Ch13 SM 9e

Chapter 13
Financial Statement Analysis
Short Exercises
(5-10 min.) S 13-1
Increase (Decrease)
(Dollars in thousands) 2012 2011
2012 2011 2010 Amount Percent Amount Percent
Revenues $10,289 $10,045 $9,449 $244 2.4% $596 6.3%
Expenses 5,915 5,238 5,100
Net income $ 4,374 $ 4,807 $4,349 $(433) (9.0)% $458 10.5%
(5-10 min.) S 13-2
Trend percentages:
2012 2011 2010 2009

Sales 116% 108% 102% 100%
Net income. 151% 112% 108% 100%
Chapter 13 Financial Statement Analysis 13-1

(10-15 min.) S 13-3
2012 2011 2010

Amount Percent Amount Percen Amount Percent
t
Cash $ 23,200 4.0% $ 15,600 3.0% $ 14,340 3.0%
Receivables, net 34,800 6.0 20,800 4.0 23,900 5.0
Inventory 266,800 46.0 197,600 38.0 148,180 31.0
Prepaid expenses 34,800 6.0 41,600 8.0 33,460 7.0
Property, plant,
and equipment, 220,400 38.0 244,400 47.0 258,120 54.0
net
Total assets $580,000 100.0% $520,000 100.0% $478,000 100.0%
Inventory, as a percent of total assets, has grown dramatically.

Property, plant and equipment appears to be wearing out and
is not being replaced due to the growth in inventory which has
led to a tight cash position.
13-2 Financial Accounting 9/e Solutions Manual

(10 min.) S 13-4
Craft Kleen
(Amounts in millions) Amount Percent Amount Percent
Net sales 100.0% $7,569 100.0%
$17,800
Cost of goods sold 59.4 4,965 65.6
10,573
Selling and
administrative
expenses 27.5 1,521 20.1
4,895
Interest expense 0.3 23 0.3
53
Other expense 0.5 38 0.5
89
Income tax expense 4.1 250 3.3
730
Net income $ 8.2% $ 772 10.2
1,460 %
Craft earned more net income, but Kleens net income was a
higher percentage of net sales. Students can argue that Craft
is more profitable because it earns more net income than
Kleen. Students could also argue that Kleen is more profitable
because it earns a higher percentage of profit on each dollar of
sales than Craft does.

(5-10 min.) S 13-5
2012 2011 2010
Total current assets $590 $497 $445

=
Total current liabilities $362 $333 $339
Current ratio = 1.63 = 1.49 = 1.31
The companys ability to pay its current liabilities is improving.
(5-10 min.) S 13-6
1.
(Dollar amounts in millions)
2012 2011
Cash + $1,200 $ 900

Short-term investments + + 6 + 70
Receivables, net + 240 + 250
=
Total current liabilities $1,227 $1,145
Quick (acid-test) ratio = 1.18 = 1.07
2. Allstotts quick (acid-test) ratio looks fairly good both

because it is slightly above 1.0 and it is higher than the
ratios of the other three companies.
(10-15 min.) S 13-7
Cost of goods
Inventory $2,509
sold
a. turnov = =
Average
er ($96 + $81) / 2
inventory
$2,509 28
= =
$89 times
Days inventory 365 365

outstanding =Inventory = 28 = 13 days
(DIO) turnover
b. Days sales outstanding (DSO):
One days $9,500

= = $26.0
sales 365
Average net
Days sales receivables $245*
outstanding = One days = $26.0 = 9 days
(DSO)
sales
____
*($240 + $250) / 2 = $245
c. Days payables outstanding:

= = = 2.6
Accounts Cost of goods $2,509
payable sold

turnover Average ($1,000 + 900) /
accounts 2
payable
Days payables 365 365

outstanding Accounts 2.6 140
= = =
(DPO) payable
turnover

(continued) S 13-7
d. Cash conversion cycle (in days):
Cash
13 + 9
conversion = DIO + DSO - DPO = = - 118
140
cycle
Inventory turnover and DSO look strong. Turning over inventory

28 times per year (every 13 days) is fast, and collecting
average receivables in only 9 days is also very fast. However,
the company is taking 140 days to pay off its accounts payable.
This is quite slow, indicative of a company that is having
difficulty paying its trade creditors. Companies who continue
to do this could face future credit problems if suppliers regard
them as a high credit risk. The sum of the ratios in the cash
conversion cycle (-118) tells us that on average the company
sells inventory and collects the cash for those sales 118 days
before it pays trade creditors. It is questionable whether a
company can continue to take this long to pay off trade
creditors without damaging its credit rating.

(5-10 min.) S 13-8
Total $5,844
1 liabilitie
Debt ratio = = = 0.808
. s
Total assets $7,235
Allstotts debt ratio is 80.8%.
2. Times-interest- Income from $1,020 +

= operations = $184 =6.5
earned ratio Interest expense $184
3. The debt ratio is high. The times-interest-earned ratio is

high. Overall, the companys ability to pay its liabilities
and interest expense looks mixed.

(10 min.) S 13-9
Net income $735

a. Rate of return on sales = = = 7.73%
Net sales $9,500
Net sales $9,500

b. Asset Average ($7,235 + 6,640) /
= = = 1.369
turnover total 2
assets
Rate of return Asset

x
c. Rate of return on sales turnover
on total = 7.73% x 1.369
assets
(ROA) = 10.6%
Average total $6,937.50*

assets
Leverage 4.7
d. = Average common = ($1,391 + =
ratio 8
stockholders $1,515) / 2
equity
e. Rate of Net
retur Preferred
n
on common income $735 $0
dividends 50.6
= = =
stockholder Average common $1,453 %
s'
equity stockholders'

equity
= ROA x Leverage ratio

= 10.6% x 4.78 = 50.6%
f These rates of return are strong.

.

(5-10 min.) S 13-10
(Amounts, except per-share amounts, in millions)
Net income Preferred dividends $600 $21*

1. EPS = =
Number of shares of common 700
stock outstanding
= $.83
Market price per

Price/earning share $11.83
14.2
s = of common stock = =
5
ratio EPS $.83
2 The stock market says that $1 of Feeney Cars net

. income is
worth $14.25.
_____
*Preferred dividend = $21 ($700 .03)

(10 min.) S 13-11
Income Statement
Thousands
Net sales $7,300
Cost of goods sold 2,358 (a)
Selling expenses 1,520
Administrative expenses 330
Interest expense 1,894 (b)
Other expenses 156
Income before taxes 1,042
Income tax expense 385
(c)
Net income $ 657
(d)
$800 + $772
(a) 3 = $2,358
2
(b) $7,300 $2,358 $1,520 $330 $156 $1,042 =

$1,894
(d) $7,300 0.09 = $657
(c) $1,042 $657 = $385

(15-20 min.) S 13-12
Balance Sheet
(Dollars in thousands)
Cash $ 60 Total current $2,100
liabilities
Receivables 360 (a) Long-term debt 799 (e)
Inventories 774 Other long-term
Prepaid expenses 1,326 (b) liabilities 920
Total current 2,520 (c)
assets
Common stock 180
Plant assets, net 1,805 (d) Retained earnings 2,701
Other assets 2,375
Total liabilities and
Total assets $6,700 equity $6,700
(f)
(f) = $6,700 (same as total assets)
(e) = $6,700 0.57 = $3,819

$3,819 $2,100 $920 = $799
Or
$6,700 $2,701 $180 $920 $2,100 = $799
(c) = $2,100 1.20 = $2,520
(a) = $2,100 0.20 = $420; $420 $60 = $360
(b) = $2,520 $60 $360 $774 = $1,326

(d) = $6,700 $2,520 $2,375 = $1,805

(15-20 min.) S 13-13
TO: Cole Binder Investment Committee
FROM: Student Name
SUBJECT: Investment Recommendation
I recommend that we invest in Tower.org for the following

reasons:
1. Tower.orgs. return on equity (ROE) is 5% higher than

Graphics Imagings. An investment in Tower.org should
therefore produce a higher return than an investment in
Graphics Imagings stock.
2. Tower.orgs ROE exceeds its return on assets by a wider
margin than does Graphics Imagings. This means that
Tower.org is earning more with its borrowed funds than
Graphics Imaging is earning.
3. Tower.org can cover its interest expense with operating
income 19 times compared to 13 times for Graphics Imaging.
4. Tower.org collects receivables faster than Graphics Imaging
does. This suggests that cash flow is stronger at Tower.org.
5. Tower.orgs gross profit percentage is higher than Graphics
Imagings.
6. Graphics Imaging is better than Tower.org on inventory
turnover and net income as a percentage of sales. These
ratios provide insight about companies operations, but ROE

and interest coverage are more bottom-line oriented. And
days sales outstanding give an indication about cash flow.
For these reasons, I place more importance on ROE, interest-
coverage, and days sales outstanding, and Tower.org
outstrips Graphics Imaging on these measures.

