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Chapter 15: Q2SE (page 835)

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.

Short Answer

Expert verified

Answer

For 2019 Revenue Increases by 200& 2.06% and COGS Increases by 250 &4.17%

for 2018 Revenue Increases by 555 & 6.08% and COGS Increases by 110 & 1.87%

Step by step solution

01

Horizontal analysis for 2019


2019

(A)

2018

(B)

Increase/ decrease

(C=A-B)

Percentage Increase/ Decrease

(C/B)


Revenue

9,890

9,690

200

2.06%

Cost of Goods Sold

6,250

6,000

250

4.17%

02

Horizontal analysis for 2018


2018

(A)

2017

(B)

Increase/ decrease

(C=A-B)

Percentage Increase/ Decrease

(C/B)


Revenue

9,690

9,135

555

6.08%

Cost of Goods Sold

6,000

5,890

110

1.87%

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Most popular questions from this chapter

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

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.

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 Digitalized Corp. and Every Zone, Inc. and have assembled the following data.

Selected income statement data for the current year:

Digitalized

Every Zone

Net sales revenue (all on credit)

\(423,035

\)493,845

Cost of goods sold

210,000

260,000

Interest expenses

0

19,000

Net income

51,000

72,000

Selected balance sheet and market price data at the end of the current year:

Digitalized

Every Zone

Current assets:

Cash

\(24,000

\)17,000

Short-term investment

40,000

14,000

Accounts receivables, Net

40,000

48,000

Merchandise inventory

66,000

97,000

Prepaid expenses

23,000

12,000

Total current assets

\(193,000

\)188,000

Total assets

266,000

323,000

Total current liabilities

105,000

96,000

Total liabilities

105,000

128,000

Common stock

\(1 par (12,000 shares)

12,000

\)1 par (17,000 shares)

17,000

Total stockholders equity

161,000

195,000

Market price per share of common stock

76.50

114.48

Dividend paid per common stock

1.10

1.00

Selected balance sheet data at the beginning of the current year:

Digitalized

Every Zone

Balance sheet:

Accounts Receivable, net

\(41,000

\)54,000

Merchandise Inventory

81,000

87,000

Total Assets

261,000

272,000

Common Stock:

\(1 par (12,000 shares)

12,000

\)1 par (17,000 shares)

17,000

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. 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.

Measuring ability to pay liabilities

Requirements

1. Compute the debt ratio and the debt-to-equity ratio at May 31, 2018, for Accel’s

Companies.

2. Is Accel’s ability to pay its liabilities strong or weak? Explain your reasoning.

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.
See all solutions

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