Chapter 13 Analyzing Financial Statements Exercises

Chapter 13 - Analyzing Financial Statements EXERCISES E13–1. 1. 2. 3. 4. Car manufacturer (high inventory; high property & equipment; lower inventory turnover) Wholesale candy company (high inventory turnover) Retail fur store (high gross profit; high inventory) Advertising agency (low inventory; absence of gross profit) E13–2. 1. 2. 3. 4. Meat packer (high inventory turnover) Travel agency (no gross profit or inventory; high receivables) Hotel (high property & equipment; no gross profit or inventory) Drug company (high gross profit, low inventory turnover) E13–3. 1. 2. 3. 4. Cable T.V. Company (no gross profit; high property & equipment) Accounting firm (high receivables; no gross profit) Retail jewelry store (high inventory; high gross profit) Grocery store (high inventory turnover) E13–4. 1. 2. 3. 4. 13–8 Restaurant (high inventory turnover; high property & equipment) Full-line department store (high cost of inventory; high gross profit) Automobile dealer (high cost of inventory; low property & equipment) Wholesale fish company (high inventory turnover; lower gross profit) Solutions Manual Chapter 13 - Analyzing Financial Statements E13–5. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. A H B L C G K M E I J D N F Q O P Profit margin Inventory turnover ratio Average days to collect Dividend yield ratio Return on equity Current ratio Debt/equity ratio Price/earnings ratio Financial leverage percentage Receivable turnover ratio Average days’ supply in inventory Earnings per share Return on assets Quick ratio Times interest earned Cash coverage ratio Fixed asset turnover ratio Financial Accounting, 8/e 13–9 Chapter 13 - Analyzing Financial Statements E13–6. Lowe's Companies, Inc. Consolidated Statements of Earnings (In millions, except per share and percentage data) % Feb 3, Fiscal years ended on 2012 Sales Net sales $ 50,208 100.00 %$ Cost of sales 32,858 65.44 Gross margin 17,350 34.56 Expenses: Selling, general and administrative 12,593 25.08 Depreciation 1,480 2.95 Interest - net 371 0.74 Total expenses 14,444 28.77 Pre-tax earnings 2,906 5.79 Income tax provision 1,067 2.13 Net earnings $ 1,839 3.66%$ % Jan 28, Jan 29, 2011 Sales 2010 48,815 100.00%$ 47,220 31,663 64.86 30,757 17,152 35.14 16,463 12,006 1,586 332 13,924 3,228 1,218 2,010 24.60 3.25 0.68 28.53 6.61 2.49 4.12%$ 11,737 1,614 287 13,638 2,825 1,042 1,783 % Sales 100.00% 65.14 34.86 24.85 3.42 0.61 28.88 5.98 2.20 3.78% There is a decline in net earnings as a percent of sales and gross margin from 2011 to 2012. The decline in profitability also appears to be related to cost control with expenses increasing as a percent of sales. Management should focus on reducing selling, general and administrative costs. 13–10 Solutions Manual Chapter 13 - Analyzing Financial Statements E13–7. Start Transaction (1) Subtotal Transaction (2)* Current Current Assets Current Liabilities Ratio (1) (2) (1 ÷ 2) $120,000 ($120,000 ÷ 1.5) $80,000 1.50 Inventory + 40,000 Accts. Pay. + 40,000 160,000 120,000 1.33 Cash – 3,000 $157,000 $120,000 1.31 *Debt and truck are noncurrent items. E13–8. Effect on Current Ratio 1. Increase, assuming that cash was collected from sale 2. Will decrease 3. Will decrease 4. Will increase E13–9. Turnover: Accounts receivable $75,312* ÷ [($6,275 + $6,068) ÷ 2] Inventory ($83,608 x 0.48) ÷ [($7,379 + $6,721) ÷ 2] *$83,680 x 90% = $75,312 Days: Accounts receivable (365 days ÷ 12.2) Inventory (365 days ÷ 5.7) Financial Accounting, 8/e = = 12.2 5.7 = 29.9 = 64.0 13–11 Chapter 13 - Analyzing Financial Statements E13–10. Cost of Goods Sold = 5.0 x $1,456,414,000 Cost of Goods Sold = $7,282,070,000 Net Sales = 7.5 x $1,218,874,000 Net Sales = $9,141,555,000 Less: CGS = 7,282,070,000 Gross profit = $1,859,485,000 E13–11. Turnover: Accounts receivable $700,000* ÷ [($45,000 + $60,000) ÷ 2] Inventory ($1,000,000 x 0.6) ÷ [($70,000 + $25,000) ÷ 2] *$1,000,000 x 70% = $700,000 Days: Accounts receivable (365 days ÷ 13.3) Inventory (365 days ÷ 12.6) 13–12 = = = = 13.3 12.6 27.4 30.0 Solutions Manual Chapter 13 - Analyzing Financial Statements E13–12. Current Assets (1) Start $410,000 Transaction (1) A/R* +11,000 Subtotal 421,000 Current Liabilities (2) ($410,000 ÷ 2) $205,000 Transaction (2) Dividends pay. Transaction (3) Cash Prepaid Transaction (4) Cash Transaction (5) Cash A/R Transaction (6) 421,000 -12,000 +12,000 421,000 -50,000 371,000 +11,000 -11,000 371,000 371,000 Current Ratio (1 ÷ 2) 2.00 205,000 2.05 +50,000 255,000 1.65 Dividends pay. 255,000 -50,000 205,000 1.65 ST Lia. 205,000 +45,000 250,000 1.81 1.81 1.48 *We assume that the periodic inventory system is used and, therefore, there is no impact on inventory. Some students will try to try to reduce inventory as part of this transaction. E13–13. Current Ratio $1,066,595 $670,891 = 1.6 Inventory Turnover $1,648,551 [($251,205 + $249,658) ÷ 2] = 6.6 Account Receivable Turnover $2,461,200 * [($450,861 + $429,131) ÷ 2] = 5.6 * $4,102,000 x 60% = $2,461,200 Financial Accounting, 8/e 13–13