Chapter 15: 8RQ (page 835)
Briefly describe the ratios that can be used to evaluate a company’s ability to paycurrent liabilities.
Working capital,
Current ratio,
Quick ratio
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Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.
MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018 | |||
Dollars in thousands | 2019 | 2018 | 2017 |
Net Sales Revenue | \( 181,000 | \) 160,000 | |
Cost of Goods Sold | 93,500 | 86,500 | |
Selling and Administrative Expenses | 45,000 | 40,500 | |
Interest Expense | 8,000 | 12,000 | |
Income Tax Expense | 11,000 | 10,500 | |
Net Income | \( 23,500 | \) 10,500 | |
Additional data: | |||
Total Assets | \( 209,000 | \) 187,000 | \( 167,000 |
Common Stockholders’ Equity | 96,000 | 91,500 | 80,500 |
Preferred Dividends | 2,000 | 2,000 | 0 |
Common Shares Outstanding During the Year | 15,000 | 15,000 | 10,000 |
Requirements
Determining the effects of business transactions on selected ratios
Financial statement data of Modern Traveler’s Magazine include the following items:
Cash | \(19,000 |
Accounts Receivable, Net | 82,000 |
Merchandise Inventory | 183,000 |
Total Assets | 638,000 |
Accounts Payable | 102,000 |
Accrued Liabilities | 35,000 |
Short-term Notes Payable | 50,000 |
Long-term Liabilities | 221,000 |
Net Income | 69,000 |
Common Shares Outstanding | 50,000 shares |
Requirements
Current ratio | Debt ratio | Earnings per share |
2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.
a. Purchased merchandise inventory of \)42,000 on account.
b. Borrowed \(121,000 on a long-term note payable.
c. Issued 5,000 shares of common stock, receiving cash of \)103,000.
d. Received cash on account, $5,000.
Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.
Requirements
1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?
2. Under what condition would the reclassification of the receivables be ethical? Unethical?
Using ratios to evaluate a stock investment
Comparative financial statement data of Garfield, Inc. follow:
| GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017 | ||
2018 | 2017 | |
Net sales revenue | \(461,000 | \)424,000 |
Cost of goods sold | 241,000 | 211,000 |
Gross profit | 220,000 | 213,000 |
Operating expenses | 137,000 | 135,000 |
Income from operations | 83,000 | 78,000 |
Interest expenses | 9,000 | 13,000 |
Income before taxes | 74,000 | 65,000 |
Income tax expenses | 18,000 | 24,000 |
Net income | \(56,000 | \)41,000 |
| GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017 | |||
2018 | 2017 | 2016 | |
Assets | |||
Current assets | |||
Cash | \(99,000 | \)98,000 | |
Accounts receivables, Net | 108,000 | 114,000 | 107,000 |
Merchandise inventory | 146,000 | 164,000 | 202,000 |
Prepaid expenses | 20,000 | 9,000 | |
Total current assets | 373,000 | 385,000 | |
Property, plant, and equipment | 211,000 | 181,000 | |
Total assets | \(584,000 | \)566,000 | \(602,000 |
Liabilities | |||
Total current liabilities | \)227,000 | \(246,000 | |
Long-term liabilities | 117,000 | 100,000 | |
Total liabilities | 344,000 | 346,000 | |
Stockholder’s equity | |||
Preferred stock, 3% | 98,000 | 98,000 | |
Common stockholder equity, no par | 142,000 | 122,000 | 89,000 |
Total liabilities and stockholder’s equity | \)584,000 | \(566,000 | |
1. Market price of Garfield’s common stock: \)69.36 at December 31, 2018, and $38.04 at December 31, 2017.
2. Common shares outstanding: 14,000 on December 31, 2018 and 12,000 on December 31, 2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
a. Current ratio
b. Cash ratio
c. Times-interest-earned ratio
d. Inventory turnover
e. Gross profit percentage
f. Debt to equity ratio
g. Rate of return on common stockholders’ equity
h. Earnings per share of common stock
i. Price/earnings ratio
2. Decide (a) whether Garfield’s ability to pay debts and to sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
Computing EPS and P/E ratio
Requirements
1. Compute earnings per share (EPS) for 2018 for Accel’s. Round to the nearest cent.
2. Compute Accel’s Companies’ price/earnings ratio for 2018. The market price per
share of Accel’s stock is $12.50.
3. What do these results mean when evaluating Accel’s Companies’ profitability?
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