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14-58



Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition



b.



148.



Earnings per share decreased due to the decrease in net income from 2013 to 2014.

However, since the stock price increased, the price-earnings ratio increased. The return

on total assets indicates the company is earning 9.8 cents per dollar of assets invested

rather than 12.7 cents form 2013, a modest decrease. The return on common equity

decreased in 2014 due to the decrease in net income and an increase in equity.



Jim Parker is interested in purchasing the stock of Hackett, a company that sells bricks to the

construction industry. Before purchasing the stock, Parker would like to learn as much as possible

about the company in which he is contemplating the potential investment. However, the only

information that Parker has is a portion of Hackett’s annual report for the current year (Year 3),

which contains no comparative data other than the summary of the ratios listed below:

Current ratio

Acid-test ratio

Accounts receivable turnover

Inventory turnover

Return on total assets

Return on common stockholders' equity

Price-earnings ratio

Earnings per share



Year 3

2.8:1

0.8:1

8.9 times

6.1 times

15.50%

18.10%

12.3

$1.53



Year 2

2.3:1

1.0:1

10.1 times

8.1 times

12.10%

14.70%

17.2

$1.52



Year 1

2.1:1

1.2:1

12.5 times

8.3 times

10.30%

11.90%

17.7

$1.55



Is the market price of the company’s stock increasing or decreasing? Support your answer with

accounting justification citing specific information in the analysis.

Answer

Hackett’s market price is declining as seen in the decline of its price-earnings ratio in Year 2 and

Year 3. The price-earnings ratio indicates that the market price per share compared to the earnings

produced by the company is declining. Given the steady earnings per share over the three years,

the factor causing the price-earnings ratio to drop is the stock price.



Chapter 14 Analyzing Financial Statements: A Managerial Perspective



149.



14-59



Comparative financial statements for Smart Buy are shown below for the year’s ending December

31, 2014 and 2013:

Assets

Current assets:

Cash

Accounts receivable

Inventory

Other

Total current assets

Long-term investments

Property, plant and equipment, net

Total assets

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Other current liabilities

Total current liabilities

Long-term debt

Total liabilities

Stockholders’ equity:

Common stock

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity



Net sales

Cost of goods sold

Gross margin

Operating expenses

Operating income

Interest expense

Earnings before income taxes

Income tax expense

Net earnings



2014



December 31

2013



$



14,000

45,489

39,239

3,400

102,128

128,580

789,145

$1,019,853



$ 12,458

35,486

32,568

2,581

83,093

104,600

771,258

$958,951



$



98,789

3,456

102,245

456,781

559,026



$ 85,451

5,157

90,608

414,760

505,368



375,000

85,827

460,827

$1,019,853



375,000

78,583

453,583

$958,951



Year Ended December 31

2014

2013

$2,281,789

$2,074,354

1,505,981

1,348,330

775,808

726,024

458,245

420,408

317,563

305,616

36,542

33,181

281,021

272,435

98,357

95,352

$ 182,664

$ 177,083



Smart Buy had 50,000 common shares outstanding throughout 2014. The December 31, 2014

market price is $43 per share. Calculate the following profitability ratios for 2014 for Smart Buy:

a.

Earnings per share

b.

Price-earnings ratio

c.

Gross margin percentage

d.

Return on total assets

e.

Return on common stockholders’ equity

Answer

a.

b.

c.

d.

e.



$182,664 ÷ 50,000 = $3.65

$43 ÷ $3.65 = $11.78

$775,808 ữ $2,281,789 = 34.0%

($182,664 + ($36,542 ì (1 35%)) ÷ $1,019,853) = 20.2%

$182,664 ÷ $460,827 = 39.6%



14-60



Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition



150.



Comparative financial statements for TJ Cleaners for December 31, 2014 and 2013 follow:

Assets

Current assets:

Cash

Accounts receivable

Inventory

Prepaid expenses

Total current assets

Long-term investments

Property, plant, and equipment, net

Total assets



December 31

2014

2013

12,000

45,489

40,239

3,400

101,128

128,580

867,565

$1,097,273



$ 12,458

37,486

33,568

2,581

86,093

104,600

739,258

$929,951



$



98,789

5,456

104,245

486,781

591,026



$ 85,451

5,157

90,608

424,760

515,368



Stockholders’ equity:

Common stock

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity



375,000

131,247

506,247

$1,097,273



336,000

78,583

414,583

$929,951



Net sales

Cost of goods sold

Gross margin

Operating expenses

Operating income

Interest expense

Earnings before income taxes

Income taxes expense

Net earnings



Year Ended December 31

2014

2013

$2,111,789

$2,174,354

1,505,981

1,648,330

605,808

526,024

418,245

420,408

187,563

105,616

36,542

33,181

151,021

72,435

98,357

15,352

$ 52,664

$ 57,083



Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Other current liabilities

Total current liabilities

Long-term debt

Total liabilities



$



TJ sells all items on account. Calculate the following for TJ Cleaners for 2014:

a.

