Accounting and Financial Management

Tutorial 5 Financial Statement Analysis

1. Lara Corp reported the following revenues and net income amounts:
(in millions) 2018 2017 2016 2015
Revenue $9,910 $9,700 $9,210 $9,110
Net income 7,475 7,400 5,495 4,690
(a) Calculate Lara’s trend analysis for revenues and net income. Use 2013 as the base year, and
round to the nearest percent.

(in millions) 2018 2017 2016 2015

Revenue 109% 106% 101% 100%
Net income 159% 158% 117% 100%
Base year 2015

(b) Which measure (revenue or net income) increased faster during 2015–2018?

- Year 2017, Net income

2. Data for Aruzhan Designs Co. follows:

Aruzhan Designs Co.
Comparative Income Statements
Years Ended 31 December 2018 and 2017
2018 2017
Net sales revenue $431,000 $372,350
Expenses:
Cost of goods sold $200,000 $187,550
Selling and general expenses 99,000 91,050
Other expense 8,350 6,850
Total expenses $307,350 $285,450
Net income $123,650 $86,900
(a) Prepare a horizontal analysis of the comparative income statement of Aruzhan Designs Co.
Round percentage changes to one decimal place.
Increase Percentage
2018 2017
(Decrease) Change
Net sales revenue $431,000 $372,350 $58,650 16%
Expenses:
Cost of goods sold $200,000 $187,550 $12,450 7%
Selling and general expenses 99,000 91,050 7,950 9%
Other expense 8,350 6,850 1,500 22%
Total expenses $307,350 $285,450 $21,900 8%
Net income $123,650 $86,900 $36,750 42%

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(b) Why did 2018 net income increase by a higher percentage than net sales revenue?
-Because sales increased at a faster rate than total expenses.

(c) Prepare comparative common-size income statement for Aruzhan Designs Co. using the
2018 and 2017 data. Round percentages to one-tenth percent (one decimal place).

2018 2017
Net sales revenue 100% 100%
Expenses:
Cost of goods sold 46% 50%
Selling and general
expenses 23% 24%
Other expense 2% 2%
Total expenses 71% 77%
Net income 29% 23%

(d) To an investor, how does 2018 compare with 2017? Explain your reasoning.
-Year 2018 is better than Year 2017 it is because the expenses are less compare to year 2017
so that the Net income from year 2018 had increased 6% compared to year 2017.

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3. Tepat Department Stores Bhd’s chief executive officer (CEO) has asked you to compare the
company’s profit performance and financial position with the average for the industry. The CEO
has given you the company’s income statement and balance sheet, as well as the industry data
for retailers.
Tepat Department Stores Bhd
Income Statement
Year Ended 31 December 2018
Industry
Amount Average
Net sales RM778,000 100.0%
Cost of goods sold 522,816 65.8
Gross profit RM255,184 34.2
Operating expenses 161,046 19.7
Operating income RM94,138 14.5
Other expenses 4,668 0.4
Net income RM89,470 14.1%

Tepat Department Stores Bhd

Balance Sheet
31 December 2018
Industry
Amount Average
Current assets RM325,440 70.9%
Fixed assets, net 120,960 23.6
Intangible assets, net 8,640 0.8
Other assets 24,960 4.7
Total assets RM480,000 100.0%
Current liabilities RM222,720 48.1%
Long-term liabilities 107,520 16.6
Stockholders’ equity 149,760 35.3
Total liabilities and stockholders’ equity RM480,000 100.0%

(a) Prepare a vertical analysis for Tepat for both its income statement and balance sheet.
(b) Prepare a common-size income statement and balance sheet for Tepat. The first column of
each statement should present Tepat’s common-size statement, and the second column, the
industry averages.
(c) Compare Tepat’s gross profit margin and net profit margin in the common-size income
statement with the industry averages. Is Tepat’s profit performance better or worse than
the industry average?
(d) Calculate Tepat’s ROCE for 2018.

