Chap 19 - Selected Ex & Prob

EXERCISE 19­4 (a)

ACCRA CORPORATION Condensed Income Statements For the Years Ended December 31                                                                                                        

Net sales Cost of goods sold Gross profit Operating expenses Net income

(b)

2006

2005

$600,000  480,000  120,000   57,200 $ 62,800

$500,000  420,000   80,000   44,000 $ 36,000

Increase or (Decrease) During 2005 Amount Percentage $100,000   60,000   40,000   13,200 $ 26,800

 20.0%  14.3%  50.0%  30.0%   74.4%

ACCRA CORPORATION Condensed Income Statements For the Years Ended December 31                                                                                                         Amount Net sales Cost of goods sold Gross profit Operating expenses Net income

2006

$600,000  480,000  120,000   57,200 $ 62,800

PROBLEM 19­4 (a) LIQUIDITY

Percent

2005 Amount Percent

100.0%  80.0%  20.0%   9.5%  10.5%

$500,000  420,000   80,000   44,000 $ 36,000

100.0%  84.0%  16.0%   8.8%   7.2%

2005

2006

Change

Current

$343,000  = 1.9:1 $182,000

$374,000  =1.9:1 $198,000

No change

Acid­test

$195,000  = 1.1:1 $182,000

$216,000  = 1.1:1 $198,000

No change

Receivables   turnover

$790,000  = 8.9 times $89,000 *

$850,000  = 9.2 times $92,000 * *

Increase

Inventory   turnover

$575,000  = 4.7 times $121,500

$620,000  = 4.9 times $127,000

Increase

*($88,000 + $90,000) ÷ 2 $94,000) ÷ 2

**($90,000 + 

An overall increase in short­term liquidity has occurred. PROFITABILITY Profit   margin

$35,000  = 4.4% $790,000

$36,000  = 4.2% $850,000

Asset   turnover

$790,000  = 1.2 times $639,000

$850,000  = 1.3 times Increase $666,000

Return on   assets

$35,000  = 5.5% $639,000

$36,000  = 5.4% $666,000

Decrease

Earnings   per share

$35,000  = $1.75 20,000

$36,000  = $1.80 20,000

Increase

Profitability has remained relatively the same. PROBLEM 19­4 (Continued)

Decrease

(b)

2006

2007

Change

1.

Return on $36,000 common stockhold­ $326,000 (a)  = 11.0% ers’ equity

$45,000  = 10.0% Decrease $448,500 (b)

2.

Debt to total assets

$348,000  = 50.9% $684,000 

$235,000  = 35.4% $700,000

Decrease

3.

Price­ earnings ratio

$9.00  = 5.0 times $1.80

$12.80  = 5.7 times $2.25 (a)

Increase

(a) (b) (c)

($200,000 + $136,000 + $200,000 + $116,000) ÷ 2. ($380,000 + $181,000 + $200,000 + $136,000) ÷ 2. $45,000 ÷ 20,000.

PROBLEM 19­5 (a)

Ratio

Target

Wal­Mart

(All Dollars Are in Millions)   (1)   (2)   (3)   (4)   (5)   (6)   (7)   (8)   (9) (10) (11)

a

÷ 2 ÷ 2

Current Receivables turnover Average collection   period Inventory turnover Days in inventory Profit margin Asset turnover Return on assets Return on common   stockholders’ equity Debt to total assets Times interest earned

1.4:1($9,648 ÷ $7,054) 20.4 ($39,176 ÷ $1,916)

1.0:1     ($28,246 ÷ $27,282) 115.6   ($217,799 ÷ $1,884)

17.9 (365 ÷ 20.4) 3.2 (365  ÷ 115.6) 6.3 ($27,246 ÷ $4,349) 7.8 ($171,562 ÷ $22,028) 57.9 (365 ÷ 6.3) 46.8 (365 ÷ 7.8) 3.5% ($1,374 ÷  3.1% ($6,854 ÷  $39,176) $217,799) 1.8 ($39,176 ÷ $21,822a) 2.7 ($217,799 ÷  c 6.3% ($1,374 ÷  $80,790.5 ) $21,822a) 8.5% ($6,854 ÷  $80,790.5c) 19.1% ($1,374 ÷  b $7,189.5 ) 20.6% ($6,854 ÷ $33,222.5d) 67.5% ($16,294 ÷ $24,154)   57.9% ($48,349 ÷  5.8 ($2,680 ÷ $464) $83,451) 9.1 ($12,077 ÷  $1,326)

($24,154 + $19,490) ÷ 2

c

($7,860 + $6,519) ÷ 2

d

b

($83,451 + $78,130)  ($35,102 + $31,343) 

(b) The comparison of the two companies shows the following: Liquidit  y—Target’s current ratio of 1.4:1 is slightly better  than   Wal­Mart’s   1.0:1.   However,   Wal­Mart   has   a   better  inventory   turnover   ratio   than   Target   and   its   receivables  turnover is significantly better than Target’s. Solvenc  y—Wal­Mart betters Target in both of the solvency  ratios. Thus, it is more solvent than Target.

Profitabilit  y—With   the   exception   of   profit   margins,   Wal­ Mart betters Target in all of the profitability ratios. Thus, it  is more profitable than Target.