Asset turnover

b.

Accounts receivable turnover

c.

Days’ sales in inventory

d.

Inventory turnover

e.

Days’ sales in inventory

Answer

a.

b.

c.

d.

e.



$2,111,789 ÷ $1,097,273 = 1.92 times

$2,111,789 ÷ $45,489 = 46.42 times

365 ÷ 46.42 = 7.86 days

$1,505,981 ÷ $40,239 = 37.42 times

365 ÷ 37.42 = 9.75 days



Chapter 14 Analyzing Financial Statements: A Managerial Perspective



151.



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The following information for BuyRite Rooms, a retail furniture and design firm, is presented for

2014 and 2013:

December 31

Assets

2014

2013

Current assets:

Cash

$ 42,000

$ 54,000

Accounts receivable

580,000

445,000

Inventory

5,010,000

4,950,000

Prepaid expenses

84,000

79,000

Total current assets

5,716,000

5,528,000

Building and equipment, net

1,097,000

1,095,000

Total assets

$6,813,000

$6,623,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

Bank loan payable

Other accrued payables

Total current liabilities

Long-term debt

Total liabilities



$ 605,000

679,000

215,000

1,499,000

1,729,000

3,228,000



$ 628,000

625,000

315,000

1,568,000

1,791,000

3,359,000



Stockholders’ equity:

Common stock

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity



1,307,000

2,278,000

3,585,000

$6,813,000



1,307,000

1,957,000

3,264,000

$6,623,000



There were 100,000 shares of common stock outstanding during both years. In addition, the

following information is provided:

2014

2013

Market price per share at the end of year

$

134

$

110

Net income for the year

815,000

639,000

Cost of goods sold for the year

2,900,000

2,700,000

Net sales for the year

5,568,000

5,253,000

a.

b.

Answer

a.



Calculate asset turnover, accounts receivable turnover, days’ sales in receivables,

inventory turnover, and days’ sales in inventory for 2013 and 2014. Use three significant

digits for all calculations.

How well does BuyRite Rooms appear to manage its accounts receivable and inventory?

What suggestions do you have for the company’s managers?

Asset turnover = Net sales ÷ Total assets

2013 = $5,253,000 ÷ $6,623,000 = 0.793

2014 = $5,568,000 ÷ $6,813,000 = 0.817

Accounts receivable turnover = Net credit sales ÷ Accounts receivable

2013 = $5,253,000 ÷ $445,000 = 11.804

2014 = $5,568,000 ÷ $580,000 = 9.600



14-62



Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition



Days’ sales in receivables = 365 ÷ Accounts receivable turnover

2013 = 365 ÷ 11.804 = 30.920 days

2014 = 365 ÷ 9.600 = 38.021 days

Inventory turnover = Cost of goods sold ÷ Inventory

2013 = $2,700,000 ÷ $4,950,000 = 0.545

2014 = $2,900,000 ÷ $5,010,000 = 0.579

Days’ sales in inventory = 365 ÷ Inventory turnover

2013 = 365 ÷ .545 = 669.72 days

2014 = 365 ÷ .579 = 630.40 days

b.



152.



There appears to be a very significant problem related to excess inventory. The company

has approximately 1.7 years of inventory on hand! Quite possibly, return on total assets

could be improved by decreasing inventory. Accounts receivable may need some

attention as the number of days to collect its entire dollar amount of receivables is

increasing.



Hank Hatley is interested in purchasing the stock of Brinker, a company that sells bricks to the

construction industry. Before purchasing the stock, Hatley would like to learn as much as possible

about the company in which he is contemplating a potential investment. However, the only

information that Hatley has is a portion of Brinker’s annual report for the current year (Year 3),

which contains no comparative data other than the summary of the ratios listed below:

Year 3

Year 2

Year 1

Current ratio

2.6:1

2.3:1

2.1:1

Acid-test ratio

0.8:1

1.0:1

1.2:1

Accounts receivable turnover

10.0 times

10.1 times

10.5 times

Inventory turnover

6.1 times

8.1 times

8.3 times

Return on total assets

15.50%

12.10%

10.30%

Return on common stockholders' equity

18.10%

14.70%

11.90%

Price-earnings ratio

12.3

17.2

17.7

Earnings per share

$1.53

$1.52

$1.55

Are customers paying their accounts as well as they were in Year 1? Support your answer with

accounting justification citing specific information in the analysis.



Answer

Yes, customers are paying their accounts almost as well in year 3 as they did in Year 1. In Year 1,

Brinker’s accounts receivable turnover was 10.5, but in Year 3, it dropped to 10.0. This drop

indicates that the balance of accounts receivable is increasing slightly due to lack of collection of

the entire receivable balance. Hatley should consider adding the calculation and assessment of

days’ sales outstanding in the company’s analysis.