(a)
Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.
To compute:
(a)
Answer to Problem 13.3DIE
Current ratio for 2017
Current ratio for 2016
Explanation of Solution
Given info: Balance sheet and income statement
Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.
Formula:
Hence, current ratio for 2017 and 2016 is 1.53:1 and 1.66:1 respectively. It has decreased in the year 2017.
(b)
To compute: Inventory turnover ratio for 2017 and 2016
(b)
Answer to Problem 13.3DIE
Inventory turnover ratio for 2017
Inventory turnover ratio for 2016
Explanation of Solution
Given info: Balance sheet and income statement
Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.
Formula:
Average inventory for 2016 and 2015 is determined as follows:
Average inventory for 2016
Average inventory for 2015
Hence, inventory turnover ratio for 2017 and 2016 is 2.25 times and 2.44 times respectively. In the year 2016, it has decreased.
(c)
To compute: Profit margin for 2017 and 2016
(c)
Answer to Problem 13.3DIE
Profit margin ratio for 2017
Profit margin ratio for 2016
Explanation of Solution
Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.
Formula:
Hence, profit margin ratio for 2017 and 2016 is 7.7% and 4.5% respectively. This ratio has increased because net income is increased.
(d)
To compute: Return on assets for 2017 and 2016
(d)
Answer to Problem 13.3DIE
Return on assets ratio for 2017
Return on assets ratio for 2016
Explanation of Solution
Return on assets determines the particular company’s overall earning power.
Formula:
Average total assets are determined by dividing opening and closing total assets by 2. It is calculated as follows:
Average assets for 2017
Average assets for 2016
Hence,
(e)
To compute: Return on common
(e)
Answer to Problem 13.3DIE
Return on stockholders’ equity for 2017
Return on stockholders’ equity for 2016
Explanation of Solution
Explanation
Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.
Formula:
Average common stockholders’ equity is determined by dividing opening and closing total common stockholders’ equity by 2. It is calculated as follows:
Average common stockholders’ equity for 2017
Average common stockholders’ equity for 2016
Hence, rate of return on stockholders’ equity for 2017 and 2016 is 28.4% and 15.9% respectively.
(f)
To compute: Debt to asset ratio for 2017 and 2016
(f)
Answer to Problem 13.3DIE
Debt to Total Assets Ratio for 2017
Debt to Total Assets Ratio for 2016
Explanation of Solution
Explanation
Debt to asset ratio is used by the company to determine how well the company is able to survive the losses without damaging the creditors’ interest. It is determined by dividing total debt and total assets.
Formula:
Total debt is determined by adding total current liabilities and total long-term liabilities.
Total debt for 2017
Total debt for 2016
Hence, debt to total assets for 2017 and 2016 is 28.4% and 15.9% respectively.
(g)
To compute: Times interest earned for 2017 and 2016
(g)
Answer to Problem 13.3DIE
Times interest earned ratio for 2017
Times interest earned ratio for 2016
Explanation of Solution
Times - interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense.
Formula:
Income before income tax and interest expense is the sum of income before tax and interest expense.
Income before income tax and interest expense for 2017
Income before income tax and interest expense for 2016
Hence, times interest earned ratio for 2017 and 2016 is 17.8 times and 12 times respectively. Company’s ability towards payment of interest has increased in the year 2017.
