(a)
Annual Report: It is a comprehensive financial report that shows all the business activities that takes place throughout the previous financial year. Its purpose is to provide the complete financial information of a company’s financial activities to its users in order to help them analyze and take well informed decisions.
Financial Ratios: Financial ratios are the metrics used to evaluate the overall financial performance of a company during a specific period of time.
To Compute: the return on common
(a)
Answer to Problem 11.3EYCT
Compute the return on common stockholders’ equity:
For Incorporation A
For Incorporation W
Working notes:
Compute average stockholders’ equity for Incorporation A.
Compute average stockholders’ equity for Incorporation W.
Explanation of Solution
Return on common stockholders’ equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on common stockholders’ equity is as follows:
Therefore, for Incorporation A the Return on Common Stockholders’ equity is (2.4%) and, for Incorporation W the Return on Common Stockholders’ equity is 20.8%
To Compute: the debt to assets ratio for Incorporation A and Incorporation W.
Answer to Problem 11.3EYCT
Compute the debt to assets ratio:
For Incorporation A
For Incorporation W
Working note:
Compute total liabilities value for Incorporation A.
Compute total liabilities value for Incorporation W.
Explanation of Solution
Debt to assets ratio: It is the ratio that measures the ability of a company to meet its long-term obligations out of its total assets available. It shows the relationship of total liabilities and total assets.
The formula to calculate the debt to assets ratio is as follows:
Therefore, for Incorporation A the Debt to assets ratio is 80.3% and, for Incorporation W the Debt to assets ratio is 57.8%.
To Compute: the return on assets ratio for Incorporation A and Incorporation W.
Answer to Problem 11.3EYCT
Compute the return on assets ratio:
For Incorporation A
For Incorporation W
Working notes:
Compute average total assets for Incorporation A.
Compute average total assets for Incorporation W.
Explanation of Solution
Return on assets is used to measure the overall earning ability of the company. Thus, it shows the relationship between the net income and the average total assets.
The formula to calculate the return on assets ratio is as follows:
Therefore, for Incorporation A the Return on assets is (0.5%) and, for Incorporation W the Return on assets is 8.0%.
(b)
To explain: the conclusions concerning the companies’ profitability ratios can be drawn on these ratios.
(b)
Explanation of Solution
From the above calculated ratios in part a, the following conclusions can be drawn concerning both companies’ profitability:
- Return on assets for Incorporation A is negative, that is, (0.5%) and that of Incorporation W is 8.0%. Thus, the positive ratio percentage of Incorporation W indicates that it is more profitable by generating more net income through effective utilization of total assets.
- Return on stockholders’ equity for Incorporation A is negative, that is, (2.4%) and that of Incorporation W is 20.8%. Thus, the positive ratio percentage of Incorporation W indicates that it is more profitable as its shareholders could earn good income from each equity share available to common stockholders.
To find: the company that relies more on debt to boost its return to common shareholders.
Answer to Problem 11.3EYCT
Incorporation A is the company that relies more on debt to boost its return to common shareholders.
Explanation of Solution
Debt to assets for Incorporation A is 80.3%. Thus, the higher ratio percentage of Incorporation A indicates that it relies more on the borrowed funds than its own available assets. Since its interest rate on borrowed funds is more than its return on assets, it provides could not provide good return on common stockholders’ equity.
However, more reliance on debts than assets for Incorporation A has lead to negative return on assets and return on common stockholders’ equity. This would again, increase the risk of non-repayment of debts in future and would adversely affect its liquidity position.
(c)
To Compute: the payout ratio for Incorporation A and Incorporation W.
(c)
Answer to Problem 11.3EYCT
Compute the payout ratio:
For Incorporation A
For Incorporation W
Explanation of Solution
Payout Ratio: It refers to a measure that evaluates the amount of dividends paid to the shareholders out of the net income earned by a corporation. It is generally expressed as a percentage. The formula to calculate the payout ratio is as follows:
Therefore, for Incorporation A the Payout ratio is 0% and, for Incorporation W the Payout ratio is 37.8%.
To find: which company pays out a higher percentage of its earnings.
Explanation of Solution
Incorporation W has a higher percentage of payout ratio of 37.8%. However, Incorporation A with negative net income could not declare any dividends to be paid to its shareholders in the year 2014
Want to see more full solutions like this?
