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Chapter 6: Assignment 2 *Note: This is a group Assignment. You must try to do it within your group, and if you are found copying from any other group, both, your group and the group allowing you to copy, will get Zero. You can decide to use hand-writing (make sure it is readable, Hard Copy) or computer-typing (Soft copy to your class monitor). Please just use the APA style of cover page. The Deadline is October 01st, 2018. Exercise 1: Horizontal Analysis. Smith Corporation provides the following comparative income statement: Smith Corporation Comparative Income Statement For the Years Ended December 31, 2013 and 2012 2013 Sales $570,000 Cost of goods sold 200,000 Gross profit $370,000 Operating expenses 100,000 EBIT $270,000

2012 $680,000 170,000 $510,000 210,000 $300,000

(a) Calculate the percentage change using horizontal analysis and (b) Evaluate the results. Exercise 2: Vertical Analysis. The Lyons Corporation reported the following income statement data: 2015 2014 Net sales $400,000 $250,000 Cost of goods sold $280,000 $160,000 Operating expenses $75,000 $56,000 (a) Prepare a comparative income statement for 2015 and 2014 using vertical analysis, and (b) Evaluate the results Exercise 3: Net Working Capital, Current Ratio, and Quick Ratio. Charles Corporation’s balance sheet at December 31, 2017, shows the following: Current assets Cash Marketable securities Accounts receivable Inventories Prepaid expenses Total current assets Current liabilities Notes payable Accounts payable Accrued expenses Income taxes payable

$4,000 8,000 100,000 120,000 1,000 $233,000 $5,000 150,000 20,000 1,000

Total current liabilities Long-term liabilities

$176,000 $340,000

Determine the following: (a) net working capital, (b) current ratio, and (c) quick ratio.

Exercise 4: Accounts Receivable. The Rivers Company reports the following data relative to accounts receivable: 2015 2014 Average accounts receivable $ 400,000 $ 416,000 Net credit sales $2,600,000 $3,100,000 The terms of sale are net 30 days. (a) Compute the accounts receivable turnover and the collection period, and (b) Evaluate the results. Exercise 5: Net Sales. Utica Company’s net accounts receivable were $250,000 as of December 31, 2016, and $300,000 as of December 31, 2017. Net cash sales for 2017 were $100,000. The accounts receivable turnover for 2017 was 5.0. What were Utica’s total net sales for 2017? Exercise 6: Inventory. On January 1, 2016, the River Company’s beginning inventory $400,000. During 20X6, River purchased $1,900,000 of additional inventory. On December 31, 2016, River’s ending inventory was $500,000. (a) What is the inventory turnover and the age of inventory for 2016? (b) If the inventory turnover in 2015 was 3.3 and the average age of the inventory was 100.6 days, evaluate the results 2016. Exercise 7: Financial Ratios. A condensed balance sheet and other financial data for the Alpha Company appear below. Alpha Company Balance Sheet December 31, 2016 Assets Current assets $100,000 Plant assets 150,000 Total asset $250,000 Liabilities and Stockholders’ equity Current liabilities $100,000 Long-term liabilities 75,000 Total liabilities $175,000 Stockholders’ equity 75,000 Total liabilities and stockholders’ equity $250,000 Income statement data appear below. Net sales $375,000 Interest expense 4,000 Net income 22,500

