Chapter 13: 2DQ (page 614)
Question: What is the difference between comparative financial statements and common-size comparative statements?
Common size statements show the financial items in percentage for single year while the comparative statements show the financial items in absolute numbers for multiple years.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Summary information from the financial statements of two companies competing in the same industry follows.
Barco Kyan Barco Kyan
Company CompanyCompanyCompany
Data from the current year-end balance sheets Data from the current year’s income statement Assets Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(770,000 \)880,200
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 19,500 \) 34,000 Cost of goods sold . . . . . . . . . . . . . . . . . . 585,100 632,500
Accounts receivable, net . . . . . . . . . . . . . 37,400 57,400 Interest expense . . . . . . . . . . . . . . . . . . . . 7,900 13,000
Current notes receivable (trade) . . . . . . . 9,100 7,200 Income tax expense . . . . . . . . . . . . . . . . . 14,800 24,300
Merchandise inventory . . . . . . . . . . . . . . . 84,440 132,500 Net income . . . . . . . . . . . . . . . . . . . . . . . . 162,200 210,400
Prepaid expenses . . . . . . . . . . . . . . . . . . . 5,000 6,950 Basic earnings per share . . . . . . . . . . . . . 4.51 5.11
Plant assets, net . . . . . . . . . . . . . . . . . . . . 290,000 304,400 Cash dividends per share . . . . . . . . . . . . . 3.81 3.93
Total assets . . . . . . . . . . . . . . . . . . . . . . . . \(445,440 \)542,450
Beginning-of-year balance sheet data
Liabilities and Equity Accounts receivable, net . . . . . . . . . . . . . \( 29,800 \) 54,200
Current liabilities . . . . . . . . . . . . . . . . . . . . \( 61,340 \) 93,300 Current notes receivable (trade) . . . . . . . 0 0
Long-term notes payable . . . . . . . . . . . . . 80,800 101,000 Merchandise inventory . . . . . . . . . . . . . . . 55,600 107,400
Common stock, \(5 par value . . . . . . . . . . 180,000 206,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . 398,000 382,500
Retained earnings . . . . . . . . . . . . . . . . . . 123,300 142,150 Common stock, \)5 par value.......... 180,000 206,000
Total liabilities and equity . . . . . . . . . . . . . \(445,440 \)542,450 Retained earnings . . . . . . . . . . . . . . . . . . . 98,300 93,600
Required
1. For both companies compute the
(a) current ratio,
(b) acid-test ratio,
(c) accounts (including notes) receivable turnover,
(d) inventory turnover,
(e) days’ sales in inventory, and
(f) days’ sales uncollected.
Identify the company you consider to be the better short-term credit risk and explain why. Round to one decimal place.
For each ratio listed, identify whether the change in ratio value from 2016 to 2017 is usually regarded as favorable or unfavorable.
Ratio | 2017 | 2016 | Ratio | 2017 | 2016 | ||
1 | Profit margin | 9% | 8% | 5 | Accounts receivable turnover | 5.5 | 6.7 |
2 | Debt ratio | 47% | 42% | 6 | Basic earnings per share | \(1.25 | \)1.10 |
3 | Gross margin | 34% | 46% | 7 | Inventory turnover | 3.6 | 3.4 |
4 | Acid test ratio | 1.00 | 1.15 | 8 | Dividend yield | 2.0% | 1.2% |
Common-size and trend percents for Rustynail Company’s sales, cost of goods sold, and expenses follow. Determine whether net income increased, decreased, or remained unchanged in this three-year period.
| Common-Size Percents | Trend Percents | |||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |
| Sales | 100.0% | 100.0% | 100.0% | 105.4% 1 | 104.2% | 100.0% |
| Cost of goods sold | 63.4 | 61.9 | 59.1 | 113.1 | 109.1 | 100.0 |
| Total expenses | 15.3 | 14.8 | 15.1 | 106.8 | 102.1 | 100.0 |
Selected comparative financial statements of Tripoly Company follow.
TRIPOLY COMPANY
Comparative Income Statements
For Years Ended December 31, 2017–2011
\( thousands 2017 2016 2015 2014 2013 2012 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . \)560 \(610 \)630 \(680 \)740 \(770 \)860
Cost of goods sold . . . . . . . . . . . . 276 290 294 314 340 350 380
Gross profit . . . . . . . . . . . . . . . . . . 284 320 336 366 400 420 480
Operating expenses . . . . . . . . . . . 84 104 112 126 140 144 150
Net income . . . . . . . . . . . . . . . . . . \(200 \)216 \(224 \)240 \(260 \)276 \(330
TRIPOLY COMPANY
Comparative Balance Sheets
December 31, 2017–2011
\) thousands 2017 2016 2015 2014 2013 2012 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 44 \) 46 \( 52 \) 54 \( 60 \) 62 \( 68
Accounts receivable, net . . . . . . . . . . . . 130 136 140 144 150 154 160
Merchandise inventory . . . . . . . . . . . . . . 166 172 178 180 186 190 208
Other current assets . . . . . . . . . . . . . . . . 34 34 36 38 38 40 40
Long-term investments . . . . . . . . . . . . . 36 30 26 110 110 110 110
Plant assets, net . . . . . . . . . . . . . . . . . . . 510 514 520 412 420 428 454
Total assets . . . . . . . . . . . . . . . . . . . . . . . \)920 \(932 \)952 \(938 \)964 \(984 \)1,040
Liabilities and Equity Current liabilities . . . . . . . . . . . . . . . . . . . \(148 \)156 \(186 \)190 \(210 \)260 \( 280
Long-term liabilities . . . . . . . . . . . . . . . . 92 120 142 148 194 214 260
Common stock . . . . . . . . . . . . . . . . . . . . 160 160 160 160 160 160 160
Other paid-in capital . . . . . . . . . . . . . . . . 70 70 70 70 70 70 70
Retained earnings . . . . . . . . . . . . . . . . . 450 426 394 370 330 280 270
Total liabilities and equity . . . . . . . . . . . . \)920 \(932 \)952 \(938 \)964 \(984 \)1,040
Required
1. Compute trend percents for all components of both statements using 2011 as the base year. (Round percents to one decimal.)
Why is working capital given special attention in the process of analyzing balance sheets?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