(10 min.) S 13-14
Net Interest Capital

EVA = +
income expense charge
= $755 + $401 $109*
= $1,047
_____
*Capital Long-term Stockholders Cost of
= +
charge debt equity capital
= ($620 + $3,010) .03
= $109*
The stockholders should be pleased with the EVA that
Lazeren Software delivered.

Exercises
(5-15 min.) E 13-15A
2012 2011 2010

Total current assets $330,000 $280,000 $260,000
Total current liabilities 155,000 140,000 130,000
Working capital $175,000 $140,000 $130,000
Increase Increase
$35,000 $10,000
25.0% 7.7%
The continued increase in 2012 working capital is

favorable.

(10-15 min.) E 13-16A
McMahon Music Co.

Horizontal Analysis of Comparative Income Statements
Years Ended December 31, 2012 and 2011
INCREASE
(DECREASE)
2012 2011 AMOUNT PERCENT
Total $1,077,000 $917,000$160,000 17.4%
revenue
Expenses:
Cost of goods $ 477,000 $408,750 $ 68,250 16.7
sold
Selling and general
expenses. 287,000 265,000 22,000 8.3
Interest 23,500 13,500 10,000 74.1
expense.
Income tax
expense... 105,500 84,650 20,850 24.6
Total 893,000 771,900 121,100 15.7
expenses...
Net income... $ 184,000 $145,100 $ 38,900 26.8%

(5-10 min.) E 13-17A
Trend percentages:
Year 4 Year 3 Year 2 Year 1 Year 0
Total 137% 121% 107% 98% 100%

revenue.
Net 209 136 122 115 100

income.....
Net income grew by 109% during the period, compared to 37%

for total revenue.
(10-15 min.) E 13-18A
Putt Golf Company

Vertical Analysis of Balance Sheet
December 31, 2012
AMOUNT PERCENT
ASSETS
Total current assets.. $ 14.58%
42,000
Property, plant, and equipment, net. 206,00 71.53
0
Other assets 40,00 13.89
0
Total assets. $288,00 100.00%
0
LIABILITIES
Total current liabilities. $ 47,000 16.32%
Long-term debt.. 107,000 37.15
Total liabilities 154,000 53.47
STOCKHOLDERS EQUITY
Total stockholders equity.. 134,000 46.53
Total liabilities and stockholders equity $288,00 100.00%
0
(10-15 min.) E 13-19A
McMahon Music Co.

Comparative Common-Size Income Statements
2012 2011
Total revenue.. 100.00% 100.00%
Expenses:
Cost of goods sold.. 44.29 44.57
Selling and general expenses... 26.65 28.90
Interest expense 2.18 1.47
Income tax expense. 9.80 9.23
Total expenses.. 82.92 84.18
Net income.. 17.08% 15.82%
(10-15 min.) E 13-20A
1. Operations provided very little cash. The company is selling

fixed assets to generate cash.
2. Selling fixed assets and purchasing no new fixed assets
suggests financial weakness.
3. New York Apple Farms paid dividends which were a large

percentage of its net income. The business cant grow by
paying such high dividends.

(10-15 min.) E 13-21A
Req. 1
Current Year Prior Year
a $245,000 $268,000
. Current ratio
$131,000 $90,000
= 1.87 = 2.98
$53,000 + $17,000 + $89,000+ $21,000 +

b. Quick (acid-test)
$77,000 $80,000
ratio
$131,000 $90,000
= 1.12 = 2.11
c Inventory $276,000 $280,000

.
turnover ($90,000 + $72,000) / ($72,000 + $60,000) /
2 2
= 3.41 = 4.24

outstanding 3.41 4.24
(DIO)
= 107 days = 86 days
d Receivables $494,000 $502,000

.
Turnover ($77,000 + $80,000) / ($80,000 + $55,000) /
2 2
= 6.29 = 7.43

e Days sales 365 365
.
(DSO)
= 58 days = 49 days
(continued) E 13-21A
f. Payables $276,000 $280,000

turnover ($65,000 + $55,000) / ($55,000 + $50,000) /
2 2
= 4.6 = 5.33

(DPO)
= 79 days = 68 days
g Cash conversion 107 + 58 79 86 + 49 68

.
cycle ( DIO +
DSO DPO) = 86 days = 67 days
Req. 2
a. deteriorated
b. deteriorated
c. deteriorated
d. deteriorated
e. deteriorated
f. deteriorated
g. deteriorated
Req. 3
The factors that need the most improvement are inventory
turnover and cash collections. The company needs to make
more sales and keep less inventory on hand, as well as tighten
collection policies. This will provide more cash that can be
used to pay off payables more quickly.

(15-20 min.) E 13-22A
a. Working capital (Current assets Current liabilities)
2012: $455,000* $207,000 = $248,000

2011: $480,000* $262,000 = $218,000
b. Current ratio (Current assets Current liabilities)
$455,000 $480,00
0
2012: = 2.20 2011: = 1.83
$207,000 $262,00
0
c. Quick (acid-test) ratio ([Cash + Short-term investments + Net

receivables] Current liabilities)
$50,000 + $28,000 + $115,000

2012: = 0.93
$207,000
$49,000 + $27,000 + $128,000

2011: = 0.78
$262,000
d. Debt ratio (Total liabilities Total assets)
$304,000 $436,00
** 0.6 0** 0.8
2012: = 2011: =
$510,000 0 $540,00 1
0
e. Times-interest-earned ratio (Income from operations

Interest expense)
$301,000 $150,00
3.5
2012: = 7.34 2011: 0 =
7
$41,000 $42,000

_____
* Current assets 2012 = $50,000 + $28,000 + $115,000 + $240,000 +
$22,000 = $455,000
Current assets 2011 = $49,000 + $27,000 + $128,000 + $268,000 + $8,000
= $480,000
** Total liabilities 2012 = $207,000 + $97,000 = $304,000
Total liabilities 2011 = $262,000 + $174,000 = $436,000
The companys ability to pay current liabilities improved as

evidenced by the improvement in items a. d. The companys
ability to cover long-term debt improved as evidenced by item
e.
(10-15 min.) E 13-23A
a. Rate of return on net sales:
$38,000 $18,000
2012: = 0.15 2011: = 0.09
$250,000 $199,000
b. Asset turnover:
$250,000 $199,000
2012: = 0.81 2011: = 0.66
$307,500* $302,500**
_____ _____
*($310,000 + $305,000) / 2 = $307,500 **($305,000 + $300,000) / 2 =
$302,500
c. Return on assets:
$38,000 $18,000
2012: = 0.12 2011: = 0.06
$307,500* $302,500**
d. Leverage:

$307,500 $302,500
2012: = 1.58 2011: = 1.57
$195,000*** $193,000****
_____ _____
***($196,000 + $194,000) / 2 = $195,000 ****($194,000 + $192,000) / 2
= $193,000.
e. Return on equity:
$38,000 $18,000
2012: $2,000 = 0.18 2011: $1,000 = 0.09
$195,000*** $193,000****
f. Gross profit percentage:
$127,000 $97,000
2012: = 0.51 2011: = 0.49
$250,000 $199,000

(continued) E 13-23A
g. Operating income percentage:
$72,000 $46,000
2012: = 0.29 2011: = 0.23
$250,000 $199,000
h. Earnings per share of common stock:
$38,000 $18,000
2012: $2,000 = $2.4 2011: $1,000 = $1.21
15,000 0 14,000
The companys operating performance improved during 2012.

All profitability measures increased.