The following account balances existed at December 31, 2015: Total assets $200,000 Stockholders’ equity $65,000 The tax rate is 35 percent. Industry norms as of December 31, 2016, are: Debt/equity ratio 1.75 Profit margin 0.12 Return on total assets 0.15 Return on stockholders’ equity 0.30 Total asset turnover 1.71 Calculate and evaluate the following ratios for Alpha Company as of December 31, 2016; (a) debt/equity ratio; (b) profit margin; (c) return on total assets; (d) return on stockholders’ equity; and (e) total asset turnover. Exercise 8: Financial Ratios. The Format Company reports the following balance sheet data: Current liabilities $280,000 Bonds payable, 16% $120,000 Preferred stock, 14%, $100 par value $200,000 Common stock $25 par value, 16,800 shares $420,000 Paid-in capital on common stock $240,000 Retained earnings $180,000 Income before taxes is $160,000. The tax rate is 40 percent. Common stockholders’ equity in the precious year was $800,000. The market price per share of common stock is $35. Calculate (a) net income; (b) preferred dividends; (c) return on common stock; (d) times interest earned; (e) earnings per share; (f) price/earnings ratio; and (g) book value per share. Exercise 9: Dividends. Wilder Corporation’s common stock account for 2013 and 2012 showed: Common stock, 10$ par value $45,000 The following data are provided relative to 2013 and 2012: 2013 2012 Dividends $2,250 $3,600 Market price per share $ 20 $ 22 Earnings per share $ 2.13 $ 2.67 (a) Calculate the dividends per share, dividend yield, and dividend payout, and (b) Evaluate the results. Exercise 10: Jones Corporation Balance Sheet December 31, 2016 Assets Current assets Cash Marketable securities Inventory Total current assets

$100,000 200,000 300,000 $ 600,000

Plant asset Total assets Liabilities and Stockholders’ Equity Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders’ equity Common stock, $1 par value, 100,000 shares Premium on common stock Retained earnings Total stockholder’s equity Total liabilities and stockholders’ equity

500,000 $1,100,000 $200,000 100,000 $300,000 $100,000 500,000 200,000 800,000 $1,100,000

Jones Corporation Income Statement For the Year Ended December 31, 2016 Net sales $10,000,000 Cost of goods sold 6,000,000 Gross Profit $ 4,000,000 Operating expenses 1,000,000 Income before taxes $ 3,000,000 Income taxes (50% rate) 1,500,000 Net income $ 1,500,000 Additional information includes a market price of $150 per share of stock, total dividends of $600,000 for 2016, and $250,000 of inventory as of December 31, 2015. Compute the following ratios: (a) current ratio; (b) quick ratio; (c) inventory turnover; (d) average age of inventory; (e) debt/equity ratio; (f) book value per share; (g) earnings per share; (h) price/earnings ratio; (i) dividends per share; and (j) dividend payout. Exercise 11: Financial Ratios. The 20X9 financial statements for Johanson Co. are reproduced below. Johanson Co. Statement of Financial Position ( in Thousands of Dollars ) December 31, 2016 and 2017 2016 Assets Current assets Cash and temporary investments Accounts receivable (net) Inventories Total current assets Long-term assets

$ 380 1,500 2,120 $4,000

2017 $ 400 1,700 2,200 $4,300

Land Building and equipment (net) Total long-term assets Total assets Liabilities and Stockholders’ equity Liabilities Current liabilities Accounts payable Current portion of long-term debt Total current liabilities Long-term debt Total liabilities Stockholders’ equity Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 500 4,000 $4,500 $8,500

$ 500 4,700 $5,200 $9,500

$ 700 500 $1,200 4,000 $5,200

$1,400 1,000 $2,400 3,000 $5,400

$3,000 300 $3,300 $8,500

$3,000 1,100 $4,100 $9,500

Johanson Company Statement of Income and Retained Earnings (in Thousands of Dollars) For the Year Ended December 31, 2017 Net sales Less: Cost of goods sold Selling expenses Administrative expenses Interest Income taxes Net Income Retained earnings January 1 Subtotal Cash dividends declared and paid Retained earnings December 31

