2013 = $739,000 ÷ $3,262,000 = 0.227
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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.
14-61
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.