(10-15 min.) E 13-24A
2012 2011
a. Price/earnings ratio:
$23.50 29.15 $15.50 17.10

($84,000 $11,500*) / = ($93,000 $11,500*) / =
6 8
90,000 90,000
_____
*$115,000 .10 =
$11,500
b. Dividend yield:
$28,000 / 90,000 $17,000 / 90,000

= 0.013 = 0.012
$23.50 $15.50
c. Book value per share of common stock:
$575,000 $500,000
$4.27
$115,000 = $5.111 $115,000 =
8
90,000 90,000
The stocks attractiveness increased during 2012, as shown by

the increases in the price/earnings ratio, dividend yield and in
book value per share. Overall, the common stock looks more
attractive than it did a year ago.

(15-20 min.) E 13-25A
Req. 1
Farmer Bank Limited appears to represent the better

investment. Farmer earns a greater net profit and has
significantly more stockholders equity than does Emerson Oil
Pipeline, Inc.
Req. 2
Emerson Oil Pipeline, Farmer Bank Limited

Inc.
EVA = $200 + $83 [($1,244 + $1,706 + $1 [($7 +

$537) .11] $10,821)
.11]
= $87 = $516
Based on the EVA analysis, Farmer appears to be the better

investment.

(5-15 min.) E 13-26B
2012 2011 2010

Total current assets $60,000 $230,000 $250,000
Total current liabilities 20,000 115,000 125,000
Working capital $40,000 $115,000 $125,000
Decrease Decrease
$75,000 $10,000
(65.2%) (8.00%)
The decrease in 2012 working capital is unfavorable.

(10-15 min.) E 13-27B
McCracken Music Co.

Horizontal Analysis of Comparative Income Statements
INCREASE
(DECREASE)
2012 2011 AMOUNT PERCENT
Total $844,000 $934,000 $(90,000) (9.6)%
revenue
Expenses:
Cost of goods $404,000 $400,000 $ 4,000 1.0
sold
Selling and general
expenses. 234,000 263,000 (29,000) (11.0)
Interest 9,300 12,000 (2,700) (22.5)
expense.
Income tax
expense... 84,000 86,000 (2,000) (2.3)
Total 731,300 761,000 (29,700) (3.9)
expenses...
Net income $112,700 $173,000 $(60,300) (34.9)%

(5-10 min.) E 13-28B
Trend percentages:
Year 4 Year 3 Year 2 Year 1 Year 0
Total 140% 119% 102% 98% 100%

revenue.
Net 143 139 112 106 100

income....
Net income grew by 43% during the period, compared to 40%

for total revenue.
(10-15 min.) E 13-29B
Drive Golf Company

Vertical Analysis of Balance Sheet
December 31, 2012
AMOUNT PERCENT
ASSETS
Total current assets.. $ 12.27%
33,000
Property, plant, and equipment, net. 199,000 73.98
Other assets 37,000 13.75
Total assets. $269,00 100.00%
0
LIABILITIES
Total current liabilities. $ 17.84%

48,000
Long-term debt.. 102,000 37.92
Total liabilities 150,000 55.76
STOCKHOLDERS EQUITY
Total stockholders equity.. 119,000 44.24
Total liabilities and stockholders equity $269,00 100.00%
0

(10-15 min.) E 13-30B
McCracken Music Co.

Comparative Common-Size Income Statements
2012 2011
Total revenue. 100.00% 100.00%
Expenses:
Cost of goods sold.. 47.87 42.83
Selling and general expenses.. 27.73 28.16
Interest expense.. 1.10 1.28
Income tax expense 9.95 9.21
Total expenses. 86.65 81.48
Net income.. 13.35% 18.52%

(10-15 min.) E 13-31B
1. Operations provided little cash. The company is selling fixed

assets to generate cash.
2. Selling fixed assets and purchasing no new fixed assets

suggests financial weakness.
3. Florida Oranges, Inc. paid a large amount of dividends during

the year. The business cant grow while paying such high
dividends.

(10-15 min.) E 13-32B
Req. 1
Current Year Prior Year
a $226,000 $226,000
. Current ratio
$133,000 $94,000
= 1.70 = 2.40
$39,000 + $12,000 + $45,000+ $23,000 +

b. Quick (acid-test)
$73,000 $76,000
ratio
$133,000 $94,000
= .93 = 1.53
c Inventory $277,000 $282,000

.
turnover ($91,000 + $77,000) / ($77,000 + $62,000) /
2 2
= 3.30 = 4.06

(DIO)
= 111 days = 90 days
d Receivables $491,000 $504,000

.
turnover ($73,000 + $76,000) / ($76,000 + $60,000) /
2 2
= 6.59 = 7.41

e Days sales 365 365
.
(DSO)
= 55 days = 49 days
(continued) E 13-32B
f. Payables $277,000 $282,000

turnover ($70,000 + $55,000) / ($55,000 + $50,000) /
2 2
= 4.43 = 5.37

(DPO)
= 82 days = 68 days
g Cash conversion 111 + 55 82 90 + 49 68

.
cycle ( DIO +
DSO DPO) = 84 days = 71 days
Req. 2
a. deteriorated
b. deteriorated
c. deteriorated
d. deteriorated
e. deteriorated
f. deteriorated
g. deteriorated
Req. 3
The factors that need the most improvement are inventory
turnover and cash collections. The company needs to make
more sales and keep less inventory on hand, as well as tighten
collection policies. This will provide more cash that can be
used to pay off payables more quickly.

(15-20 min.) E 13-33B
a. Working capital (Current assets Current liabilities)
2012: $445,000* $237,000 = $208,000

2011: $457,000* $151,000 = $306,000
b. Current ratio (Current assets Current liabilities)
$445,000 $457,0
00
2012: = 1.88 2011: = 3.03
$237,000 $151,0
00
c. Quick (acid-test) ratio ([Cash + Short-term investments + Net

receivables] Current liabilities)
$40,000 + $31,000 + $121,000

2012: = 0.81
$237,000
$50,000 + $6,000 + $129,000

2011: = 1.23
$151,000
d. Debt ratio (Total liabilities Total assets)
$324,000 $406,00
** 0.5 0** 0.7
2012: = 2011: =
$570,000 7 $540,00 5
0
e. Times-interest-earned ratio (Income from operations

Interest expense)
2012: $250,00 = 6.2 2011: $199,00 = 4.9

0 5 0 8

$40,000 $40,000
_____
* Current assets 2012 = $40,000 + $31,000 + $121,000 + $238,000 +
$15,000 = $445,000
Current assets 2011 = $50,000 + $6,000 + $129,000 + $267,000 + $5,000 =
$457,000
** Total liabilities 2012 = $237,000 + $87,000 = $324,000
Total liabilities 2011 = $151,000 + $255,000 = $406,000
The companys ability to pay current liabilities deteriorated as

evidenced by the decline in items a. d. The companys ability
to cover long-term debt improved as evidenced by item e.
(10-15 min.) E 13-34B
a. Rate of return on net sales:
$40,000 $25,000
2012: = 0.11 2011: = 0.09
$350,000 $290,000
b. Asset turnover
$350,000 $290,000
2012: = 0.88 2011: = 0.73
$398,000* $395,000**
_____ _____
*($400,000 + $396,000) / 2 = $398,000 **($396,000 + $394,000) / 2 =
$395,000
c. Return on assets:
$40,000 $25,000
2012: = 0.10 2011: = 0.06
$398,000* $395,000**
d. Leverage:
2012: $398,000 = 2.75 2011: $395,000 = 2.92

$144,500*** $135,500****
_____ _____
***($149,000 + $140,000) / 2 = $144,500 ****($140,000 + $131,000) / 2
= $135,500
e. Return on equity:
$40,000 $25,000
2012: $11,000 = 0.20 2011: $9,000 = 0.12
$144,500*** $135,500****
_____ _____
***($149,000 + $140,000) / 2 = $144,500 ****($140,000 + $131,000) / 2
= $135,500
f. Gross profit percentage:
$175,000 $142,000
2012: = 0.50 2011: = 0.49
$350,000 $290,000

(continued) E 13-34B
g. Operating income percentage:
$75,000 $48,000
2012: = 0.21 2011: = 0.17
$350,000 $290,000
h. Earnings per share of common stock:
$40,000 $25,000
$1.4
2012: $11,000 = 2011: $9,000 = $1.07
5
20,000 15,000
The companys operating performance improved during 2012.