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4. NJT Company’s total current assets, total current liabilities, and inventory for each of the past 4
years follow:

2015 2016 2017 2018

Total current assets RM16,950 RM21,900 RM22,500 RM27,000
Total current liabilities 9,000 12,600 12,600 17,400
Inventory 6,000 6,900 6,900 7,200

(a) Calculate the firm’s current ratio, quick ratio and net working capital for each year. Compare
the resulting time series (trend) for these measures of liquidity.
(b) Comment on the firm’s liquidity over the 2015-2018 period.
(c) If you were told that NJT Company’s inventory turnover for each year in the 2015-2018 period
and the industry averages were as follows, would this information support or conflict with
your evaluation in part (b)? Why?

2015 2016 2017 2018

NJT Company 6.3 6.8 7.0 6.4
Industry average 10.6 11.2 10.8 11.0

5. The following data are taken from the financial statements of Renu Company.
2018 2017
Accounts receivable (net), end of year RM 550,000 RM 520,000
Net sales on account RM3,960,000 RM3,100,000

Terms for all sales are 1/10,n/60. (The terms are read “one ten, net sixty.” This means the buyer
receives 1% cash discount if payment is made within 10 days, while the full amount is payable
within 60 days.)

Required:
(a) Calculate for each year
(i) days’ sales in receivables (average collection period), and
(ii) the accounts receivable turnover.

1)
2018 2017
550000 520000
3960000 3100000
= 50.7 days = 61.2 days
365 365

2) 2018 2017
3960000 3100000
= 7 times = 6 times
550000 520000

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(b) What conclusions about the management of accounts receivable can be drawn from these
data?

- Renu Company should be pleased with the effectiveness of its credit and collection policies.
The company has decreased its average collection period by 10.5 days and the collection
period of approximately 51 days is well within the 60 days allowed in the credit terms. This
contrast favourably with the poor average collection period in 2017, which was longer than
the 60-day credit period

6. The following data are from the income statements of LMJ Company.
2018 2017
Sales RM6,420,000 RM6,240,000
Beginning inventory 980,000 860,000
Purchases 4,340,000 4,661,000
Ending inventory 1,020,000 980,000

(a) Calculate for each year

(i) days in inventory (the average days to sell the inventory), and.
(ii) the inventory turnover.
(b) What conclusions concerning the management of the inventory can be drawn from these
data?

7. Comparative financial statement data of Hartabillion Sdn Bhd. follow:

Hartabillion Sdn Bhd.
Comparative Income Statements
For the Years Ended 31 December
2018 2017
RM000 RM000
Net sales 467 428
Cost of goods sold 237 218
Gross profit 230 210
Operating expenses 136 134
Income from operations 94 76
Interest expense 9 10

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Income before income tax 85 66

Income tax expense 24 27
Net income 61 39

Hartabillion Sdn Bhd.

Comparative Balance Sheets
As at 31 December
2018 2017 2016
RM000 RM000 RM000
Current assets:
Cash 97 95 91
Current receivables, net 112 118 110
Inventories 145 163 142
Prepaid expenses 12 5 6
Total current assets 366 381 337
Property, plant and equipment, net 211 179 175
Total assets 577 560 524
Total current liabilities 225 246 238
Long-term liabilities 114 97 83
Total liabilities 339 343 349
Preferred stock, 3% 108 108 108
Common stockholders’ equity, no par 130 109 95
Total liabilities and stockholders’ equity 577 560 524

1. Market price of Hartabillion’s common stock: RM86.58 at 31 December 2018, and RM46.54
at 31 December 2017.
2. Common shares outstanding: 12,000 during 2018 and 10,000 during 2017.
3. All sales were on credit.

Required:
(a) Calculate the following ratios for 2018 and 2017:
(i) Current ratio
(ii) Quick ratio
(iii) Days’ sales in receivables (average collection period)
(iv) Inventory turnover
(v) Gross profit margin
(vi) Operating profit margin
(vii) Total asset turnover
(viii) Gearing ratio
(ix) Times interest earned
(x) ROCE
(xi) Earnings per share
(xii) Price/earnings ratio
(b) Decide
(i) whether Hartabillion’s ability to pay debts and to sell inventory improved or deteriorated
during 2018, and

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(ii) whether the investment attractiveness of its common stock appears to have increased or
decreased.

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