Chapter 15: Q1RQ (page 835)
Question: What are the three main ways to analyze financial statements?
Answer
1. Horizontal analysis, 2. Vertical analysis, 3. Ratio analysis
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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.
Verifine Corp. reported the following on its comparative income statement:
(In millions)2019 2018 2017
Revenue \( 9,890 \) 9,690 $ 9,135
Cost of Goods Sold 6,250 6,000 5,890
Prepare a horizontal analysis of revenues and gross profit—both in dollar amounts
and in percentages—for 2019 and 2018.
Describe a common-size statement and how it might be helpful in evaluating a company.
Data for Connor, Inc. and Alto Corp. follow:
Connor Alto
Net Sales Revenue \( 13,000 \) 22,000
Cost of Goods Sold 7,917 15,730
Other Expenses 4,342 5,170
Net Income \( 741 \) 1,100
Requirements
1. Prepare common-size income statements.
2. Which company earns more net income?
3. Which company’s net income is a higher percentage of its net sales revenue?
The financial statements of Valerie’s Natural Foods include the following items:
Compute the following ratios for the current year:
Current ratio
Cash ratio
Acid-test ratio
Inventory turnover
Day’s sales in inventory
Day’s sales in receivables
Gross profit percentage
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