$28,800 $15,120 7,180 4,100 400 800

27,600 $ 1,200 300 $ 1,500 400 $ 1,100

For 2017, find (a) the acid-test ratio; (b) the average number of days sales were outstanding; (c) the times interest earned ratio; (d) the asset turnover; (e) the inventory turnover; (f) the operating income margin; and (g) the dividend payout ratio. (CMA, adapted.) Exercise 12: The Du Pont Formula and Return on Total Assets. Industry A has three companies whose income statements and balance sheets are summarized below. Company X Company Y Company Z Sales $500,000 (d) (g) Net income $ 25,000 $30,000 (h) Total assets $100,000 (e) $250,000 Total asset turnover (a) (f) 0.4 Profit margin (b) 0.4% 5% Return on total assets (ROA) (c) 2% (i)

First supply the missing data in the table below. Then comment on the relative performance of each company. Exercise 13: Barnaby Cartage Company has current assets of $800,000 and current liabilities of $500,000. What effect would the following transactions have on the firm’s current ratio (and state the resulting figures)? (a) Two new trucks are purchased for a total of $ $100,000 in cash. (b) The company borrows $100,000 short term to carry an increase in receivables of the same amount. (c) Additional common stock of $200,000 is sold and the proceeds invested in the expansion of several terminals. (d) The company increases its accounts payable to pay a cash dividend of $40,000 out of cash. Exercise 14: Acme Plumbing Company sells plumbing fixtures on terms of 2/10, net 30. Its financial statements over the last three years are as follows: 2015 2016 2017 Cash $ 30,000 $ 20,000 $ 5,000 Accounts receivable 200,000 260,000 290,000 Inventory 400,000 480,000 600,000 Net fixed assets 800,000 800,000 800,000 $1,430,000 $1,560,000 $1,695,000 Accounts payable $ 230,000 $ 300,000 $ 380,000 Accruals 200,000 210,000 225,000 Bank loan, short term 100,000 100,000 140,000 Long-term debt 300,000 300,000 300,000 Common stock 100,000 100,000 100,000 Retained earnings 500,000 550,000 550,000 $1,430,000 $1,560,000 $1,695,000 Sales $4,000,000 $4,300,000 $3,800,000 Cost of goods sold 3,200,000 3,600,000 3,300,000 Net profit 300,000 200,000 100,000 Using the ratios discussed in the chapter, analyze the company’s financial condition and performance over the last three years. Are there any problems? Exercise 15: Kedzie Kord Company had the following balance sheets and income statements over the last three years (in thousands): 2015 2016 2017 Cash $ 561 $ 387 $ 202 Receivable 1,963 2,870 4,051 Inventories 2,031 2,613 3,287 Current assets $ 4,555 $ 5,870 $ 7,540 Net fixed assets 2,581 4,430 4,364 Total assets $ 7,136 $10,300 $11,904 Payables $ 1,862 $ 2,944 $ 3,613 Accruals 301 516 587 Bank loan 250 900 1,050

Current liabilities Long-term debt Shareholder’s equity Total liabilities and shareholder’s equity Sales Cost of goods sold Selling, general, and administrative expenses Interest Profit before taxes Taxes Profit after taxes

$ 2,413 500 4,223

$ 4,360 1,000 4,940

$ 5,250 950 5,704

$ 7,136 $11,863 8,537

$10,300 $14,952 11,124

$11,904 $16,349 12,016

2,276 73 $ 977 390 $ 587

2,471 188 $ 1,169 452 $ 717

2,793 200 $ 1,340 576 $ 764

Using common-sixe and index analysis, evaluate trends in the company’s financial condition and performance. Exercise 16: Cordillera Carson Company has the following balance sheet and income statement for 2016 ( in thousands ): Balance Sheet Cash $ 400 Accounts receivable 1,300 Inventories 2,100 Current assets $3,800 Net fixed assets 3,320 Total asset $7,120 Accounts payable $ 320 Accruals 260 Short-term loans 1,100 Current liabilities $1,680 Long-term debt 2,000 New worth 3,440 Total liabilities and net worth $7,120 Income Statement Net sales (all credit) Cost of goods sold Gross profit Selling, general, and administration expenses Interest expenses Profit before taxes Taxes Profit after taxes

$12,680 8,930 $ 3,750 2,230 460 $ 1,060 390 $ 670

On the basis of this information, compute (a) the current ratio, (b) the acid-test ratio, (c) the average collection period, (d) the inventory turnover ratio, (e) the debt-to-net-worth ratio, (f) the long-term debt-to-total-capitalization ratio, (g) the gross profit margin, (h) the net profit margin, and (i) the return on equity.

