Chapter 12

Financial Statement Analysis

Short Exercises

(5-10 min.) S 12-1

Increase (Decrease)
(Dollars in thousands) 20X6 20X5
20X6 20X5 20X4 Amount Percent Amount Percent
Revenues $10,727 $9,832 $9,411 $895 9.1% $421 4.5 %
Expenses 6,325 6,099 5,772
Net income $ 4,402 $ 3,733 $3,639 $669 17.9% $ 94 2.6%

(5-10 min.) S 12-2

Trend percentages:

20X6 20X5 20X4 20X3

Sales…………… 146% 117% 103% 100%
Net income……. 205% 166% 126% 100%

Chapter 13 Financial Statement Analysis 1037

 (10 min.) S 12-4
[Errata: Income tax expense should be 434, not 432. We have
used the correct value in the computation of the solution. The
value print book will be corrected.]

Hartigan Pintal
(Amounts in Amount Percent Amount Percent
millions)
Net sales $10,850 100.0% $8,700 100.0%
Cost of goods 6,499 59.9 6,029 69.3
sold
Selling and
administrative
expenses 3,125 28.8 1,688 19.4
Interest expense 54 0.5 35 0.4
Other expense 33 0.3 43 0.5
Income tax 434 4.0 209 2.4
expense
Net income $ 705 6.5% $ 696 8.0%

Hartigan earned slightly more net income. Students can argue

that Hartigan is more profitable because it earns slightly more
net income than Pintal.

Pintal’s net income was a higher percentage of net sales. The

students can argue that Pintal is more profitable because it
earns a higher percentage of profit on each dollar of sales than
Hartigan does.

1038 Financial Accounting 8/e Solutions Manual

 (5-10 min.) S 12-5
(Dollar amounts in millions)
20X6 20X5 20X4

Total current assets $560 $455 $445

=
Total current liabilities $360 $333 $356

Current ratio = 1.56 = 1.37 = 1.25

The company’s ability to pay its current liabilities is improving.

(5-10 min.) S 12-6

1.
(Dollar amounts in millions)
20X6 20X5

Cash + $1,203 $ 903

Short-term investments + +$ 7 + $ 84
Receivables, net + $ 246 + $ 256
Total current assets = $1,456 $1,243
Total current liabilities $1,207 $1,141

= 1.21 = 1.09

2. Gargantua’s acid-test ratio looks fairly good both because it

is slightly above 1.0 and it is higher than the ratios of the
other three companies.

Chapter 13 Financial Statement Analysis 1039

 (10-15 min.) S 12-7
(Dollar amounts in millions)

Cost of goods sold $2,230

a. Inventory turnover = =
Average inventory ($91 + $81) / 2

$2,200
= = 25.6 times
$86

Days inventory= 365/25.6=14.26 days

b. Days’ sales in receivables:

One day’s $9,550

= = $26.16
sales 365

Average net
Days’ sales in receivables $251*
= = = 9.59 days
receivables One day’s $26.16
sales

Accounts payable turnover:

APT = COGS = $2230 = 2.39

Av Acc payable $930.5

365 365
= = 152.7 days
APT 2.39

Cash Conversion Cycle = 14.26 + 9.59 – 152.7 = - 128.86 days

_____.
*($246 + $256) / 2 = $251

These measures look strong. Turning over inventory 26 times

per year is fast, and collecting average receivables within ten
days is also very fast.
1040 Financial Accounting 8/e Solutions Manual
Chapter 13 Financial Statement Analysis 1041
 (5-10 min.) S 12-8
(Dollar amounts in millions)

Total liabilities $5,928

1. Debt ratio = = = 0.814
Total assets $7,282

Gargantua’s debt ratio is 81.4%.

2. Times-interest- Income before $1,069 + $154

= interest and taxes = 7.9
earned ratio Interest expense $154

3. The debt ratio is high which indicates excessive leverage.

However the times-interest-earned ratio is high. Overall, the
company’s ability to pay its liabilities and interest expense
looks mixed.

1042 Financial Accounting 8/e Solutions Manual

 (10 min.) S 12-9
(Dollar amounts in millions)

Revenue – $9,550-
Cost of $2,230
a. Gross profit margin = = = 76.6%
goods sold
Revenue $9,550

Income before income $1,069

Operating profit
= taxes = = 11.2%
margin
Revenue $9,550

Net income $781

Net profit margin = = = 8.2%
Revenue $9,550

Net
b. Return income $781
= =
on total assets Average total assets ($7,282 + $6,622) / 2

= 11.2%

c. Rate of return
on Net income $781
= = = 55.6%
shareholders' Average ($1,354 + $1,453) / 2
equity equity

These rates of return are very strong.

Chapter 13 Financial Statement Analysis 1043

 (5-10 min.) S 12-10
(Amounts, except per-share amounts, in millions)

Net income − Preference $510 −

1. EPS = dividends = $25.50*
Number of ordinary shares 100
outstanding

= $4.85
_____
*Preference dividend = $25.50 ($425 × .06)

Market price per share

Price/earnings of ordinary shares $57.12
= = = 11.78
ratio EPS $4.85

2. The stock market says that $1 of Tri-State Cars’ net

income is worth $11.78

1044 Financial Accounting 8/e Solutions Manual

 (10-15 min.) E 12-18A

[Errata: Total liabilities should be 151,620, not 125,700. We have

used the correct value in the computation of the solution. The
value print book will be corrected.]

Fore Golf Company

Vertical Analysis of Balance Sheet
December 31, 20X6
AMOUNT PERCENT
ASSETS
Total current assets……………………….. $ 41,230 21.7%
Property, plant, and equipment, net.…… 112,290 59.1
Other assets………………………………… 36,480 19.2
Total assets…………………………………. $190,000 100.0

LIABILITIES
Total current liabilities……………………. $ 46,930 24.7
Long-term debt…………………………….. 104,690 55.1
Total liabilities……………………………… 151,620 79.8

SHAREHOLDERS’ EQUITY
Total shareholders’ equity……………….. 38,380 20.2
Total liabilities and shareholders’ equity $190,000 100.0

Chapter 13 Financial Statement Analysis 1045