Chapter 15: Q1SE (page 835)
Explaining financial statements
Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?
Answer
Horizontal analysis, vertical analysis, and ratio analysis
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Completing a comprehensive financial statement analysis
In its annual report, XYZ Athletic Supply, Inc. includes the following five-year financial summary:
XYZ ATHLETIC SUPPLY, INC. | ||||||
Five-Year Financial Summary (Partial; adapted) | ||||||
(Dollar amounts in thousands except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2016 |
Net sales revenue | \(275,000 | \)222,000 | \(199,000 | \)171,000 | 131,000 | |
Net Sales Revenue Increase | 24% | 12% | 16% | 31% | 17% | |
Domestic Comparative Store Sales Increase | 6% | 6% | 5% | 8% | 10% | |
Other Income—Net | 2,090 | 1,780 | 1,770 | 1,700 | 1,310 | |
Cost of Goods Sold | 208,725 | 169,386 | 154,822 | 134,235 | 103,883 | |
Selling and Administrative Expenses | 41,280 | 36,340 | 31,670 | 27,450 | 22,540 | |
Interest: | ||||||
Interest Expense | (1,070) | (1,370) | (1,330) | (1,100) | (800) | |
Interest Income | 140 | 155 | 150 | 230 | 140 | |
Income Tax Expense | 4,420 | 3,900 | 3,610 | 3,390 | 2,730 | |
Net Income | 21,735 | 12,939 | 9,488 | 6,755 | 2,497 | |
Per Share of Common Stock: | ||||||
Net Income | 1.10 | 0.80 | 0.70 | 0.50 | 0.28 | |
Dividends | 0.45 | 0.43 | 0.39 | 0.35 | 0.31 | |
Financial Position | ||||||
Current Assets, Excluding Merchandise Inventory | \(30,900 | \)27,200 | \(26,800 | \)24,400 | $21,800 | |
Merchandise Inventory | 24,700 | 22,400 | 21,600 | 19,300 | 17,000 | 16,800 |
Property, Plant, and Equipment, Net | 51,600 | 46,200 | 40,500 | 35,000 | 25,200 | |
Total Assets | 107,200 | 95,800 | 88,900 | 78,700 | 64,000 | |
Current Liabilities | 32,600 | 27,800 | 28,800 | 25,600 | 17,000 | |
Long-term Debt | 23,000 | 21,200 | 16,800 | 18,600 | 12,900 | |
Stockholders’ Equity | 51,600 | 46,800 | 43,300 | 35,500 | 34,100 | |
Financial Ratios | ||||||
Acid-Test Ratio | 0.9 | 1.0 | 0.9 | 1.0 | 1.3 | |
Rate of Return on Total Assets | 22.5% | 15.5% | 12.8% | 10.9% | 9.9% | |
Rate of Return on Common Stockholders’ Equity | 44.2% | 28.7% | 24.1% | 19.4% | 18.9% |
Requirements
Analyze the company’s financial summary for the fiscal years 2014–2018 to decide whether to invest in the common stock of XYZ. Include the following sections in your analysis.
1. Trend analysis for net sales revenue and net income (use 2014 as the base year).
2. Profitability analysis.
3. Evaluation of the ability to sell merchandise inventory.
4. Evaluation of the ability to pay debts.
5. Evaluation of dividends.
6. Should you invest in the common stock of XYZ Athletic Supply, Inc.? Fully explain your final decision
Consider the data for Klein Department Stores presented in Problem P15-24A.
Requirements
1.Prepare a common-size income statement and balance sheet for Klein. The first column of each statement should present Klein’s common-size statement, and the second column, the industry averages.
2.For the profitability analysis, compute Klein’s
3.For the analysis of financial position, compute Klein’s
Assume the current ratio industry average is 1.47, and the debt-to-equity industry average is 1.83. Is Klein’s financial position better or worse than the industry averages?
The Randall Department Stores, Inc. chief executive officer (CEO) has asked you to compare the company’s profit performance and financial position with the averages for the industry. The CEO has given you the company’s income statement and balance sheet as well as the industry average data for retailers.