All profitability measures increased.

(10-15 min.) E 13-35B
2012 2011
a. Price/earnings ratio:
$21.50 14.56 $16.25 16.18

($143,000 $10,200*) / = ($97,000 $6,600*) / =
6 5
90,000 90,000
_____ _____
*$170,000 .06 = *$110,000 .06 = $6,600
$10,200
b. Dividend yield:
$23,000 / 90,000 $19,000 / 90,000

= 0.012 = 0.013
$21.50 $16.25
c. Book value per share of common stock:
$550,000 $500,000
$4.22 $4.33
$170,000 = $110,000 =
2 3
90,000 90,000
The stocks attractiveness decreased during 2012, as shown by

the decreases in the price/earnings ratio and in book value per
share. The dividend yield remained about the same. Overall,
the common stock looks less attractive than it did a year ago.

(15-20 min.) E 13-36B
Req. 1
Larson Bank Limited appears to represent the better

investment. Larson earns a greater net profit and has
significantly more stockholders equity than does Karin Oil
Pipeline, Inc.
Req. 2
Karin Oil Pipeline, Inc. Larson Bank Limited
EVA = $195 + $77 [($1,246 + $1,496 + $8 [($17 +

$307) .125] $11,578)
.125]
= $78 = $55
Based on the EVA analysis, Karin Oil Pipeline appears to be

the better investment.

Quiz
Q13-37 a ($19,311 $15,047 = $4,264 increase;

$4,264 / $15,047 = 0.283)
Q13-38 b ($10,649 / $11,384 = 0.935 .9
Q13-39 a [($4,333 + $845 + $3,400) / $11,384 =
0.75]
Q13-40 c
Q13-41 c ($42,666 / $31,111 = 1.37 or 137%)
Q13-42 d ($35,147 / $42,666 = 0.824 or 82.4%)
Q13-43 d ($3,400+ $2,403) / 2

= 25 days
$42,666 / 365
Q13-44 c $35,147
= 83 times
($433 + $411) / 2
Q13-45 c ($3,634 / (long-term debt of $304 .11) =

33.44 108 times)
Q13-46 d 2012: $2,651 / $42,666 = 0.062

2011: $1,418 / $35,220 = 0.040
2010: $1,084 / $31,111 = 0.035
Q13-47 a EPS Net income $2,651

=
$1.41 Shares outstanding*
Shares outstanding = 1,880
Q13-48 c $5,922
= $2.99
2,163 183

*usually calculated based on weighted average

Problems
(20-30 min.) P 13-49A
Req. 1
Aaron Shipping, Inc.

Trend Percentages
2012 2011 2010 2009 2008

Net sales 135% 119% 106% 100%
304%
Net income 208 163 192 154 100
Total assets 147 129 121 111 100
Req. 2 Return on sales Dollar amounts in thousands
2012 2011 2010
Net income $50 $39 $46

= 5.6% = 9.8% = 13.1%
Net sales $900 $400 $352
Return on sales measures the amount of net income for each

dollar of net sales.
Req. 3 Asset turnover Dollar amounts in thousands
2012 2011 2010
Net sales $900 $400 $352

Ave. total $288.51 = 3.12 $260. = 1.54 $241.5 = 1.46
assets 52 03

1 2 3
(308 + $269) / 2 ($269 + $252) / ($252 + $231) / 2
2
Asset turnover means the amount of net sales per dollar
invested in assets. High ratios mean high efficiency (low cost).

(continued) P 13-49A
Req. 4 Return on assets Dollar amounts in thousands
2012 2011 2010

Asset turnover
5.6% x 17.5 9.8% x 13.1% x 19.1
x Return on = = 15.1% =
3.12 % 1.54 1.46 %
sales
Req. 5
Aaron Shippings rate of return on net sales compares

favorably with the industry average of 5%. However, return on
sales dropped below the excellent industry average of 7% in
2012.
Req. 6
Aaron Shippings return on assets (ROA) for 2012 compares

favorably with the 15% industry benchmark. The ROA for the
current year compares favorably with the previous year, but
does not compare favorably with the ROA in 2010.

(20-30 min.) P 13-50A
Req. 1
OHare Products, Inc.
Common-Size Income Statement Compared to Industry Average
Year Ended December 31, 2012
OHare INDUSTRY
Products AVERAGE
Net sales 100.0% 100.0%
Cost of goods sold. 69.0 57.3
Gross profit... 31.0 42.7
Operating expenses 23.0 29.4
Operating income 8.0 13.3
Other expenses 1.0 2.5
Net income 7.0% 10.8%
OHare Products, Inc.

Common-Size Balance Sheet Compared to Industry Average
December 31, 2012
OHare INDUSTRY
Products AVERAGE
Current assets.. 73.0% 72.1%
Fixed assets, net. 18.2 19.0
Intangible assets, 3.5 4.8
net.
Other assets.. 5.3 4.1
Total assets... 100.0% 100.0%
Current liabilities. 47.0% 47.2%

Long-term liabilities 21.0 21.0
Stockholders equity.. 32.0 31.8

Total liabilities and stockholders 100.0% 100.0%
equity..

Req. 2
OHare Products common-size income statement shows that

its ratios of gross profit to net sales, operating income to net
sales, and net income to net sales are all worse than the
industry averages. Overall, OHare Products profit
performance is worse than average for the industry.
Req. 3
OHare Products common-size balance sheet shows that its

ratios of current assets, current liabilities, and stockholders
equity to total assets are better than the industry averages.
Overall, the companys financial position is better than average
for companies in its industry.

(20-30 min.) P 13-51A
Blue Yonder Airlines statement of cash flows reveals only one

strong point, a continuing purchase of plant assets. The
companys weaknesses include:
1. Net income and cash provided by operations are down

significantly, with the company incurring a net loss during
2013.
2. Operating activities provided a much smaller proportion of
cash in 2013 than in 2012. In both years, borrowing not
operations was the primary source of cash inflows, which
is an unfavorable signal about the company.
3. The large payments on notes payable suggest that the
company has a lot of debt. Coupled with the loss during 2013
and the decrease in net cash provided by operations, the
payments on notes payable may indicate that the company
has too much debt.
4. Purchases of property, plant, and equipment were down
significantly from the prior year but the large amount
suggests expansion.
5. The companys cash balance decreased by $92,000 during
2013 to $14,000, which is dangerously low.

Horizons statement of cash flows reveals the following

strengths (no significant weaknesses):
1. During both years, operating activities were the major

source of cash.
2. The companys heavy investments in plant assets suggest
expansion. The use of cash, coupled with increasing income
and net cash provided by operations, suggests successful
operations.
3. The cash balance is much higher than that of the other
company and is increasing.
Horizon appears to be the stronger company and thus the

better investment.
Student wording may vary.

