Chapter 13 Analyzing Financial Statements Cases and Projects

Chapter 13 - Analyzing Financial Statements CASES AND PROJECTS FINANCIAL REPORTING AND ANALYSIS CASES CP13–1. American Eagle Return on equity: $151,705 ($1,416,851 + $1,351,071) ÷ 2 = 11.0% Earnings per share: As reported $0.78 Profit margin: $151,705 = 4.8% $3,159,818 Current ratio: $1,287,488 $405,401 = 3.2 Inventory turnover: $2,031,477 ($378,426 + $301,208)  2 = 6.0 Debt/Equity $405,401 + $128,550 $1,416,851 = .38 Price earnings: $20 $0.78 = 25.6 Dividend yield: $0.44 $20 Financial Accounting, 8/e = 2.2% 13–31 Chapter 13 - Analyzing Financial Statements CP13–2. Urban Outfitters Return on equity: $185,251 ($1,066,268 + $1,411,548)  2 = 15.0% Earnings per share: As reported $1.20 Profit margin: $185,251 $2,473,801 = 7.5% Current ratio: $596,992 $233,466 = 2.6 Inventory turnover: $1,613,265 ($250,073 + $229,561)  2 = 6.7 Debt/Equity: $417,440 $1,066,268 = 0.39 Price/earnings: $35 $1.20 = 29.2 Dividend yield: 0% (No dividends were paid) 13–32 Solutions Manual Chapter 13 - Analyzing Financial Statements CP13–3. For calculations, see CP13–1, CP13–2, and Appendix D. Urban Outfitters American Eagle Industry Average 15.0% 11.0% 13.6% $1.20 $0.78 N/A 7.5% 4.8% 5.4% 2.6 3.2 2.7 6.7 6.0 4.9 .39 .38 .70 29.2 25.6 16.1 0% 2.2% 1.5% Return on equity Earnings per share Profit margin Current ratio Inventory turnover Debt/Equity Price earnings Dividend yield CP13–4. Case 1: ROE = 10% = Net Income Average Stockholders’ Equity $200,000 Average Stockholders’ Equity Average Stockholders’ Equity = $2,000,000 Case 2: Asset Turnover 8 = = Net Sales Average Total Assets $8,000,000 Average Total Assets Average Total Assets = $1,000,000 Financial Accounting, 8/e 13–33 Chapter 13 - Analyzing Financial Statements CP13–4. (continued) Case 3: Asset Turnover 5 = Net Sales Average Total Assets = Net Sales $1,000,000 Net Sales = $5,000,000 Net Profit Margin 10% = Net Income Net Sales = Net Income $5,000,000 Net Income = $500,000 ROE = Net Income Average Stockholders’ Equity 15% = $500,000 Average Stockholders’ Equity Average Stockholders’ Equity = $3,333,333 Case 4: Asset Turnover 5 = = Net Sales Average Total Assets $1,000,000 Average Total Assets Average Assets = $200,000 13–34 Solutions Manual Chapter 13 - Analyzing Financial Statements CP13–5. The two areas where we would expect the largest difference are profit margin and asset turnover. We would expect the ―high quality‖ company to have higher margins. The ―low cost‖ company could produce high returns to the owners. CRITICAL THINKING CASES CP13–6. Although the amount of working capital was unchanged, the current ratio for Barton Company increased as a result of paying $420,000 to the trade creditors: Current assets Current liabilities Working capital Before $1,900,000 = 1.77 $1,075,000 $ 825,000 After $1,480,000 = 2.26 $655,000 $825,000 The current ratio has increased to an amount that is considered to be acceptable by First Federal Bank, but it appears that the increase is mere ―window dressing.‖ Total working capital was unaffected by the transaction. In the process of improving the current ratio, Barton Company created a potential cash crisis. The cash balance was reduced to $10,000 ($430,000 – $420,000) compared with current liabilities of $655,000. First Federal should deny the second loan request. A more fundamental point concerns the validity of the 2:1 criterion imposed by First Federal. The case illustrates the ease with which some ratios can be manipulated. Usually a rigid cut-off point is not advisable for ratio analysis. FINANCIAL REPORTING AND ANALYSIS PROJECTS CP13–7. The response to this question will depend on the companies selected by the students. CONTINUING CASE CC13–1. This case is designed to give students experience in looking up financial information and using it for analysis. Because the students are instructed to use the current Pool report, we cannot provide a solution. Financial Accounting, 8/e 13–35