Exercise 17: Selected financial ratio for RMN, Incorporated, are as follows: 2015 2016 2017 Current ratio 4.2 2.6 1.8 Acid-test ratio 2.1 1.0 0.6 Debt-to-total-asset 23% 33% 47% Inventory turnover 8.7x 5.4x 3.5x Average collection period 33 days 36 days 49 days Total asset turnover 3.2x 2.6x 1.9x Net profit margin 3.8% 2.5% 1.4% Return on investment (ROA) 12.1% 6.5% 2.8% Return on equity (ROE) 15.7% 9.7% 5.4% (a) Why did return on investment decline? (b) Was the increase in debt a result of greater current liabilities or of greater long-term debt? Explain. Exercise 18: A company has total annual sales (all credits) of $400,000 and a gross profit margin of 20 percent. Its current assets are $80,000; current liabilities, $60,000; inventories, $30,000; and cash, $10,000. (a) How much average inventory should be carried if management wants the inventory turnover to be 4? (b) How rapidly (in how many days) must accounts receivable be collected if management want to have an average of $50,000 invested in receivable? (Assume a 360-day year.) Exercise 19: Stoney Mason, Inc., has sales of $6 million, a total asset turnover ratio of 6 for the year, and net profits of $120,000. (a) What is the company’s return on assets or earning power? (b) The company is considering the installation of new point-of-sales cash registers throughout its stores. This equipment is expected to increase efficiency in inventory control, reduce clerical errors, and improve record keeping throughout the system. The new equipment will increase the investment in assets by 20 percent and is expected to increase the net profit margin from 2 to 3 percent. No change in sales is expected. What is the effect of the new equipment on the return on assets ratio or earning power? Exercise 20: Tic-Tac Homes has had the following balance sheet statements the past four years (in thousands): 2014 2015 2016 2017 Cash $ 214 $ 93 $ 42 $ 38 Receivable 1,213 1,569 1,846 2,562 Inventories 2,102 2,893 3,678 4,261 Net fixed assets 2,219 2,346 2,388 2,692 Total assets $5,748 $6,901 $7,954 $9,553 Accounts payable $1,131 $1,578 $1,848 $2,968 Notes payable 500 650 750 750 Accruals 656 861 1,289 1,743 Long-term debt 500 800 800 800 Common stock 200 200 200 200 Retained earnings 2,761 2,812 3,067 3,092

Total liabilities and shareholders’ equity

$5,748

$6,901

$7,954

$9,553

Using index analysis, what are the major problems in the company’s financial condition?

