Learning Materials
Features
Discover
Chapter 15: Q4RQ (page 835)
Question: What is trend analysis, and how does it differ from horizontal analysis?
Answer
Trend analysis is done by the companies to see the directions in which their business is going.
Both the analysis, i.e., trend and horizontal are almost similar.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
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
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
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.
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.
Question: What is vertical analysis? What item is used as the base for the income statement? What item is used as the base for the balance sheet?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine