San Sebastian College – Recoletos

Canlubang Campus

MANAGEMENT ADVISORY SERVICES BADILLA/TAN/URO

Notes
1. When analyzing financial statements, these are the major characteristics of a company that are evaluated:

Liquidity ratios — measures of the short-term debt-paying ability.

Ratio Formula Purpose Or Use
1 Current ratio Current Assets ÷ Measures the short-term debt-paying
Current Liabilities ability
2 Acid Test or Cash + Marketable Securities + Measures the immediate short-term
Quick ratio Accounts Receivable ÷ liquidity.
Current Liabilities

Activity ratios — measures the efficiency of the conduct of business activity.

Ratio Formula Purpose Or Use
1 Accounts Net Credit Sales ÷ Measures the number of times in a year
Receivable Average Net Accounts Receivable that receivables were collected
Turnover
2 Average 365 days ÷ Accounts receivable Measures the average number of days
collection turnover that receivables were collected
period
OR
Accounts receivable Net ÷
Net Credit Sales ÷ 365 days
3 Inventory Cost of Goods Sold ÷ Measures the number of times in a year
Turnover Average Inventory that inventories were sold
4 Average sales 365 days ÷ Inventory turnover Measures the average number of days
period that inventories were sold
OR
Accounts Payable ÷
Cost of Goods Sold ÷ 365 days

Profitability ratios—measures of the income or operating success of an enterprise for a given period of
time.
Ratio Formula Purpose Or Use
1 Profit margin Net Income ÷ Sales Measures the net income generated by
each peso sales
2 Asset Turnover Net Sales ÷ Average Total Assets Measures how assets are efficiently used
to generate sales
3 Return On Assets Net Income ÷ Total Assets Measures overall profitability of assets
4 Return On Net Income ÷ Average Common Measures profitability of owner’s
Equity Stockholder’s Equity investment
5 Earnings Per Net Income Or Earningsafter tax − Measures net income per common share
Share Preferred Dividends) ÷ Average outstanding
number of common shares
outstanding
Or
Earnings available to common
stockholder ÷ Average number of
common shares outstanding
6 Price Earnings Market Value of common Stock ÷ Measures the value investors are willing to
Ratio Earnings Per Share give up for every peso earnings they earn
7 Payout Ratio Common Cash Dividends ÷ Earnings Measures the percentage of earnings
Available To Common Stockholders distributed as cash dividends
8 Dividend Yield Common Cash Dividends ÷ Market Measures the percentage of cash
Value of common Stock dividends received over the cash
investment per share of common
stockholders
9 Book value per Common stockholders' equity ÷ Book value per common share
share Number of common shares
outstanding
10 Book value to Book value per share ÷ Measures the book value per share against
Market Market Value of common Stock perceived market value of common stock

Solvency ratios— measures of the ability of the enterprise to survive over a long period of time.
Ratio Formula Purpose Or Use
1 Times interest
earned ratio
2 Debt-to-equity
ratio
3 Debt ratio
4 Equity ratio
Operating income ÷ Interest Measures the ability to meets interest
expense payments as they become due
Liabilities ÷ Stockholders' equity Measures size of total debt to total capital
Liabilities ÷ Total Assets Measures the percentage of total assets
provided by creditors
Total Equity ÷ Total Assets Measures the percentage of total assets
provided by owners

PROBLEMS

1
The comparative balance sheet of Greer Company appears below:
GREER COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Current assets ............................................................................................................... $ 330 $280
Plant assets .................................................................................................................. 670 520
Total assets ................................................................................................................... $1,000 $800

Liabilities and stockholders' equity

Current liabilities ........................................................................................................... $ 160 $120
Long-term debt .............................................................................................................. 240 160
Common stock .............................................................................................................. 340 320
Retained earnings ......................................................................................................... 260 200
Total liabilities and stockholders' equity ................................................................. $1,000 $800
Instructions
(a) Using horizontal analysis, show the percentage change for each balance sheet item using 2008 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.

2
Selected financial statement data for Morton Company are presented below.
December 31, 2009 December 31, 2008
Cash $ 20,000 $30,000
Short-term investments 25,000 18,000
Receivables (net) 100,000 80,000
Inventories 85,000 65,000
Total current liabilities 100,000 90,000

During 2009, net sales were $810,000, and cost of goods sold was $615,000.

Instructions
Compute the following ratios at December 31, 2009:
(a) Current.
(b) Acid-test.
(c) Receivables turnover.
(d) Inventory turnover.

3
Selected information from the comparative financial statements of Fryman Company for the year ended December 31,
appears below:
2009 2008
Accounts receivable (net) $ 180,000 $200,000
Inventory 140,000 160,000
Total assets 1,200,000 800,000
Current liabilities 140,000 110,000
Long-term debt 340,000 300,000
Net credit sales 1,520,000 700,000
Cost of goods sold 750,000 530,000
Interest expense 40,000 25,000
Income tax expense 60,000 29,000
Net income 160,000 85,000

Instructions: Answer the following questions relating to the year ended December 31, 2009. Show computa-tions.
1. Inventory turnover for 2009 is __________.
2. Times interest earned in 2009 is __________.
3. The debt to total assets ratio for 2009 is __________.
4. Receivables turnover for 2009 is __________.
5. Return on assets for 2009 is __________.
4
The financial statements of Dobson Company appear below:
 DOBSON COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash........................................................................................................................ $ 35,000 $ 40,000
Short-term investments ........................................................................................... 15,000 60,000
Accounts receivable (net)........................................................................................ 50,000 30,000
Inventory ................................................................................................................. 50,000 70,000
Property, plant and equipment (net) ........................................................................ 250,000 300,000
Total assets ..................................................................................................... $400,000 $500,000

Liabilities and stockholders' equity

Accounts payable .................................................................................................... $ 10,000 $ 30,000
Short-term notes payable ........................................................................................ 40,000 90,000
Bonds payable ........................................................................................................ 88,000 160,000
Common stock ........................................................................................................ 160,000 145,000
Retained earnings ................................................................................................... 102,000 75,000
Total liabilities and stockholders' equity ........................................................... $400,000 $500,000

DOBSON COMPANY
Income Statement
For the Year Ended December 31, 2009

Net sales ................................................................................................................. $360,000

Cost of goods sold .................................................................................................. 198,000
Gross profit ............................................................................................................. 162,000
Expenses
Administrative expenses .................................................................................. $59,000
Selling expenses .............................................................................................. 40,000
Interest expense .............................................................................................. 12,000
Total expenses ......................................................................................... 111,000
Income before income taxes ................................................................................... 51,000
Income tax expense ................................................................................................ 15,000
Net income .............................................................................................................. $ 36,000

Additional information:
a. Cash dividends of $9,000 were declared and paid in 2009.
b. Weighted-average number of shares of common stock outstanding during 2009 was 30,000 shares.
c. Market value of common stock on December 31, 2009, was $21 per share.

Instructions
Using the financial statements and additional information, compute the following ratios for Coulter Company for 2009.
Show all computations.
Computations
1. Current ratio _________.
2. Return on common stockholders' equity _________.
3. Price-earnings ratio _________.
4. Acid-test ratio _________.
5. Receivables turnover _________.
6. Times interest earned _________.
7. Profit margin _________.
8. Days in inventory _________.
9. Payout ratio _________.
10. Return on assets _________.

5
The following ratios have been computed for Pratt Company for 2009.

Profit margin 20%

Times interest earned 15 times
Receivables turnover 5 times
Acid-test ratio 1.60 : 1
Current ratio 3:1
Debt to total assets ratio 26%

Pratt Company’s 2009 financial statements with missing information follow:

PRATT COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash................................................................................................................. $ 25,000 $ 35,000
Short-term Investments .................................................................................... 15,000 15,000
Accounts receivable (net)................................................................................. ? (6) 60,000
Inventory .......................................................................................................... ? (8) 50,000
Property, plant, and equipment (net) ................................................................ 200,000 150,000
Total assets ............................................................................................. $ ? (9) $310,000
Liabilities and stockholders' equity
Accounts payable............................................................................................. $ ? (7) $ 25,000
Short-term notes payable ................................................................................. 35,000 30,000
Bonds payable ................................................................................................. ? (10) 20,000
Common stock ................................................................................................. 200,000 200,000
Retained earnings ............................................................................................ 59,000 35,000
Total liabilities and stockholders' equity .................................................. $ ? (11) $310,000

