Chapter 13: 5DQ (page 614)
Suggest several reasons why a 2:1 current ratio might not be adequate for a particular company
2:1 current ratio shows the defensive style of business operation, low investment for growth and limited opportunity.
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What is the difference between comparative financial statements and common-size comparative statements?
Selected comparative financial statements of Haroun Company follow.
HAROUN COMPANY
Comparative Income Statements
For Years Ended December 31, 2017–2011
\( thousands 2017 2016 2015 2014 2013 2012 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . \)1,694 \(1,496 \)1,370 \(1,264 \)1,186 \(1,110 \)928
Cost of goods sold . . . . . . . . . . . . 1,246 1,032 902 802 752 710 586
Gross profit . . . . . . . . . . . . . . . . . . 448 464 468 462 434 400 342
Operating expenses . . . . . . . . . . . 330 256 234 170 146 144 118
Net income . . . . . . . . . . . . . . . . . . \( 118 \) 208 \( 234 \) 292 \( 288 \) 256 \(224
HAROUN COMPANY
Comparative Balance Sheets
December 31, 2017–2011
\) thousands 2017 2016 2015 2014 2013 2012 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 58 \) 78 \( 82 \) 84 \( 88 \) 86 \( 89
Accounts receivable, net . . . . . . . . . . . . . 490 514 466 360 318 302 216
Merchandise inventory . . . . . . . . . . . . . . . 1,838 1,364 1,204 1,032 936 810 615
Other current assets . . . . . . . . . . . . . . . . . 36 32 14 34 28 28 9
Long-term investments . . . . . . . . . . . . . . 0 0 0 146 146 146 146
Plant assets, net . . . . . . . . . . . . . . . . . . . . 2,020 2,014 1,752 944 978 860 725
Total assets . . . . . . . . . . . . . . . . . . . . . . . . \)4,442 \(4,002 \)3,518 \(2,600 \)2,494 \(2,232 \)1,800 Liabilities and Equity
Current liabilities . . . . . . . . . . . . . . . . . . . . \(1,220 \)1,042 \( 718 \) 614 \( 546 \) 522 \( 282
Long-term liabilities . . . . . . . . . . . . . . . . . 1,294 1,140 1,112 570 580 620 400
Common stock . . . . . . . . . . . . . . . . . . . . . 1,000 1,000 1,000 850 850 650 650
Other paid-in capital . . . . . . . . . . . . . . . . . 250 250 250 170 170 150 150
Retained earnings . . . . . . . . . . . . . . . . . . 678 570 438 396 348 290 318
Total liabilities and equity . . . . . . . . . . . . . \)4,442 \(4,002 \)3,518 \(2,600 \)2,494 \(2,232 \)1,800
Required
1. Compute trend percents for all components of both statements using 2011 as the base year. (Round percents to one decimal.)
Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2016, 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, 2017
Sales . . . . . . . . . . . . . . . . . \(448,600
Cost of goods sold . . . . . . 297,250
Gross profit . . . . . . . . . . . . 151,350
Operating expenses . . . . . 98,600
Interest expense . . . . . . . . 4,100
Income before taxes . . . . . 48,650
Income taxes . . . . . . . . . . . 19,598
Net income . . . . . . . . . . . . \) 29,052
CABOT CORPORATION
Balance Sheet
December 31, 2017
Assets Liabilities and Equity
Cash . . . . . . . . . . . . . . . . . . . . . . . \( 10,000 Accounts payable . . . . . . . . . . . . . . . . . . . . \) 17,500
Short-term investments . . . . . . . . 8,400 Accrued wages payable . . . . . . . . . . . . . . 3,200
Accounts receivable, net . . . . . . . 29,200 Income taxes payable . . . . . . . . . . . . . . . . 3,300
Notes receivable (trade)* . . . . . . . 4,500 Long-term note payable, secured
Merchandise inventory . . . . . . . . . 32,150 by mortgage on plant assets . . . . . . . . 63,400
Prepaid expenses . . . . . . . . . . . . . 2,650 Common stock . . . . . . . . . . . . . . . . . . . . . . 90,000
Plant assets, net . . . . . . . . . . . . . . 153,300 Retained earnings . . . . . . . . . . . . . . . . . . . 62,800
Total assets . . . . . . . . . . . . . . . . . . \(240,200 Total liabilities and equity . . . . . . . . . . . . . \)240,200
* These are short-term notes receivable arising from customer (trade) sales.
Required
Compute the following:
(1) current ratio,
Round to one decimal place; for part 6, round to two decimals.
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 |
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% |
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