Exercise 23: In mid-2012, Apple had cash and short-term investments of $27.65 billion, accounts receivable of $14.30 billion, current assets of $51.94 billion, and current liabilities of $33.06 billion. (a) What was Apple’s current ratio? (b) What was Apple’s quick ratio? (c) What was Apple’s cash ratio? (d) In mid-2012, Dell had a cash ratio of 0.67, a quick ratio of 1.11 and a current ratio of 1.35. What can you say about the asset liquidity of Apple relative to Dell? Exercise 24: In mid-2012, United Airlines (ULA) had a market capitalization of $6.8 billion, debt of $12.4 billion, and cash of $7.3 billion. United also had annual revenues of $37.4 billion. Southwest Airlines (LUV) had a market capitalization of $6.6 billion, debt of $3.3 billion, cash of $3.3 billion, and annual revenues of $17.0 billion. (a) Compare the market capitalization-to-revenue ratio (also called the price-to-sales ratio) for United Airlines and Southwest Airlines. (b) Compare the enterprise value-to-revenue ration for United Airlines and Southwest Airlines. (c) Which of these comparisons is more meaningful? Explain. Exercise 25: For fiscal year 2011, Peet’s Coffee and Tea (PEET) had a net profit margin of 4.78%, asset turnover of 1.73, and a book equity multiplier of 1.21. (a) Use this data to compute Peet’s’ ROE using the DuPont Identity. (b) If Peet’s managers wanted to increase its ROE by one percentage point, how much higher would their asset turnover need to be? (c) If Peet’s net profit margin fell by one percentage point, by now much would their asset turnover need to increase to maintain their ROE? Exercise 26: For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion. (a) Calculate the Starbucks’ ROE directly, and using the DuPont Identity. (b) Comparing with the date for Peet’s in Exercise 5, use the DuPont Identity to understand the difference between the two firms’ ROEs. Exercise 27: Consider a retailing firm with a net profile margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million. (a) What is the firm’s current ROE? (b) If the firm increased its net profit margin to 4%, what would be its ROE? (c) If, in addition, the firm increased its revenues by 20% (while maintaining this higher profit margin and without changing its assets or liabilities), what would be it ROE?

Exercise 30: Selected comparative financial statements of Korbin Company follow: KORBIN COMPANY Comparative Income Statements For Years Ended December 31, 2015, 2014, and 2013

Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total expenses Income before taxes Income taxes Net income

2015 $555,000 283,500 271,500 102,900 50,668 153,568 117,932 40,800 $ 77,132

2014 $340,000 212,500 127,500 46,920 29,920 76,840 50,660 10,370 $ 40,290

2013 $278,000 153,900 124,100 50,800 22,800 73,600 50,500 15,670 $ 34,830

KORBIN COMPANY Comparative Balance Sheets December 31, 2015, 2014, and 2013 2015 Assets Current assets Long-term investments Plant assets, net Total Assets Liabilities and Equity Current liabilities Common stock Other paid-in capital Retained earnings Total liabilities and equity

2014

2013

$ 52,390 0 100,000 $152,390

$ 37,924 500 96,000 $134,424

$ 51,748 3,950 60,000 $115,698

$ 22,800 72,000 9,000 48,590 $152,390

$ 19,960 72,000 9,000 33,464 $134,424

$ 20,300 60,000 6,000 29,398 $115,698

Required: (a) Compute each year’s current ratio. (Round ratio amounts to one decimal.) (b) Express the income statement data in common-size percent. (Round percent to two decimals.) (c) Express the balance sheet data in trend percent with 2013 as the base year. (Round percent to two decimals.) Exercise 31: Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit, selected balance sheet amounts at December 31, 2014, were inventory, $48,900; total assets, $189,400; common stock, $90,000; and retained earnings, $22,748.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2015 Sales Cost of goods sold Gross profit Operating expenses Interest expenses Income before taxes Income taxes Net income

$448,600 297,250 151,350 98,600 4,100 48,650 19,598 $ 29,052 CABOT CORPORATION Balance Sheet December 31, 2015

Assets Cash Short-term investments Account receivable, net Notes receivable (trade) Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Accrued wages payable Income taxes payable Long-term note payable, secured by mortgage on plant assets Common stock Retained earnings Total liabilities and equity

$ 10,000 8,400 29,200 4,500 32,150 2,650 153,300 $240,200

$ 17,500 3,200 3,300 63,400 90,000 62,800 $240,200

Required: Compute the following: (1) current ratio, (2) acid-test ratio, (3) days’ sales uncollected, (4) inventory turnover, (5) days’ sales in inventory, (6) debt-to-equity ratio, (7) times interest earned, (8) profit margin ratio, (9) total asset turnover, (10) return on total assets, and (11) return on common stockholders’ equity. Round to one decimal place; for part 6, round to two decimals....