PRATT COMPANY
Income Statement
For the Year Ended December 31, 2009
———————————————————————————————————————————
Net sales .......................................................................................................... $250,000
Cost of goods sold ........................................................................................... 125,000
Gross profit ...................................................................................................... 125,000
Expenses:
Depreciation expense ............................................................................... $ ? (5)
Administrative expenses ........................................................................... 15,000
Selling expenses ....................................................................................... 10,000
Interest expense ....................................................................................... 5,000
Total expenses .................................................................................. ? (4)
Income before income taxes ............................................................................ ? (2)
Income tax expense .................................................................................. ? (3)
Net income ....................................................................................................... $ ? (1)

Instructions
Use the above ratios and information from the Pratt Company financial statements to fill in the missing information on
the financial statements. Follow the sequence indicated. Show computations that support your answers.

6
Selected financial statement data for Holmes Company are presented below.
Net sales $1,200,000
Cost of goods sold 700,000
Interest expense 10,000
Net income 180,000
Total assets (ending) 850,000
Total common stockholders' equity (ending) 650,000

Total assets at the beginning of the year were $750,000; total common stockholders' equity was $550,000 at the
beginning of the period.

Instructions
Compute each of the following:
(a) Asset turnover
(b) Profit margin
(c) Return on assets
(d) Return on common stockholders' equity

7
Winter Corporation has issued common stock only. The company has been successful and has a gross profit rate of
20%. The information shown below was taken from the company's financial statements.
Beginning inventory $ 482,000
Purchases 5,636,000
Ending inventory ?
Average accounts receivable 700,000
Average common stockholders' equity 3,500,000
Sales (all on credit) 7,000,000
Net income 525,000

Instructions
Compute the following:
(a) Receivables turnover and the average collection period.
(b) Inventory turnover and the days in inventory.
(c) Return on common stockholders' equity.

8
Boyle Corporation had the following comparative current assets and current liabilities:
Dec. 31, 2009 Dec. 31, 2008
Current assets
Cash $ 20,000 $ 30,000
Short-term investments 40,000 10,000
Accounts receivable 55,000 95,000
Inventory 110,000 90,000
Prepaid expenses 35,000 20,000
Total current assets $260,000 $245,000
 Current liabilities
Accounts payable $140,000 $110,000
Salaries payable 40,000 30,000
Income tax payable 20,000 15,000
Total current liabilities $200,000 $155,000

During 2009, credit sales and cost of goods sold were $600,000 and $350,000, respectively.
Instructions
Compute the following liquidity measures for 2009:
1. Current ratio.
2. Working capital.
3. Acid-test ratio.
4. Receivables turnover.
5. Inventory turnover.

9
Selected data from Oates Company are presented below:
Total assets $1,600,000
Average assets 1,750,000
Net income 175,000
Net sales 1,225,000
Average common stockholders' equity 1,000,000

Instructions
Calculate the profitability ratios that can be computed from the above information.

10
The following data are taken from the financial statements of Doyle Company:

2009 2008
Monthly average accounts receivable $ 520,000 $ 500,000
Net sales on account 5,460,000 4,500,000
Terms for all sales are 2/10, n/30

Instructions
(a) Compute the receivables turnover and the average collection period for both years.
(b) What conclusion can an analyst draw about the management of the accounts receivable?

11
The income statement for Stoval Company for the year ended December 31, 2008 appears below.
Sales $610,000
Cost of goods sold 380,000
Gross profit 230,000
Expenses 170,000*
Net income $ 60,000

*Includes $30,000 of interest expense and $18,000 of income tax expense.

Additional information:
1. Common stock outstanding on January 1, 2008 was 40,000 shares. On July 1, 2008, 10,000 more shares were
issued.
2. The market price of Stoval's stock was $15 at the end of 2008.
3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred stockholders.
Instructions
Compute the following ratios for 2008:
(a) earnings per share.
(b) price-earnings.
(c) times interest earned.
(d) dividend yield

12
The President of Roque Company, which makes a single product, request an explanation for the gorss profit decline
for 2014. The following information is available:
2013 2014 Increase (Decrease)
Sales P75,000 P66,000 (P 9,000)
Cost of Good Sold 59,500 57,600 (1,900)
Gross Profit P15,500 P57,600 (P7,100)
Unit Sold 25,000 24,000

Required: Gross profit Analysis

***END***