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Chapter 15: Q13RQ (page 835)
What are some common red flags in financial statement analysis?
Red Flags in Financial Analysis are as follows- Sales trending down from the past years, consistently higher liabilities than Assets, etc.
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Preparing common-size income statements
Refer to the data presented for Mulberry Designs, Inc. in Exercise E15-13.
Requirements
1. Prepare a comparative common-size income statement for Mulberry Designs,
Inc. using the 2018 and 2017 data. Round percentages to one-tenth percent (three
decimal places).
2. To an investor, how does 2018 compare with 2017? Explain your reasoning.
Computing inventory, gross profit, and receivables ratios
Requirements
1. Compute the inventory turnover, days鈥� sales in inventory, and gross profit
percentage for Accel鈥檚 Companies for 2018.
2. Compute days鈥� sales in receivables during 2018. Round intermediate calculations to
three decimal places. Assume all sales were on account.
3. What do these ratios say about Accel鈥檚 Companies鈥� ability to sell inventory and
collect receivables?
Completing a comprehensive financial statement analysis
In its annual report, XYZ Athletic Supply, Inc. includes the following five-year financial summary:
XYZ ATHLETIC SUPPLY, INC. | ||||||
Five-Year Financial Summary (Partial; adapted) | ||||||
(Dollar amounts in thousands except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2016 |
Net sales revenue | \(275,000 | \)222,000 | \(199,000 | \)171,000 | 131,000 | |
Net Sales Revenue Increase | 24% | 12% | 16% | 31% | 17% | |
Domestic Comparative Store Sales Increase | 6% | 6% | 5% | 8% | 10% | |
Other Income鈥擭et | 2,090 | 1,780 | 1,770 | 1,700 | 1,310 | |
Cost of Goods Sold | 208,725 | 169,386 | 154,822 | 134,235 | 103,883 | |
Selling and Administrative Expenses | 41,280 | 36,340 | 31,670 | 27,450 | 22,540 | |
Interest: | ||||||
Interest Expense | (1,070) | (1,370) | (1,330) | (1,100) | (800) | |
Interest Income | 140 | 155 | 150 | 230 | 140 | |
Income Tax Expense | 4,420 | 3,900 | 3,610 | 3,390 | 2,730 | |
Net Income | 21,735 | 12,939 | 9,488 | 6,755 | 2,497 | |
Per Share of Common Stock: | ||||||
Net Income | 1.10 | 0.80 | 0.70 | 0.50 | 0.28 | |
Dividends | 0.45 | 0.43 | 0.39 | 0.35 | 0.31 | |
Financial Position | ||||||
Current Assets, Excluding Merchandise Inventory | \(30,900 | \)27,200 | \(26,800 | \)24,400 | $21,800 | |
Merchandise Inventory | 24,700 | 22,400 | 21,600 | 19,300 | 17,000 | 16,800 |
Property, Plant, and Equipment, Net | 51,600 | 46,200 | 40,500 | 35,000 | 25,200 | |
Total Assets | 107,200 | 95,800 | 88,900 | 78,700 | 64,000 | |
Current Liabilities | 32,600 | 27,800 | 28,800 | 25,600 | 17,000 | |
Long-term Debt | 23,000 | 21,200 | 16,800 | 18,600 | 12,900 | |
Stockholders鈥� Equity | 51,600 | 46,800 | 43,300 | 35,500 | 34,100 | |
Financial Ratios | ||||||
Acid-Test Ratio | 0.9 | 1.0 | 0.9 | 1.0 | 1.3 | |
Rate of Return on Total Assets | 22.5% | 15.5% | 12.8% | 10.9% | 9.9% | |
Rate of Return on Common Stockholders鈥� Equity | 44.2% | 28.7% | 24.1% | 19.4% | 18.9% |
Requirements
Analyze the company鈥檚 financial summary for the fiscal years 2014鈥�2018 to decide whether to invest in the common stock of XYZ. Include the following sections in your analysis.
1. Trend analysis for net sales revenue and net income (use 2014 as the base year).
2. Profitability analysis.
3. Evaluation of the ability to sell merchandise inventory.
4. Evaluation of the ability to pay debts.
5. Evaluation of dividends.
6. Should you invest in the common stock of XYZ Athletic Supply, Inc.? Fully explain your final decision
Briefly describe the ratios that can be used to evaluate a company鈥檚 stock as an investment.
Data for Connor, Inc. and Alto Corp. follow:
Connor Alto
Net Sales Revenue \( 13,000 \) 22,000
Cost of Goods Sold 7,917 15,730
Other Expenses 4,342 5,170
Net Income \( 741 \) 1,100
Requirements
1. Prepare common-size income statements.
2. Which company earns more net income?
3. Which company鈥檚 net income is a higher percentage of its net sales revenue?
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