Chapter 03 - Working with Financial Statements

Practice Questions:

54. Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215, and
inventory of $409. What is the value of the quick ratio?

55. Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263,
fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is
the value of the net working capital to total assets ratio?

57. A firm has a debt-equity ratio of 0.42. What is the total debt ratio?

58. A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the
total assets?

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59. A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of
$6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?

61. Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of
$208,400, and accounts receivable of $74,100. How many days, on average, does it take the
firm to sell its inventory assuming that all sales are on credit?

62. The Flower Shoppe has accounts receivable of $3,709, inventory of $4,407, sales of
$218,640, and cost of goods sold of $167,306. How many days does it take the firm to both
sell its inventory and collect the payment on the sale assuming that all sales are on credit?

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64. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of
$365,000, and a profit margin of 5.20 percent. What is the return on assets?

67. Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings per
share of $0.87. How many shares of stock are outstanding?

68. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of
$126,400, a price-earnings ratio of 18.7, and a book value per share of $9.12. What is the
market-to-book ratio?

69. Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent,
and an equity multiplier of 1.49. What is the return on equity?

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Chapter 03 - Working with Financial Statements

72. What is the quick ratio for 2009?

73. How many days of sales are in receivables? (Use 2009 values)

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Chapter 03 - Working with Financial Statements

74. What is the price-sales ratio for 2009 if the market price is $18.49 per share?

75. What is debt-equity ratio? (Use 2009 values)

76. What is the cash coverage ratio for 2009?

77. What is the return on equity? (Use 2009 values)

78. What is the amount of the dividends paid for 2009?

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Chapter 03 - Working with Financial Statements

79. What is the amount of the cash flow from investment activity for 2009?

Q. Below is a comparative income statement for Elky Co.: [25 Marks]

Elky Co.
Income Statement
For the years ended December 31
2017 2016
Sales $168,000 $151,000
Cost of goods sold 90,000 78,000
Gross profit 78,000 73,000
Operating expenses 32,000 30,000
Operating income 46,000 43,000
Interest expense 2,000 3,000
Income before taxes 44,000 40,000
Income taxes 11,000 10,000
Net income $33,000 $30,000

Required:
a.) Prepare a horizontal analysis for the company calculating the change and
percentage change of each line item from one year to the next. (Round your
answers to the nearest tenth of a percent, ie 0.13578  13.6%)

Which item/items in your analysis would you wish to investigate? Why?

Solution:

2017 2016 Change * % Change **

Sales $168,000 $151,000
Cost of goods sold 90,000 78,000
Gross profit 78,000 73,000
Operating expenses 32,000 30,000

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Chapter 03 - Working with Financial Statements

Operating income 46,000 43,000

Interest expense 2,000 3,000
Income before taxes 44,000 40,000
Income taxes 11,000 10,000
Net income $33,000 $30,000

Q . Harpreet Gill is concerned about his company’s financial performance and

financial position. He has obtained the financial statements of his largest competitor,
Hossain Inc. and notes that the company is over ten times larger than his, so it is
making the numbers difficult to compare.

Below is condensed financial information from Hossain Inc. and Gill Inc.:

Hossain Inc. and Gill Inc.

Income Statements
For the years ended August 31, 2017
Hossain Gill
Sales $5,600,000 $450,000
Cost of goods sold 2,300,000 160,000
Gross profit 3,300,000 290,000
Operating expenses 2,200,000 125,000
Operating income 1,100,000 165,000
Interest expense 60,000 5,000
Income before taxes 1,040,000 160,000
Income taxes 300,000 48,000
Net income $740,000 $112,000

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Chapter 03 - Working with Financial Statements

Hossain Inc. and Gill Inc.

Balance Sheets
As at August 31, 2017
Hossain Gill
Current assets $1,450,000 $85,000
Long-term assets 3,000,000 250,000
Total assets $4,450,000 $335,000

Current liabilities $500,000 $68,000

Long-term liabilities 1,500,000 120,000
Total liabilities 2,000,000 188,000
Shareholders’ equity 2,450,000 147,000
Total liabilities and $4,450,000 $335,000
shareholders’ equity

Required:
a.) Prepare a vertical analysis for the companies calculating the relative
percentages of each item in the financial statements. (Round your answers to
the nearest tenth of a percent, ie 0.13578  13.6%)
b.) Comment on the common-sized income statements of the companies
(prepared in part a.).
c.) Comment on the common-sized balance sheets of the companies (prepared in
part a.).

Solution:

Hossain Hossain V.A. * Gill Gill V.A.

Sales $5,600,000 $450,000
Cost of goods sold 2,300,000 160,000
Gross profit 3,300,000 290,000
Operating expenses 2,200,000 125,000
Operating income 1,100,000 165,000
Interest expense 60,000 5,000
Income before taxes 1,040,000 160,000
Income taxes 300,000 48,000
Net income $740,000 $112,000

Hossain Hossain V.A. * Gill Gill V.A.

Current assets $1,450,000 $85,000
Long-term assets 3,000,000 250,000

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Total assets 4$,450,000 $335,000

Current liabilities $500,000 $68,000

Long-term liabilities 1,500,000 120,000
Total liabilities 2,000,000 188,000
Shareholders’ equity 2,450,000 147,000
Total liabilities & SE $4,450,000 $335,000

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