(30-40 min.) P 13-52A
Req. 1 (ratios before the transactions)
(Dollar Amounts and Stock Quantities in

Thousands)
Earnings
Current Ratio Debt Ratio per share
$291 $380
$184 + $163 +
$23 + $36 + $87 + $141 = $33 = $95 =
+ $4 1.58 0.56 $1.86*
$42 + $107 + $35 $675 51
$184
____
*Not in thousands.
Req. 2 (ratios after the transactions)
(Dollar Amounts and Stock Quantities in Thousands)

Trans-
Action Earnings per
Current Ratio Debt Ratio
Share
a. $291 + $380 + No effect

$120 $120 0.6
= 2.23 =
$184 $675 + 3
$120
b. $291 + = 3.56 $380 = 0.3 $95 = $1.44*

$364 7

$184 $675 + 51 + 15
$364
c. $291 $24 $380 $24 0.5 No effect

= 1.67 =
$184 $24 $675 $24 5
d. $291 + $46 $380 + $46 0.5 No effect

= 1.47 =
$184 + $46 $675 + $46 9
e. No effect No effect No effect

_____
*Not in thousands.

(40-50 min.) P 13-53A
Req. 1
2012 2011
a. Current ratio $558 $51
7
= 1.96 = 1.76
$285 $29
3
b. Quick (acid- $45 + $212 = .90 $49 + $158 = .71

test) ratio $285 $293
c. Receivables $687 = 3.71 $595 = 3.32

turnover ($212 + $158) / ($158 + $200) /
2 2
Days sales 365 = 98 365 = 110

d. Inventory $375 $276

turnover ($297 + $281) / = 1.30 ($281 + $181) / = 1.19
2 2
Days 365 = 281 365 = 307

inventory
e. Accounts $375 = 2.94 $276 = 2.54

payable ($150 + $105) / ($105 + $112) /
turnover 2 2
Days 365 = 124 365 = 144

payables

f. Cash
conversion 281 + 98 124 = 254 307 + 110 = 273
cycle 144
g. Times- $183 $177

interest- = 4.95 = 3.93
earned ratio $37 $45
(continued) P13-53A
h. Return on $110 = 0.160 $81 = 0.136

sales $687 $595
Asset $687 = .839 $595 = .797

turnover $818.5 $747
Return on 16.0% x .839 = 13.6% x .797 = 10.8%

13.4
%
assets
i. Leverage $818.5 $747

($315 + $270) / = 2.798 ($270 + $199) / = 3.186
2 2
Return on 13.4% x 2.798 = 10.8% x 3.186 = 34.4

37.5 %
%
equity

j. Earnings per
share $110 $81 $4.63
= $6.11 =
of common 18 * 17.5 *
stock
k. Price/earning $102.1 $77.01*

s 7* = 17 = 17
ratio $6.11* $4.63*
_____
*Not in thousands.

Req. 2
Decisions:
a. The companys financial position improved during 2012 as
shown by increases in the current ratio, the quick ratio, the
cash conversion cycle, and the times-interest-earned ratio.
b. The common stocks attractiveness increased during 2012,
as shown by the increase in the market price per share of
the common stock, return on assets, return on equity, and
earnings per share. The price/earnings ratio stayed the
same.
Req. 3
This problem gives you practice in computing and evaluating

many of the ratios used in investment analysis. By analyzing
the two-year trends in the ratios, you can see whether the
companys abilities to pay its debts, sell its inventory, and
generate profits have improved or deteriorated during this
period. Improving ratio values generally indicate an attractive
investment, and deteriorating ratio values usually signal an
unattractive investment.

(45-60 min.) P 13-54A
Req. 1
CDROM.com Web Stores
Quick (acid- $31 + $7 + $36 + $11 +

a.
test) $182 = 0.60 $165 = 0.64
ratio: $368 $332
b. Inventory $455 $382

turnover: ($208 + $204) / = 2.21 ($184 + $198) / = 2.00
2 2
Days sales ($182 + $144) / ($165 + $192) /

c.
2 = 99 2 = 125
outstanding: $601 / 365 $523 / 365
d. Debt ratio: $665 $710

= 0.68 = 0.77
$984 $927
Times- Ratio is not meaningful $7

e.
interest- 6 = 6.91
earned ratio: because CDROM has $11
no interest expense.
Return on
f. common $68 = 0.23 $39 ($20 .
= 0.19
06)
stockholders' ($319 + $263) / [($217 $20) +
equity: 2 ($217 $20)] / 2

Earnings per
g. share $68 $39 ($20 .
$0.45 $3.78
= 06) =
* *
of common 150 10
stock:
Price/earnings $4.95* $64.26

h.
= 11 * = 17
ratio: $.45* $3.78*
*Not in thousands.
Decision:
The common stock of CDROM.COM seems to fit the investment
strategy better. Its price/earnings ratio is lower than that of
Web Stores, and CDROM.COM appears to be in slightly better
shape financially than Web Stores. On several of the ratios, the
two companies are relatively close. The ratios that tip the
decision in favor of CDROM.COM are days sales outstanding,
the debt ratio, and the return on common stockholders equity.
Req. 2
CDROM.com Web Stores
EVA $68,000 ($263,000 $39,000 + $11,000

.12) [($307,000 + $217,000) .
12]
= $68,000 $31,560 = $39,000 + $11,000

$62,880
= $36,440 = ($12,880)
The EVA analysis confirms the conclusion from the ratio

analysis. CDROM.COM appears to be the better investment.

(20-30 min.) P 13-55B
Req. 1 Trend percentages
Azbell Shipping, Inc.

Trend Percentages
2012 2011 208 2007 2006

Net revenues 234% 207% 109% 103% 100
%
Net income 152 144 152 126 100
Total assets 149 130 126 111 100
Req. 2 Return on sales (Dollar amounts in thousands)
2012 2011 2010
Net income $41 $39 $41

= 5.8% = 6.3% = 12.6%
Net sales $700 $618 $325
Return on sales measures the amount of net income for each

dollar of net sales.
Req. 3 Asset turnover (Dollar amounts in thousands)
2012 2011 2010
Net sales $700 $618 $325

Ave. total $2811 = 2.49 $257.5 = 2.40 $2383 = 1.37
assets 02
1 2 3
(300 + $262) / 2 ($262 + $253) / 2 ($253 + $223) / 2

Asset turnover means the amount of net sales per dollar
invested in assets. High ratios mean high efficiency (low cost).
*Not in thousands.
(continued) P 13-55B
Req. 4 Return on assets (Dollar amounts in thousands)
2012 2011 2010

Asset turnover
14.4 6.3% x 12.6% x 17.3
x Return on 5.8% x 2.49 = = 15.1% =
% 2.40 1.37 %
sales
Req. 5
Azbell Shippings rate of return on net sales is above the

industry average of 5%. However, return on sales is decreasing
and dropped below the 7% benchmark for outstanding
companies in 2011.
Req. 6
Azbell Shippings return on assets (ROA) compares unfavorably

with the 15% industry benchmark. The ROA has decreased
each year for the last two years.

(20-30 min.) P 13-56B
Req. 1
Gilligan Products, Inc.
Common-Size Income Statement Compared
to Industry Average
Year Ended December 31, 2012
Gilligan INDUSTRY
Products AVERAGE
Net sales 100.0% 100.0%
Cost of goods sold. 69.0 57.3
Gross profit.. 31.0 42.7
Operating expenses... 23.0 29.4
Operating income 8.0 13.3
Other expenses.... 0.5 2.5
Net income 7.5% 10.8%
Gilligan Products, Inc.

Common-Size Balance Sheet Compared to Industry Average
December 31, 2012
Gilligan INDUSTRY
Products AVERAGE
Current assets... 59.0% 72.1%
Fixed assets, net... 17.8 19.0
Intangible assets, net.. 3.0 4.8
Other assets... 20.2 4.1
Total assets 100.0% 100.0%
Current liabilities 47.0% 47.2%

Long-term liabilities.. 21.0 21.0
Stockholders equity.... 32.0 31.8
Total liabilities and stockholders 100.0% 100.0%
equity

Req. 2
Gilligan Products common-size income statement shows that

its ratios of (a) gross profit to net sales, (b) operating income
to net sales, and (c) net income to net sales are worse than the
industry averages. Overall, the companys profit performance
is worse than the average for the industry.
Req. 3
Gilligan Products common-size balance sheet shows that its

(a) ratio of current assets to total assets is worse than the
industry average. Gilligan Products (b) ratio of stockholders
equity to total assets is slightly better than the industry
average. Overall, the companys financial position is worse
than the industry average.

(20-30 min.) P 13-57B
Smooth Airliness statement of cash flows reveals few

strengths. The companys weaknesses include:
1. Net income and cash provided by operations are down

significantly. There was a net loss in 2013.
2. Operating activities provided a much smaller proportion of

cash in 2013 than in 2012. For both years, borrowing was the
primary source of cash inflow.
3. Payments on debt are high and the company is still making

investments in new property, plant, and equipment. This is
not necessarily a weakness, for the company may have
acquired fixed assets in earlier years and may now be paying
the debts incurred to purchase those assets. However, the
companys downward trends of income and net cash flow
from operations suggest that its operations are not very
successful.
4. The company reduced the dividends from the previous year

but still paid dividends that were many times larger than the
net cash flow from operating activities in 2013.