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Chapter 13 Solutions
FINANCIAL ACCOUNTING: TOOLS WP ACCESS
- Financial statement analysis The financial statements for Nike, Inc., are presented in Appendix D at the end of the text. Use the following additional information (in thousands): Instructions 1. Determine the following measures for the fiscal years ended May 31, 2016, and May 31, 2015. Round ratios and percentages to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Asset turnover j. Return on total assets. k. Return on common stockholders equity l. Price-earnings ratio, assuming that the market price was 54.90 per share on May 29, 2016, and 52.81 per share on May 30, 2015 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forwardReal-world annual report The financial statements for Nike, Inc. (NKE), are presented in Appendix E at the end of the text. The following additional information is available (in thousands): Instructions 1. Determine the following measures for the fiscal years ended May 31, 2017, and May 31, 2016. Round ratios and percentages to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory' h. Ratio of liabilities to stockholders equity i. Asset turnover j. Return on total assets, assuming interest expense is 82 million for the year ending May 31. 2017, and 33 million for the year ending May 31, 2016. k. k. Return on common stockholders equity l. Price-eamings ratio, assuming that the market price was 52.81 per share on May 31, 2017, and 54.35 per share on May 31, 2016. m. m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forwardFinancial Statement Analysis The financial statements for Nike, Inc., are presented in Appendix C at the end of the text. The following additional information (in thousands) is available: Instructions 1. Determine the following measures for the fiscal years ended May 31, 2013 (fiscal 2012), and May 31, 2012 (fiscal 2011), rounding to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Ratio of sales to assets j. Rate earned on total assets, assuming interest expense is 23 million for the year ending May 31, 2013, and 31 million for the year ending May 31, 2012 k. Rate earned on common stockholders equity l. Price-earnings ratio, assuming that the market price was 61.66 per share on May 31, 2013, and 53.10 per share on May 31, 2012 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forward
- Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: Note: Round answers to two decimal places. 1. Calculate the times-interest-earned ratio. 2. Calculate the debt ratio. 3. Calculate the debt-to-equity ratio.arrow_forwardThe following selected information is taken from the financial statements of Arnn Company for its most recent year of operations: During the year, Arnn had net sales of 2.45 million. The cost of goods sold was 1.3 million. Required: Note: Round all answers to two decimal places. 1. Compute the current ratio. 2. Compute the quick or acid-test ratio. 3. Compute the accounts receivable turnover ratio. 4. Compute the accounts receivable turnover in days. 5. Compute the inventory turnover ratio. 6. Compute the inventory turnover in days.arrow_forwardThe comparative balance sheet of Prime Sports Gear, Inc., at December 31, the end of the fiscal year, is as follows: Additional data obtained from the records of Prime Sports Gear are as follows: a. Net income for 2013 was 121,610. b. Depreciation reported on income statement for 2013 was 46,500. c. Purchased 165,000 of new equipment, putting 90,000 cash down and issuing 75,000 of bonds for the balance. d. Old equipment originally costing 19,500, with accumulated depreciation of 7,950, was sold for 8,000. e. Retired 60,000 of bonds. f. Declared cash dividends of 64,000. g. Issued 1,500 shares of common stock at 27 cash per share. Open the file CASHFLOW from the website for this book at cengagebrain.com. First, enter the formulas. Then, complete the worksheet in the manner described next. According to the problem, cash increased from 39,600 to 67,210 during the year. This is a 27,610 increase. To record this increase on the worksheet, move to row 17. Since this is the first account you are analyzing, enter the letter a in column C. Then enter 27610 in column D (a debit since cash increased). This brings the year-end balance (column G) to 67,210, its proper balance. Now move to the bottom part of the statement where you see the categories Operating Activities, Investing Activities, and so on. The credit side of the entry has to be entered here. The proper space for this cash entry is on row 59. Enter the letter a in cell E59 and 27610 in cell F59. Notice the totals at the bottom of the page (row 60) now agree. The next account balance that changed is accounts receivable. It increased by 9,035. To enter this change on the worksheet, enter the letter b in cell C18 and 9035 in cell D18 (again, a debit since accounts receivable increased). This brings the year-end balance in column G to 121,250, its proper balance. The change in accounts receivable balance is an operating activity adjustment (as explained in your textbook). Enter the credit side of this entry in cells E34 and F34, and enter the explanation Increase in accounts receivable in cell A34. Note: Your textbook probably shows Net income as the first item under Operating Activities. We will get to that later. The sequence in which you enter items on this worksheet is not important. All other balance sheet accounts must be analyzed in the same manner, placing appropriate debit or credit entries in the top part of the worksheet to obtain the proper balances in column G, and then entering the second side of the entry in the appropriate row on the bottom part of the worksheet. You should use letter references to identify all entries. Also, you must enter a description of the entry in column A under the appropriate activity category. Although a sequence of analyzing the balance sheet from top to bottom is suggested here, this order is not necessary. As mentioned earlier, your textbook may specify a different sequence. Also, note that some accounts may have both debit and credit adjustments to them. The worksheet is not a substitute for a statement of cash flows, but it does provide you with all the numbers you need to properly prepare one. You will be done with your analysis when: a. The individual account balances at December 31, 2013, as shown on the worksheet (column G) equal those shown in the given problem data. b. The transaction column totals are equal (cells D60 and F60). c. The sum of the operating, investing, and financing activities (cell G59) equals the change in cash (cell D59 or F59). When you are finished, enter your name in cell A1. Save your completed file as CASHFLOW2. Print the worksheet when done. Also print your formulas. Check figure: Total credits at 12/31/2013 (cell G31), 860,460.arrow_forward
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