymore’s 2020 net income. $220,400 is Barrymore’s 2020 average assets: 2020 2019 ₤128,927 ₤142,842 82,581 86,450 ₤229,292 + ₤211,508 =

Plant assets Current assets Total assets

£ 440,800 2

c

₤162,649 is Lionel’s 2020 net income. $817,556 is Lionel’s 2020 average ordinary shareholders’ equity: Share capital ordinary Retained earnings Total equity

2020 2019 ₤578,765 ₤578,765 225,358 252,224 ₤830,989 + ₤804,123 =

£ 1,635,112 2

d

₤13,224 is Barrymore’s 2020 net income. ₤188,914 is Barrymore’s 2020 average ordinary shareholders’ equity: Share capital ordinary Retained earnings Total equity

15-12

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2020 2019 ₤137,435 ₤137,435 47,430 55,528 ₤192,963 + ₤184,865 =

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PROBLEM 15.2

(a) Earnings per share =

R$192,000 = R$3.20. 60,000

R$192,000 (b) Return on ordinary shareholders’ equity =  R$465,400 + R$542,600    2 =

R$192,000 R$504,000

= 38.1%. R$ 192,000 R$192,000 (c) Return on assets =  R$852,800 + R $946,100  = = 21.3%. R$899,450   2

(d) Current ratio =

R$345,800 = 1.70:1 R$203,500

(e) Acid-test ratio =

(f)

R$234,850 = 1.15:1 R$203,500

R$1,818,500 Accounts receivable turnover =  (R$102,800 + R$105,750 )    2   =

R$1,818,500 R$104,275

= 17.4 times.

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15-13

PROBLEM 15.2 (Continued) R $1,011,500 R$1,011,500 (g) Inventory turnover =  R$115,500 + R $110,950  = R$113,225   2 = 8.9 times.

(h) Times interest earned =

(i)

Asset turnover =

R$291,000 = 19.4 times. R$15,000

R$1,818,500 = 2.0 times. R$899,450*

*(R$852,800 + R$946,100) ÷ 2

(j)

15-14

Debt to assets =

R$403,500 = 42.6%. R$946,100

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PROBLEM 15.3

(a)

2019

2020

(1) Profit margin. £30,000 = 4.7% £640,000

£44,000 = 6.3% £700,000

(2) Asset turnover. £640,000  £533,000 + £600,000 = 1.1 times   2

£700,000  £600,000 + £640,000  = 1.1 times   2

(3) Earnings per share. £30,000 = ₤0.97 31,000

£44,000 = ₤1.38 32,000

(4) Price-earnings ratio. £5.00 = 5.2 times £0.97

£7.00 = 5.1 times £1.38

(5) Payout ratio. £20,000* = 66.7% £30,000 *(₤113,000 + ₤30,000 – ₤123,000)

£22,000** = 50.0% £44,000 **(₤123,000 + ₤44,000 – ₤145,000)

(6) Debt to assets. £162,000 = 27.0% £600,000

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£150,000 = 23.4% £640,000

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PROBLEM 15.3 (Continued) (b) The underlying profitability of the corporation appears to have improved. For example, profit margin and earnings per share have both increased. Also, the corporation appears to be involved in attempting to reduce its debt burden as its debt to assets ratio has decreased. Similarly, its payout ratio has decreased, which should help its overall solvency.

15-16

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PROBLEM 15.4 (a) LIQUIDITY 2019

2020

Change

Current

€ 343,000 = 1.9:1 € 182,000

€374,000 =1.9:1 €192,000

No change

Acid-test

€ 185,000 = 1.0:1 € 182,000

€220,000 = 1.1:1 €192,000

Increase

Accounts receivable turnover

€ 798,000 €858,000 = 9.5 times = 9.6 times €84,000* €89,000**

*(€88,000 + €80,000) ÷ 2 Inventory turnover

**(€80,000 + €98,000) ÷ 2

€ 611,000 €575,000 = 4.5 times €130,000** € 126,500* times

*(€118,000 + €135,000) ÷ 2

Increase

= 4.7

Increase

**(€135,000 + €125,000) ÷ 2

An overall increase in short-term liquidity has occurred. PROFITABILITY Profit margin

€42,000 = 5.3% €798,000

Asset turnover

€798,000 € 858,000 = 1.2 times = 1.3 times Increase €660,000 * * €640,000 *

*(€632,000 + €648,000) ÷ 2

€42,500 = 5.0% €858,000

Decrease

**(€648,000 + €672,000) ÷ 2

Return on assets

€42,000 = 6.6% €640,000

€42,500 = 6.4% €660,000

Decrease

Earnings per share

€42,000 = €2.10 20,000

€42,500 = €2.13 20,000

Increase

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PROBLEM 15.4 (Continued) (b)

2020 1.

2.

3.

(a) (b) (c) (d)

15-18

Return on ordinary shareholders’ equity Debt to assets

Price-earnings ratio

€42,500 € 323,000 (a)

2021 = 13.2%

€50,000 € 445,000 (b)

Change = 11.2% Decrease

€ 242,000 € 342,000 (c) = 50.9% = 34.6% € 700,000 €672,000

Decrease

€ 9.00 = 4.2 times € 2.13

Increase

€12.50 = 5.0 times € 2.50 (d)

(€200,000 + €130,000 + €200,000 + €116,000) ÷ 2. (€380,000 + €180,000 + €200,000 + €130,000) ÷ 2. €100,000 + €48,000 + €44,000 + €150,000. €50,000 ÷ 20,000.

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PROBLEM 15.5

(a)

Ratio

Target

Wal-Mart

(All Dollars Are in Millions) (1) Current (2) Accounts receivable turnover (3) Average collection period (4) Inventory turnover (5) Days in inventory (6) Profit m...