Mountain Incs statement of cash flows reveals the following

strengths (no significant weaknesses):
1. During both years, operating activities generated the bulk of

the companys cash. Furthermore, the trend of net income is
up, a favorable sign.
2. The companys heavy investments in property, plant, and

equipment suggests that the company is expanding. This
investing activity, coupled with increasing income and
increasing net cash flow from operating activities, suggests
successful operations.
3. The cash balance is higher than that of the other company,

and cash increased during the current year. It is interesting
to note that Mountain did not pay a dividend in either year.
Rapidly growing companies often reinvest operating cash
flow into the business.
Conclusion: Mountain, Inc. appears to be the stronger

company and thus the better investment.
Student wording may vary.

(30-40 min.) P 13-58B
Req. 1 (ratios before the transactions)

Thousands)
Earnings
Current Ratio Debt Ratio per share
$300 $380
$30+ $32 + $86 + $147 $186 + $163 + $91

= = =
+ $5 $31
1.61 0.56 $1.82*
$48+ $107 + $31 $673 50
$186
Req. 2 (ratios after the transactions)

Thousands)
Trans- Earnings per

action Current Ratio Debt Ratio share
a. $300 + $110 $380 + $110 No effect

= 2.20 = 0.63
$186 $673 + $110
b. $300 + $368 $380 $91

$186 = 3.59 $673 + $368 = 0.37 50 = $1.47*
+20
c. $300 $30 $380 $30 No

= 1.73 = 0.54
$186 $30 $673 $30 effect
d. $300 + $48 = 1.49 $380 + $48 = 0.59 No effect

$186 + $48 $673 + $48
e. No effect No effect No effect
*Not in thousands.

(40-50 min.) P 13-59B
Req. 1 (Dollar amounts and stock quantities in

thousands)
2012 2011
a. Current ratio $553 $55
2
= 1.94 = 1.89
$285 $29
2
b. Quick (acid- $32 + $217 = .87 $82 + $157 = .82

test) ratio $285 $292
c. Receivables $686 = 3.67 $592 = 3.32

turnover ($217 + $157) / ($157 + $200) /
2 2
Days sales 365 = 99 365 = 110

d. Inventory $380 $281

turnover ($297 + $284) / = 1.31 ($284 + $188) / = 1.19
2 2
Days 365 = 279 365 = 307

inventory
e. Accounts $380 = 2.98 $281 = 2.59

payable ($150 + $105) / ($105 + $112) /
turnover 2 2
Days 365 = 122 365 = 141

payables

f. Cash
conversion 279 + 99 122 = 256 307 + 110 = 276
cycle 141
g. Times- $179 $163

interest- = 5.97 = 3.26
earned ratio $30 $50
(continued) P13-59B
h. Return on $111 $68

= 0.162 = 0.115
sales $686 $592
Asset $686 = .827 $592 = .777

turnover $829.5 $762
Return on 16.2% x .827 = 11.5% x .777 = 8.9%

13.4
%
assets
i. Leverage $829.5 $762

($311 + $298) / = 2.724 ($298 + $199) / = 3.066
2 2
Return on 13.4% x 2.724 = 36.5 8.9% x 3.066 = 27.3%

%
equity

j. Earnings per
share $111 $7.40 $68 $6.80
= =
of common 15 * 10 *
stock
k. Price/earning $94.38 $85.67

s * = 13 * = 13
ratio $7.40* $6.80*
_____
*Not in thousands.

Req. 2
Decisions:
a. The companys financial position improved during 2012 as
shown by increases in the current ratio, the quick ratio,
inventory turnover, the cash conversion cycle, and the times-
interest-earned ratio.
b. The common stocks attractiveness increased during 2012,
as shown by the increase in the market price of the common
stock, return on assets, return on equity, and earnings per
share. The price/earnings ratio stayed the same.
Req. 3
This problem gives you practice in computing and evaluating

several of the ratios used in investment analysis. By analyzing
the two-year trends in the ratios, you can see whether the
companys abilities to pay its debts, sell its inventory, and
generate profits have improved or deteriorated during this
period. Improving ratio values generally indicate an attractive
investment, and deteriorating ratio values usually signal an
unattractive investment.

(45-60 min.) P 13-60B
Req. 1
Topline.com E-shop Stores
Quick (acid- $28 + $9 + $36 + $11 +

a. = 0.60 = 0.63
test) $187 $166
ratio: $371 $340
b. Inventory $452 $382

($219 + = 2.10 ($186 + $199) / = 1.98
turnover:
$212 / 2 2
($187 + $143) ($166 + $194) /

c. Days sales in
/2 = 101 2 = 127
average $598 / 365 $518 / 365
receivables:
d. Debt ratio: $663 $700

= 0.67 = 0.75
$984 $935
Times- Ratio is not $69 = 6.27

e.
interest- meaningful
earned ratio: because Topline.com $11
has no interest
expense.
Return on
f. $63 $37 ($30 .
common
= 0.22 08) = 0.18
($321 + $259) / [($235 $30)
stockholders'
2 +

($219 $30)] /
equity:
2
Earnings per
g. $63 $37 ($30 .
share $0.63
= 08) = $3.46*
*
of common 100 10
stock:
h. Price/earnings $6.93* $58.82*

= 11 = 17
ratio: $.63* $3.46*
_____
*Not in thousands.

Decision:
Topline.coms common stock seems to fit the investment
strategy better. Its price/earnings ratio is lower than that of E-
shop Stores, and Topline.com appears to be in better shape
financially than E-shop Stores, as indicated by all the ratio
values except for the Quick (acid-test) Ratio and Earnings per
Share of Common Stock.
Req. 2
Topline.com E-shop Stores
EVA $63,000 [($0 + $259,000) $37,000 + $11,000

.06] [($310,000 + $219,000)
.06]
= $63,000 $15,540 = $37,000 + $11,000
$31,740
= $47,460 = $16,260
The EVA analysis confirms the conclusion from the ratio

analysis, that Topline.com appears to be the better investment.

Challenge Exercises and Problem
(20-30 min.) E 13-61
ORDER OF
COMPUTATION Millions
Given Current assets... $13,500
4 Property, plant, and equipment. $13,100
Given Less Accumulated depreciation (1,600) 11,500
3 Total assets ($12,500 0.50). $25,000
1 Current liabilities ($13,500 1.50) $ 9,000

2 Long-term liabilities ($12,500 $9,000) 3,500
..
6 Stockholders equity ($25,000 $12,500).. 12,500
5 Total liabilities and stockholders equity... $25,000

(20-30 min.) E 13-62
ORDER OF
COMPUTATION Millions
5 Sales ($1,700 0.25). $6,800
6 Operating expenses ($6,800 $1,700). 5,100
4 Operating income.. 1,700
Given Interest expense. 800
2 Pretax income [$540 (1 0.40)].. 900
3 Income tax expense ($900 0.40). 360
1 Net income ($5,400 .10) $ 540

(30-40 min.) P 13-63
Amherst Corporation
Comparative Income Statements
2013 2012
Sales revenue.............................. $2,100,000 $2,000,000

Cost of goods sold (a).................. 1,365,000 1,400,000
Gross profit (b)............................. 735,000 600,000
Operating expense (d)................. 465,000 400,000
Operating income (c)................... 270,000 200,000
Interest expense.......................... 40,000 40,000
Income before income tax (e)..... 230,000 160,000
Income tax expense (30%) (f)..... 69,000 48,000
Net income (g)............................. $ 161,000 $ 112,000

(continued) P 13-63
Amherst Corporation
Comparative Balance Sheets
December 31, 2013 and 2012
2013 2012
ASSETS
Current:
Cash (l)........................................... $ 35,000 $ 30,000
Accounts receivable, net (k)......... 165,000 135,000
Inventory (j)................................... 240,000 180,000
Total current assets (h)............. 440,000 345,000
Plant and equipment, net................. 760,000 555,000
Total assets...................................... $1,200,000 $900,000
LIABILITIES
Current liabilities.............................. $ 160,000 $140,000
10% Bonds payable (r)...................... 400,000 400,000
Total liabilities (q)............................. 560,000 540,000
STOCKHOLDERS EQUITY
Common stock, $5 par (o)............. 360,000 220,000
Retained earnings (p).................... 280,000 140,000
Total stockholders equity (n)........... 640,000 360,000
Total liabilities and stockholders equity (m) $900,000
$1,200,000
Computations (alternate order of calculations is possible)
(a) Cost of goods sold ($1,365,000) = Sales x COGS % ($2,100,000 65%)

