Chapter 15: Q13RQ (page 835)
What are some common red flags in financial statement analysis?
Red Flags in Financial Analysis are as follows- Sales trending down from the past years, consistently higher liabilities than Assets, etc.
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Question:Theater by Design and Show Cinemas are asking you to recommend their stock to your clients. Because Theater by Design and Show Cinemas earn about the same net income and have similar financial positions, your decision depends on their statement of cash flows, summarized as follows:
Theater by Design Show Cinemas
Net Cash Provided by Operating Activities \( 30,000 \) 70,000
Cash Provided by (Used for) Investing Activities:
Purchase of Plant Assets \( (20,000) \) (100,000)
Sale of Plant Assets 40,000 20,000 10,000 (90,000)
Cash Provided by (Used for) Financing Activities:
Issuance of Common Stock 0 30,000
Payment of Long-term Debt (40,000) 0
Net Increase (Decrease) in Cash \( 10,000 \) 10,000
Based on their cash flows, which company looks better? Give your reasons.
Question: Using ratios to decide between two stock investments
Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone, Inc. and have assembled the following data.
Selected income statement data for the current year:
All digital | Green Zone | |
Net sales revenue (all on credit) | \(417,925 | \)493,115 |
Cost of goods sold | 209,000 | 258,000 |
Interest expenses | 0 | 14,000 |
Net income | 58,000 | 72,000 |
Selected balance sheet and market price data at the end of the current year:
All digital | Green Zone | |
Current assets: | ||
Cash | \(23,000 | \)18,000 |
Short-term investment | 37,000 | 17,000 |
Accounts receivables, Net | 39,000 | 49,000 |
Merchandise inventory | 64,000 | 102,000 |
Prepaid expenses | 21,000 | 17,000 |
Total current assets | \(184,000 | \)203,000 |
Total assets | \(263,000 | \)326,000 |
Total current liabilities | 105,000 | 99,000 |
Total liabilities | 105,000 | 134,000 |
Common stock: | ||
\(1 par (10,000 shares) | 10,000 | |
\)2 par (14,000 shares) | 28,000 | |
Total stockholder’s equity | 158,000 | 192,000 |
Market price per share of common stock | 92.80 | 128.50 |
Dividend paid per common share | 1.20 | 0.90 |
Selected balance sheet data at the beginning of the current year:
All digital | Green Zone | |
Balance sheet: | ||
Accounts receivables, Net | \(41,000 | \)54,000 |
Merchandise inventory | 81,000 | 89,000 |
Total assets | 258,000 | 277,000 |
Common stock: | ||
\(1 par (10,000 shares) | 10,000 | |
\)2 par (14,000 shares) | 28,000 |
Your strategy is to invest in companies with low price/earnings ratios but in good financial shape. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.
Requirements
1. Compute the following ratios for both companies for the current year:
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy
Muscateer Corp. reported the following revenues and net income amounts:
(In millions)2019 2018 2017 2016
Revenue \( 9,610 \) 9,355 \( 9,050 \) 8,950
Net Income 7,290 6,790 5,020 4,300
Requirements
1. Calculate Muscateer’s trend analysis for revenues and net income. Use 2016 as the
base year, and round to the nearest percent.
2. Which measure increased at a higher rate during 2017–2019?
Net sales revenue, net income, and common stockholders’ equity for Eyesight Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.
2019 | 2018 | 2017 | 2016 | |
Net Sales Revenue | \(766000 | \)708000 | \(644000 | \)664000 |
Net Income | 60000 | 38000 | 36000 | 44000 |
Ending Common Stockholder’s Equity | 368000 | 352000 | 326000 | 296000 |
Requirements
1.Compute trend analyses for each item for 2017–2019. Use 2016 as the base year, and round to the nearest whole percent.
2.Compute the rate of return on common stockholders’ equity for 2017–2019, rounding to three decimal places.
Monroe Corp. reported the following amounts on its balance sheet at December 31, 2018 and 2017:
2018, 2017
Cash and Receivables \( 35,000 \) 40,000
Merchandise Inventory 20,000 15,000
Property, Plant, and Equipment, Net 80,000 60,000
Total Assets \( 135,000 \) 115,000
Prepare a vertical analysis of Monroe Corp. for 2018 and 2017.
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