RANDALL DEPARTMENT STORES, INC. Income Statement Compared with Industry Average Year Ended December 31, 2018 | ||
Randall | Industry Average | |
Net Sales Revenue | \( 783,000 | 100.0% |
Cost of Goods Sold | 527,742 | 65.8 |
Gross Profit | 255,258 | 34.2 |
Operating Expenses | 163,647 | 19.7 |
Operating Income | 91,611 | 14.5 |
Other Expenses | 6,264 | 0.4 |
Net Income | \) 85,347 | 14.1% |
RANDALL DEPARTMENT STORES, INC. Balance Sheet Compared with Industry Average December 31, 2018 | ||
Randall | Industry Average | |
Current Assets | \( 310,040 | 70.9% |
Property, Plant, and Equipment, Net | 119,600 | 23.6 |
Intangible Assets, Net | 7,360 | 0.8 |
Other Assets | 23,000 | 4.7 |
Total Assets | \) 460,000 | 100.0% |
Current Liabilities | \( 210,680 | 48.1% |
Long-term Liabilities | 103,960 | 16.6 |
Total Liabilities | 314,640 | 64.7 |
Stockholders’ Equity | 145,360 | 35.3 |
Total Liabilities and Stockholders’ Equity | \) 460,000 | 100.0% |
Requirements
Compare the company’s profit performance and financial position with the average for the industry
Question: P15-38 Using ratios to evaluate a stock investment
This problem continues the Canyon Canoe Company situation from Chapter 14. The company wants to invest some of its excess cash in trading securities and is considering two investments, The Paddle Company (PC) and Recreational Life Vests (RLV). The income statement, balance sheet, and other data for both companies follow for 2019 and 2018, as well as selected data for 2017:
THE PADDLE COMPANY Comparative Financial Statements Years Ended December 31 | RECREATIONAL LIFE VESTS Comparative Financial Statements Years Ended December 31 | ||||||
Income statement | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |
Net sales revenue | \(430,489 | \)425,410 | \(410,570 | \)383,870 | |||
Cost of goods sold | 258,756 | 256,797 | 299,110 | 280,190 | |||
Gross profit | 171,733 | 168,613 | 111,460 | 103,680 | |||
Operating expenses | 153,880 | 151,922 | 78,290 | 70,830 | |||
Operating income | 17,853 | 16,691 | 33,170 | 32,850 | |||
Interest expenses | 865 | 788 | 2,780 | 2,980 | |||
Income before income tax | 16,988 | 15,903 | 30,390 | 29,870 | |||
Income tax expenses | 5,137 | 4,809 | 8,780 | 8,630 | |||
Net income | \(11,851 | \)11,094 | \(21,610 | \)21,240 | |||
Balance sheet | |||||||
Assets | |||||||
Cash & Cash Equivalents | \(69,159 | \)70,793 | \(65,730 | \)55,270 | |||
Accounts Receivable | 44,798 | 44,452 | \(44,104 | 39,810 | 38,650 | \)36,460 | |
Merchandise Inventory | 79,919 | 66,341 | 76,363 | 68,500 | 65,230 | 59,930 | |
Other Current Assets | 15,494 | 16,264 | 24,450 | 37,630 | |||
Total Current Assets | 209,370 | 197,850 | 198,490 | 196,780 | |||
Long-term Assets | 89,834 | 90,776 | 116,760 | 116,270 | |||
Total Assets | \(299,204 | \)288,626 | \(276,482 | \)315,250 | $$313,050 | \(310,640 | |
Liabilities | |||||||
Current Liabilities | \)69,554 | \(60,232 | \)90,810 | \(90,010 | |||
Long-term Liabilities | 31,682 | 29,936 | 96,310 | 105,890 | |||
Total Liabilities | 101,236 | 90,168 | 187,120 | 195,900 | |||
Stockholders’ Equity | |||||||
Common Stock | 72,795 | 80,885 | 111,530 | 102,480 | |||
Retained Earnings | 125,173 | 117,573 | 16,600 | 14,670 | |||
Total Stockholders’ Equity | 197,968 | 198,458 | 128,130 | 117,150 | 103,840 | ||
Total Liabilities and Stockholder’s Equity | \)299,204 | \(288,626 | \)315,250 | \(313,050 | |||
Other data | |||||||
Market price per share | \)21.38 | \(33.82 | \)46.37 | $51.64 | |||
Annual dividend per share | 0.32 | 0.30 | 0.53 | 0.45 | |||
Weighted average number of shares outstanding | 9,000 | 8,000 | 9,000 | 8,000 | |||
Requirements
a. Current ratio | h. Profit margin ratio |
b. Cash ratio | i. Asset turnover ratio |
c. Inventory turnover | j. Rate of return on common stockholders’ equity |
d. Accounts receivable turnover | k. Earnings per share |
e. Gross profit percentage | l. Price/earnings ratio |
f. Debt ratio | m. Dividend yield |
g. Debt to equity ratio | n. Dividend payout |
Data for Mulberry Designs, Inc. follow:
Requirements
1. Prepare a horizontal analysis of the comparative income statement of Mulberry
Designs, Inc. Round percentage changes to one decimal place.
2. Why did 2018 net income increase by a higher percentage than net sales
revenue?
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