(b) Gross profit ($735,000) = Sales COGS ($2,100,000 - $1,365,000)

(c) Operating income ($270,000) = Operating income in 2012 2013
Trend % ($200,000 135%)
(d) Operating expenses ($465,000) = Gross profit Operating Income
($735,000 $270,000)
(continued) P13-63
(e) Income before income tax ($230,000) = Operating income Interest

expense ($270,000 $40,000)
(f) Income tax expense ($69,000) = Income before income tax tax rate
($230,000 30%)
(g) Net income ($161,000) = Income before income tax Income tax
expense ($230,000 $69,000)
(h) Current assets ($440,000) = Current ratio Current liabilities (2.75

$160,000)
(i) Cash + Accounts receivable = Quick assets ($200,000) = Quick ratio

Current liabilities (1.25 $160,000)
(j) Inventory ($240,000) = (h) (i) ($440,000 $200,000)
(k) Average accounts receivable ($150,000) = Sales Accounts
receivable turnover ($2,100,000 14)
Average accounts receivable = (Beginning + Ending) 2; $150,000 =
($135,000 + Ending) 2; Ending = $165,000
(l) Cash ($35,000) = Quick assets Accounts Receivable ($200,000
$165,000)
(m) Average total assets ($1,050,000) = Sales Asset turnover
($2,100,000 2); Average Assets = (Beginning + Ending) 2;
$1,050,000 = ($900,000 + Ending) 2; Ending = $1,200,000; this
amount is also total liabilities and stockholders equity.
(n) Average stockholders equity ($500,000) = (Beginning + Ending) 2;
$500,000 = ($360,000 + Ending ) 2; Ending = $640,000
(o) Common stock ($360,000 = Common size % total assets (30%

$1,200,000)
(p) Retained earnings ($280,000) = Total stockholders equity Common
stock ($640,000 $360,000)

(q) Total liabilities ($560,000) = Total assets Total stockholders equity
($1,200,000 $640,000)
(r) Bonds payable = Total liabilities Current liabilities ($560,000
$160,000)

Decision Cases
(30 min.) Decision Case 1
Req. 1
Times-
Interest- Return Book
Trans- Current Debt Earned on Value
action Ratio Ratio Ratio Equity Per Share
1 Increase Decrease No effect Increase Increase

2 Increase Increase No effect No effect No effect
3 Decrease Increase No effect Increase Indeterminat
e
4 No effect Increase Decrease Decrease Decrease
5 Increase Decrease Increase Increase Increase
6 Decrease Increase No effect No effect No effect
Req. 2
Transaction Overall Effect on the Company
1 Positive (due to gain)

2 Unclear
3 Unclear*
4 Negative (due to loss)
5 Positive (due to gross profit)
6 Unclear
____
*May be negative because of decreasing assets to shrink the
company.

(20-30 min.) Decision Case 2
Ratio CNH Caterpillar
1. Current ratio Higher Lower
2. Quick (acid-test) ratio No effect No effect
3. Inventory turnover Lower Higher
4. Receivable turnover No effect No effect

and
Days sales outstanding
5. Debt ratio Lower Higher
6. Times-interest-earned Higher Lower
7. Return on sales, total assets, Higher Lower

and equity,
and earnings per share
8. Price/earnings ratio Lower* Higher*
_____
*Assuming stock price is unaffected by the accounting
difference. If stock price is affected, the price/earnings
ratio could be higher (lower) for either company.
9. Dividend yield No effect No effect
10. Book value per share Higher Lower

(continued) Decision Case 2
CONCLUSION:
Overall, CNH will look better than Caterpillar because of:
Higher current ratio, times-interest-earned ratio, rate of

return measures, and book value per share of common
stock.
Lower debt ratio.
Caterpillar may have the higher inventory turnover ratio and

may have a higher price/earnings ratio. Overall, CNH will
appear stronger based solely on the ratios.

(20-30 min.) Decision Case 3
To reduce losses and establish profitable operations, Outward

Bound should take the following steps:
1. Make a dedicated effort to collect receivables and consider
extending less credit to customers. Receivables make up
15.2% of assets, compared to 11.0% for the industry average.
The companys inability to collect its receivables may
explain the shortage of cash (3.0% of total assets compared
to 6.8% for the industry).
2. Reduce the amount of the companys interest-bearing debt.
The companys short-term notes payable equal 17.1% of total
assets, compared to 14.0% for the industry average.
(Interest-bearing) long-term debt equals 19.7% of total
assets, compared to 16.4% for the industry. Outward Bounds
total interest-bearing debt is 36.8% of total assets,
compared to only 30.4% for the industry. This debt burden
causes the company to pay more interest expense than the
norm for the industry (5.8% of net sales, compared to only
1.3% for the average company in the industry). The high
level of interest expense drags profits down.
3. Sell higher profit-margin products. Cost of sales is 68.2% of
sales, compared to 64.8% for the industry average.
Consequently, gross profit is only 31.8% of net sales, which
is less than the 35.2% industry average.

4. Cut operating expenses below their current level of 37.1% of
sales by finding cheaper ways of doing business. The
company should consider operating out of a less expensive
building, spending less on advertising, laying off employees,
and other cost-cutting measures to trim operating expenses.

Ethical Issue
Req. 1
The ethical issue is: Should Turnberry reclassify its

investments from long-term to short-term?
Req. 2 and Req. 3
The stakeholders in the decision are Turnberry Corporation,

its officers and directors, and its current and future
creditors.
Economic analysis: Reclassifying the long-term investments

as short-term will increase current assets and, therefore,
increase the current ratio. Turnberrys financial position is
not improved by this reclassification because the companys
asset position has not changed. However, its short-term
debt paying ability will appear to be improved and thus might
entice current or future creditors to loan money to the
corporation that they would otherwise not lend, subjecting
them to possible loan losses in the future, should Turnberry
prove unable to service their debt.

Legal analysis: If Turnberrys management truly believes
that they intend to sell the investments within a year, thus
justifying reclassification of the investments to current
assets, nothing illegal has happened. However, intentionally
falsifying financial statements is considered illegal in all
states, and is also a federal crime, with criminal or civil
penalties, or both.
(continued) Ethical Issue
Ethical analysis: Reclassifying a long-term investment as

current to meet a debt agreement does not, in itself, brand
Turnberry managers as unethical. The managers may have
honestly intended to sell the investments in order to meet
the companys obligations. In that case, the managers took
appropriate action.
Req. 4.
Reclassifying the investments from current back to long-

term may suggest to some observers that managers are
playing a shell game. However, the case states that sales
subsequent to the first reclassification have improved the
current ratio. Under these circumstances, Turnberry may not

need to sell the investments. The managers may prefer to
hold the investments beyond one year and, therefore, need
to reclassify them as long-term. In that case, the managers
action is appropriate.
This case illustrates how gray accounting can be. Here the
debt agreement depends on the current ratio, which is
affected by an asset classification that managers control
simply by their intentions. Because the managers intentions
cannot be observed, it would be hard to prove that the
managers are acting unethically.

