Chapter 15: Q7RQ (page 835)
What is benchmarking, and what are the two main types of benchmarks in financialstatement analysis?
The practice of setting standards of measurement values based on the leading company in the industry and comparing process measurements against such standards is benchmarking.
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Computing inventory, gross profit, and receivables ratios
Requirements
1. Compute the inventory turnover, days’ sales in inventory, and gross profit
percentage for Accel’s Companies for 2018.
2. Compute days’ sales in receivables during 2018. Round intermediate calculations to
three decimal places. Assume all sales were on account.
3. What do these ratios say about Accel’s Companies’ ability to sell inventory and
collect receivables?
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?
Completing a comprehensive financial statement analysis
In its annual report, ABC Athletic Supply, Inc. includes the following five-year financial summary:
| ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted) | ||||||
(Dollar amounts in thousands except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Sales Revenue | \(250,000 | \)216,000 | \(191,000 | \)161,000 | \(134,000 | |
Net Sales Revenue Increase | 16% | 13% | 19% | 20% | 17% | |
Domestic Comparative Store Sales Increase | 5% | 6% | 4% | 7% | 9% | |
Other Income—Net | 2,110 | 1,840 | 1,760 | 1,690 | 1,330 | |
Cost of Goods Sold | 189,250 | 164,592 | 148,216 | 126,385 | 106,396 | |
Selling and Administrative Expenses | 41,210 | 36,330 | 31,620 | 27,440 | 22,540 | |
Interest: | ||||||
Interest Expense | (1,080) | (1,380) | (1,400) | (1,020) | (830) | |
Interest Income | 125 | 165 | 155 | 235 | 190 | |
Income Tax Expense | 4,470 | 3,900 | 3,700 | 3,320 | 2,700 | |
Net Income | 16,225 | 11,803 | 7,979 | 4,760 | 3,054 | |
Per Share of Common Stock: | ||||||
Net Income | 1.60 | 1.30 | 1.20 | 1.00 | 0.78 | |
Dividends | 0.40 | 0.38 | 0.34 | 0.30 | 0.26 | |
Financial Position | ||||||
Current Assets, Excluding Merchandise Inventory | \)30,700 | \(27,200 | \)26,700 | \(24,400 | \)21,500 | |
Merchandise Inventory | 24,500 | 22,600 | 21,700 | 19,000 | 17,500 | $16,700 |
Property, Plant, and Equipment, Net | 51,400 | 45,200 | 40,000 | 35,100 | 25,600 | |
Total Assets | 106,600 | 95,000 | 88,400 | 78,500 | 64,600 | |
Current Liabilities | 32,300 | 28,000 | 28,300 | 25,000 | 16,500 | |
Long-term Debt | 23,000 | 21,500 | 17,600 | 19,100 | 12,000 | |
Stockholders’ Equity | 51,300 | 45,500 | 42,500 | 34,400 | 36,100 | |
Financial Ratios | ||||||
Acid-Test Ratio | 1.0 | 1.0 | 0.9 | 1.0 | 1.3 | |
Rate of Return on Total Assets | 17.2% | 14.4% | 11.2% | 8.1% | 7.1% | |
Rate of Return on Common Stockholders’ Equity | 35.5% | 26.% | 20.8% | 13.5% | 13.0% | |
Requirements
Analyze the company’s financial summary for the fiscal years 2014–2018 to decide whether to invest in the common stock of ABC. Include the following sections in your analysis.
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
Big Beautiful Photo Shop has asked you to determine whether the company’s ability to pay current liabilities and total liabilities improved or deteriorated during 2018. To answer this question, you gather the following data:
2018 | 2017 | |
Cash | \(58,000 | \)47,000 |
Short-term Investments | 34,000 | 0 |
Net Accounts Receivable | 140,000 | 124,000 |
Merchandise Inventory | 217,000 | 272,000 |
Total Assets | 530,000 | 565,000 |
Total Current Liabilities | 288,000 | 205,000 |
Long-term Notes Payable | 40,000 | 50,000 |
Income from Operations | 165,000 | 158,000 |
Interest Expense | 55,000 | 41,000 |
Compute the following ratios for 2018 and 2017, and evaluate the company’s ability to pay its current liabilities and total liabilities:
a. Current ratio
b. Cash ratio
c. Acid-test ratio
d. Debt ratio
e. Debt to equity ratio
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