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Chapter 15: Q2SE (page 835)

Verifine Corp. reported the following on its comparative income statement:

(In millions)2019 2018 2017

Revenue \( 9,890 \) 9,690 $ 9,135

Cost of Goods Sold 6,250 6,000 5,890

Prepare a horizontal analysis of revenues and gross profit鈥攂oth in dollar amounts

and in percentages鈥攆or 2019 and 2018.

Short Answer

Expert verified

Answer

For 2019 Revenue Increases by 200& 2.06% and COGS Increases by 250 &4.17%

for 2018 Revenue Increases by 555 & 6.08% and COGS Increases by 110 & 1.87%

Step by step solution

01

Horizontal analysis for 2019


2019

(A)

2018

(B)

Increase/ decrease

(C=A-B)

Percentage Increase/ Decrease

(C/B)


Revenue

9,890

9,690

200

2.06%

Cost of Goods Sold

6,250

6,000

250

4.17%

02

Horizontal analysis for 2018


2018

(A)

2017

(B)

Increase/ decrease

(C=A-B)

Percentage Increase/ Decrease

(C/B)


Revenue

9,690

9,135

555

6.08%

Cost of Goods Sold

6,000

5,890

110

1.87%

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Most popular questions from this chapter

Ross鈥檚 Lipstick Company鈥檚 long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders鈥� equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company鈥檚 lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross鈥檚 management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management鈥檚 intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term鈥攁 current asset. On the controller鈥檚 recommendation, Ross鈥檚 board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross鈥檚 true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross鈥檚 management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Traditional Mills鈥檚 balance sheet appears as follows (amounts in thousands):

Use the following ratio data to complete Traditional Mills鈥檚 balance sheet.

  1. Current ratio is 0.72.

2. Acid-test ratio is 0.36.

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.

Question: Using ratios to decide between two stock investments

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone, Inc. and have assembled the following data.

Selected income statement data for the current year:

All digital

Green Zone

Net sales revenue (all on credit)

\(417,925

\)493,115

Cost of goods sold

209,000

258,000

Interest expenses

0

14,000

Net income

58,000

72,000

Selected balance sheet and market price data at the end of the current year:

All digital

Green Zone

Current assets:

Cash

\(23,000

\)18,000

Short-term investment

37,000

17,000

Accounts receivables, Net

39,000

49,000

Merchandise inventory

64,000

102,000

Prepaid expenses

21,000

17,000

Total current assets

\(184,000

\)203,000

Total assets

\(263,000

\)326,000

Total current liabilities

105,000

99,000

Total liabilities

105,000

134,000

Common stock:

\(1 par (10,000 shares)

10,000

\)2 par (14,000 shares)

28,000

Total stockholder鈥檚 equity

158,000

192,000

Market price per share of common stock

92.80

128.50

Dividend paid per common share

1.20

0.90

Selected balance sheet data at the beginning of the current year:

All digital

Green Zone

Balance sheet:

Accounts receivables, Net

\(41,000

\)54,000

Merchandise inventory

81,000

89,000

Total assets

258,000

277,000

Common stock:

\(1 par (10,000 shares)

10,000

\)2 par (14,000 shares)

28,000

Your strategy is to invest in companies with low price/earnings ratios but in good financial shape. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Requirements

1. Compute the following ratios for both companies for the current year:

a. Acid-test ratio

b. Inventory turnover

c. Days鈥� sales in receivables

d. Debt ratio

e. Earnings per share of common stock

f. Price/earnings ratio

g. Dividend payout

2. Decide which company鈥檚 stock better fits your investment strategy

The financial statements of Valerie鈥檚 Natural Foods include the following items:

Compute the following ratios for the current year:

  1. Current ratio

  2. Cash ratio

  3. Acid-test ratio

  4. Inventory turnover

  5. Day鈥檚 sales in inventory

  6. Day鈥檚 sales in receivables

  7. Gross profit percentage
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