Focus on Financials: Amazon.com, Inc.
(1-2 hours)
Req. 1
1. Ability to pay current liabilities
Ratio Computatio 2010 2009 Interpretatio

n
n
Current CA*/CL $13,747 / $9,797 / Flat
$10,372 = 1.3 $7,364 =
1.3
Acid-test QA**/CL ($3,777 + ($3,444 + Flat

(Quick) $4,985 + $2,922+
$1,587)/ $988)/
$10,372 = $7,364 =
1.00 1.00
CA = Current Assets
QA = Quick Assets (Cash and equivalents + Marketable securities +
Receivables)
2. Ability to sell inventory and collect receivables
Ratio Computati 2010 2009 Interpretati

on
on
Inventory COGS $26,561 $18,978 Declined
turnover Avg. $2,687 $1,785 slightly
Inventory* = 9.89 = 10.63
Days Avg. $1,288 $908 Lengthene

sales d
in receivables* ($34,204 / ($24,509 / slightly
* 365) 365) but
receivabl One days = 13.74 days = 13.52 days still low
es sales

*Avg. inventory: 2010: ($3,202 + $2,171) / 2 = $2,687
2009: ($2,171 + $1,399) / 2 = $1,785
**Avg. receivables 2010: ($1,587 + $988) / 2 = $1,288
2009: ($988 + $827) / 2 = $908

(continued) Amazon.com
3. Ability to pay long-term debt
Ratio Computati 2010 2009 Interpretatio

on n
Debt Tot.liabiliti $10,373 + $7,364 + Worsened

es $1,561 $1,192
Ratio Total $18,797 $13,813 slightly
assets
= .635 = .619
Times Income $1,406 $1,129 Lengthen

from ed
interest operations $39 $34 slightly
but
earned Interest = 36.05 = 33.21 still very
expense high
4. Profitability

on n
Return Net $1,152 $902 Worsened

income
on Net sales $34,204 $24,509 slightly
Sales = .034 = .036
Return Net $1,152 $902 Worsened

income
on Average $16,305* $11,064 significant
ly
assets total assets = .073 = .082

Net income
-
Return Pfd. Div. $1,152 - $0 $902 - $0 Worsened
on Ave. $6,061 $3,965 slightly
equity stockholder = .190 = .227
s
equity
*2010 average assets: ($18,797 + $13,813) / 2 = $16,305

2009 average assets: ($13,813 + 8,314) / 2 = $11,064
**2010 average stockholders equity: ($6,864 + $5,257)/ 2 = $6,061

2009 average stockholders equity : ($5,257 + $2,672) / 2 =
$3,965

on n
Earnings Net income

-
per Pfd. Div. $1,152 - $0 $902 - $0 Improved
share Ave. 447 433 significant
common ly
sh.
= $2.58 =$2.08
outstanding
5. Cash flow from operations:
2010: $3,495 (per share = $3,495/448) = $7.80

2009: $3,293 (per share = $3,293/436) = $7.55
Cash flow from operations improved, both on a total and per

share basis. In 2010, cash flow from operations exceeded net
income by about 203%. In 2009, cash flow from operations
13- Financial Accounting 9/e Solutions Manual
100
exceeded net income by 265%. The company is generating
significant amounts of cash from operations and using it
wisely.
6. Evaluating stock as an investment
Student opinions and answers based on the market price of the

stock will vary. The following statistics will bolster their
positions.

n n
Price Market $180* $134.52** Worsened

price
earnings EPS $2.58 $24,509 significantl
y
ratio = .775 = .619
Dividend Div. per 0 0 No

share
yield Market dividends
price paid
*market price on 12/31/2010 ** market price on

12/31/2009

n n
Stockholder
s
Book equity pfd
value equity $6,864 - $0 $5,257 Improved
per share
Com.shares 448 436 significantl
y
outstanding = $15.32 = $12.06
Amazon.com, Inc. appears to be well positioned for the future.

Most would say their stock would be a decent buy at $180.00 a
share as of December 31, 2010. On September 30, 2011, the
stock was selling for $216.23, so in retrospect, it would have
been a very good investment on December 31, 2010. It
increased in price by 20% in 9 months.

102
Focus on Analysis: RadioShack Corporation
(20 min.)
Req. 1
Trend analysis:
2010 2009 2008

Net sales.......................................... 106% 101% 100%
Cost of sales.................................... 107% 101% 100%
Gross profit (Net sales Cost of $2,011 $1,963 $1,923
sales)...............................................
Gross profit rate.............................. 105% 102% 100%
Operating income............................ 116% 115% 100%
Net income (net loss)...................... 109% 108% 100%
The trend analysis paints a slightly favorable trend in

RadioShacks operations over the 2008 to 2010 period. Sales
increased very little in 2009, and then accelerated slightly in
2010. Meanwhile, cost of sales increased at a slightly more
rapid pace through 2010, causing gross margin to increase by a
lesser percentage than net sales. However, the company saved
money in the operating expense category. Operating income
increased by 15% in 2009 over 2008, and then just slightly in
2010 to 16% over 2008 levels.
Req. 2

Students responses will be updated through 2011 for the
answers above. At time of printing, these figures were not
available.

104
(continued) Focus on Analysis: RadioShack Corporation
Req. 3
Student views on this part will vary. RadioShack Corporation,

like other mid-size retailers, is a mid-level performer that tends
to struggle to compete with big-box retailers like Best Buy.
The company is viewed as in transition, constantly
attempting to improve its core business by introducing a more
compelling assortment of brands and products to bolster its
image as a leader in the wireless technology space. In
October of 2011, the company announced that it was doubling
its annual dividend payout to 50 cents per share, which
boosted its dividend yield (dividend/market price per share) to
3.8%. The company also announced it would continue its
stock buyback program and repurchase an additional $200
million of its common stock over the next 12 months. That
would amount to about 15% of the companys recent total
market capitalization of $1.33 billion. The company failed to
meet its target earnings for the third quarter of 2011, and
finished the quarter with $668 million in cash. RadioShack
Corporation stock closed at $13.08 per share on November 8,
2011. That was down from 18.49 per share (29.3%) from the
price on December 31, 2010. The analysts recommendation
according to www.finance.yahoo.com was 2.6 (where 1.0 =
strong buy and 5.0 = sell).
106
Group Projects
(2-3 hours)
Student responses will vary on this assignment.

Ch13 SM 9e

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Chapter 13

Financial Statement Analysis

(5-10 min.) S 13-1

(5-10 min.) S 13-2

2012 2011 2010 2009

Chapter 13 Financial Statement Analysis 13-1

2012 2011 2010

Inventory, as a percent of total assets, has grown dramatically.

13-2 Financial Accounting 9/e Solutions Manual

Chapter 13 Financial Statement Analysis 13-3

2012 2011 2010

Total current assets $590 $497 $445

Current ratio = 1.63 = 1.49 = 1.31

The companys ability to pay its current liabilities is improving.

(5-10 min.) S 13-6

Cash + $1,200 $ 900

Quick (acid-test) ratio = 1.18 = 1.07

2. Allstotts quick (acid-test) ratio looks fairly good both

(Dollar amounts in millions)

Days inventory 365 365

b. Days sales outstanding (DSO):

One days $9,500

c. Days payables outstanding:

Chapter 13 Financial Statement Analysis 13-5

Days payables 365 365

13-6 Financial Accounting 9/e Solutions Manual

Inventory turnover and DSO look strong. Turning over inventory

Chapter 13 Financial Statement Analysis 13-7

(Dollar amounts in millions)

Allstotts debt ratio is 80.8%.

2. Times-interest- Income from $1,020 +

3. The debt ratio is high. The times-interest-earned ratio is

13-8 Financial Accounting 9/e Solutions Manual

(Dollar amounts in millions)

Net income $735

Net sales $9,500

Rate of return Asset

Average total $6,937.50*

Chapter 13 Financial Statement Analysis 13-9

= ROA x Leverage ratio

f These rates of return are strong.

13-10 Financial Accounting 9/e Solutions Manual

(Amounts, except per-share amounts, in millions)

Net income Preferred dividends $600 $21*

Market price per

2 The stock market says that $1 of Feeney Cars net

Chapter 13 Financial Statement Analysis 13-11

(b) $7,300 $2,358 $1,520 $330 $156 $1,042 =

(d) $7,300 0.09 = $657

(c) $1,042 $657 = $385

13-12 Financial Accounting 9/e Solutions Manual

(f) = $6,700 (same as total assets)

(e) = $6,700 0.57 = $3,819

(c) = $2,100 1.20 = $2,520

(a) = $2,100 0.20 = $420; $420 $60 = $360

(b) = $2,520 $60 $360 $774 = $1,326

Chapter 13 Financial Statement Analysis 13-13

13-14 Financial Accounting 9/e Solutions Manual

TO: Cole Binder Investment Committee

FROM: Student Name

SUBJECT: Investment Recommendation

I recommend that we invest in Tower.org for the following

1. Tower.orgs. return on equity (ROE) is 5% higher than