Chapter 11 Solutions
Financial Accounting: Tools for Business Decision Making, 8e WileyPLUS (next generation) + Loose-leaf
- A Preparation of Ratios Refer to the financial statements for Burch Industries in Problem 12-89A and the following data. Required: 1. Prepare all the financial ratios for Burch for 2019 and 2018 (using percentage terms where appropriate and rounding all answers to two decimal places). 2. CONCEPTUAL CONNECTION Explain whether Burchs short-term liquidity is adequate. 3. CONCEPTUAL CONNECTION Discuss whether Burch uses its assets efficiently. 4. CONCEPTUAL CONNECTION Determine whether Burch is profitable. 5. CONCEPTUAL CONNECTION Discuss whether long-term creditors should regard Burch as a high-risk or a low-risk firm. 6. Perform a Dupont analysis (rounding to two decimal places) for 2018 and 2019.arrow_forwardFinancial statement analysis The financial statements for Nike, Inc., are presented in Appendix D at the end of the text. Use the following additional information (in thousands): Instructions 1. Determine the following measures for the fiscal years ended May 31, 2016, and May 31, 2015. Round ratios and percentages to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Asset turnover j. Return on total assets. k. Return on common stockholders equity l. Price-earnings ratio, assuming that the market price was 54.90 per share on May 29, 2016, and 52.81 per share on May 30, 2015 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forwardFinancial Statement Analysis The financial statements for Nike, Inc., are presented in Appendix C at the end of the text. The following additional information (in thousands) is available: Instructions 1. Determine the following measures for the fiscal years ended May 31, 2013 (fiscal 2012), and May 31, 2012 (fiscal 2011), rounding to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Ratio of sales to assets j. Rate earned on total assets, assuming interest expense is 23 million for the year ending May 31, 2013, and 31 million for the year ending May 31, 2012 k. Rate earned on common stockholders equity l. Price-earnings ratio, assuming that the market price was 61.66 per share on May 31, 2013, and 53.10 per share on May 31, 2012 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forward
- Using the following select financial statement information from Black Water Industries, compute the accounts receivable turnover ratios for 2018 and 2019 (round answers to two decimal places). What do the outcomes tell a potential investor about Black Water Industries?arrow_forwardFinancial statement data for years ending December 31 for Latchkey Company follows: a. Determine the ratio of sales to assets for 2016 and 2015. b. Does the change in the ratio of sales to assets from 2015 to 2016 indicate a favorable or an unfavorable trend?arrow_forwardComparing Two Companies in the Same Industry: Chipotle and Panera Bread This case should be completed after responding to the requirements in Decision Case 13-2. Refer to the financial statement information of Chipotle and Panera Bread reprinted at the back of the book. Required Using the format in Example 13-5, prepare common-size comparative income statements for 2014 and 2013, for Panera Bread. Use total revenues as the base (i.e., 100%). Round all percentages to the nearest one-tenth of a percent. The common-size comparative income statements indicate the relative importance of items on the statement. Compare the common-size income statements of Panera Bread and Chipotle. What are the most important differences between the two companies income statements? Using the format in Example 13-4, prepare common-size comparative balance sheets at the end of 2014 and 2013, for Panera Bread. Round all percentages to the nearest one-tenth of a percent. The common-size comparative balance sheets indicate the relative importance of items on the statement. Compare the common-size balance sheets of Panera Bread and Chipotle. What are the most important differences between the two companies balance sheets?arrow_forward
- The average liabilities, average stockholders' equity, and average total assets are as follows: 1. Determine the following ratios for both companies, rounding ratios and percentagesto one decimal place: a. Return on total assets b. Return on stockholders' equity c. Times interest earned d. Ratio of total liabilities to stockholders' equity 2. Based on the information in (1), analyze and compare the two companies'solvency and profitability. Comprehensive profitability and solvency analysis Marriott International, Inc., and Hyatt Hotels Corporation are two major owners and managers of lodging and resort properties in the United States. Abstracted income statement information for the two companies is as follows for a recent year (in millions): Balance sheet information is as follows:arrow_forwardThe following select account data is taken from the records of Reese Industries for 2019. A. Use the data provided to compute net sales for 2019. B. Prepare a simple income statement for the year ended December 31, 2019. C. Compute the gross margin for 2019. D. Prepare a multi-step income statement for the year ended December 31, 2019.arrow_forwardVII. Direction: Compute and interpret. The following comparative financial statements are provided by Avatar Industries. You were asked to compute the different financial ratios and provide your interpretations with regards to profitability, efficiency, liquidity and solvency of the company. Use the Answer Sheet template below to input your answer and solution. AVATAR INDUSTRIES AVATAR INDUSTRIES Comparative Statement of Financial Position For the years 2019 and 2018 Comparative Income Statement For the years 2019 and 2018 2019 2018 2019 2018 ASSETS Current Assets: Sales P200,000 P210,000 Cash & Cash Equivalent P65,000 P70,000 Sales Returns and Allowances 40,000 25,000 Accounts Receivable 40,000 35,000 Net Sales 160,000 185,000 Marketable Securities 40,000 35,000 Cost of Goods Sold 100,000 115,625 Inventory 100,000 80,000 Gross Profit 60,000 69,375 Total Current Assets 245,000 220,000 Operating Expenses: Fixed Assets 200,000 160,000 Selling Expenses 22,000 25,000 Total Assets P445,000…arrow_forward
- Making Business Decisions: Analyzing Wal-Mart's Gross Profit Ratio You are considering an investment in the common stock of Wal-Mart. The following information is from the consolidated statements of income of Wal-Mart Stores, Inc. and Subsidiaries for the years ended January 31, 2016 and 2015 and the consolidated statements of operations for its competitor Target Corporation for the years ended January 30, 2016, and January 31, 2015 (included in the companies’ Form 10-Ks, amounts in millions of dollars): Wal-Mart Target (in millions) Year EndedJanuary 31, 2016 Year EndedJanuary 31, 2015 Year EndedJanuary 30, 2016 Year EndedJanuary 31, 2015 Sales* $478,614 $482,229 $73,785 $72,618 Cost of sales 360,984 365,086 51,997 51,278 *Described as net sales by Wal-Mart. Calculate the gross profit ratios for Wal-Mart and Target for 2016 and 2015. Enter the amounts as a percent, rounded to one decimal place.arrow_forwardSpecialty Department Stores chief executive officer (CEO) has asked you to compare the company's profit performance and financial position with the average for the industry. The CEO has given you the company's income statement and balance sheet, as well as the industry average data for retailers. Assets \table[[Current assets, %,.71.1%arrow_forwardSolve and perform the different financial ratios using the financial statements of XYZ Company for the year 2021. 1. Current Ratio 2. Quick Ratio 3. Receivables Turnover 4. Inventory Turnover 5. Debt Ratio 6. Equity Ratio 7. Times Interest Earned 8. Gross Profit Margin 9. Operating Profit Margin 10. Net Profit Marginarrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning