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Chapter 15: Q3RQ (page 835)
Question: What is horizontal analysis, and how is a percentage change computed?
Answer
It was used for the analysis of horizontal data over the last years to make decisions.
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Great Value Optical Company reported the following amounts on its balance sheet at
December 31, 2018 and 2017:
2018 2017
Cash and Receivables \( 80,640 \) 80,575
Merchandise Inventory 56,840 54,450
Property, Plant, and Equipment, Net 142,520 139,975
Total Assets \( 280,000 \) 275,000
Prepare a vertical analysis of Great Value鈥檚 assets for 2018 and 2017.
The financial statements of Ion Corporation include the following items:
Current Year Preceding Year
Balance Sheet:
Cash \( 6,000 \) 8,000
Short-term Investments 4,400 10,700
Net Accounts Receivable 21,600 29,200
Merchandise Inventory 30,800 27,600
Prepaid Expenses 6,000 3,600
Total Current Assets 68,800 79,100
Total Current Liabilities 53,200 37,200
Income Statement:
Net Sales Revenue $ 184,800
Cost of Goods Sold 126,000
Compute the following ratios for the current year:
7. Current ratio
8. Acid-test ratio
9. Inventory turnover
10. Gross profit percentage
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
Computing EPS and P/E ratio
Requirements
1. Compute earnings per share (EPS) for 2018 for Accel鈥檚. Round to the nearest cent.
2. Compute Accel鈥檚 Companies鈥� price/earnings ratio for 2018. The market price per
share of Accel鈥檚 stock is $12.50.
3. What do these results mean when evaluating Accel鈥檚 Companies鈥� profitability?
Using ratios to evaluate a stock investment
Comparative financial statement data of Sanfield, Inc. follow:
| SANFIELD, INC. Comparative Income Statement Years Ended December 31, 2018, and 2017 | ||
2018 | 2017 | |
Net Sales Revenue | \( 462,000 | \) 430,000 |
Cost of Goods Sold | 236,000 | 213,000 |
Gross Profit | 226,000 | 217,000 |
Operating Expense | 135,000 | 133,000 |
Income from Operations | 91,000 | 84,000 |
Interest Expense | 8,000 | 12,000 |
Income Before Income Tax | 83,000 | 72,000 |
Income Tax Expense | 18,000 | 22,000 |
Net Income | \( 65,000 | \) 50,000 |
| SANFIELD, INC. Comparative Balance Sheet December 31, 2018, and 2017 | |||
2018 | 2017 | 2016 | |
Asset | |||
Current Assets: | |||
Cash | \( 99,000 | \) 97,000 | |
Accounts Receivable, Net | 109,000 | 117,000 | \( 100,000 |
Merchandise Inventory | 142,000 | 164,000 | 207,000 |
Prepaid Expenses | 15,000 | 5,000 | |
Total Current Assets | 365,000 | 383,000 | |
Property, Plant, and Equipment, Net | 215,000 | 177,000 | |
Total Assets | \) 580,000 | \( 560,000 | \) 599,000 |
Liabilities | |||
Total Current Liabilities | \( 222,000 | \) 244,000 | |
Long-term Liabilities | 113,000 | 92,000 | |
Total Liabilities | 335,000 | 336,000 | |
Stockholders鈥� Equity | |||
Preferred Stock, 4% | 92,000 | 92,000 | |
Common Stockholders鈥� Equity, no par | 153,000 | 132,000 | 85,000 |
Total Liabilities and Stockholders鈥� Equity | \( 580,000 | \) 560,000 | |
1. Market price of Sanfield鈥檚 common stock: \(51.48 at December 31, 2018, and \)37.08 at December 31, 2017.
2. Common shares outstanding: 16,000 on December 31, 2018 and 15,000 on December 31, 2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
2. Decide (a) whether Sanfield鈥檚 ability to pay debts and sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
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