Financial accounting
Financial accounting
3rd Edition
ISBN: 9780077506902
Author: David J Spieceland Wayne Thomas Don Herrmann
Publisher: Mcgraw-Hill
Question
Book Icon
Chapter 12, Problem 12.2APFA

1.

To determine

To complete:  Amount and columns to be used in a horizontal analysis of the income statements for Company AE

1.

Expert Solution
Check Mark

Explanation of Solution

Horizontal Analysis: Horizontal analysis is prepared to make comparison between the financial statements to determine the changes in the financial statements for the previous year to the current year. The changes of the company are measured in dollars as well as in percentage.

Following is the Amount and percentage columns to be used in a horizontal analysis of the income statements for Company AE for the Year Ended February 2, 2013.

Company AE
Comparative Income Statement
For the Year Ended February 2, 2013
      Increase (Decrease)
Particulars 2013 (A) 2012 (B) Amount Percentage
Net sales $3,475,802 $3,120,065 $355,737 11.40%
Less: Cost of sales $2,085,480 $1,975,471 $110,009 5.57%
Gross profit $1,390,322 $1,144,594 $245,728 21.47%
Less: Selling, General and administrative expenses $834,601 $718,123 $116,478 16.22%
Loss on impairment $34,869 $19,178 $15,691 81.82%
Depreciation $126,246 $137,958 ($11,712) -8.49%
Operating income $394,606 $269,335 $125,271 46.51%
Other income(expense) net $7,432 $5,874 $1,558 26.52%
Income before taxes $402,038 $275,209 $126,829 46.08%
Less: Income tax expense $137,940 $99,930 $38,010 38.04%
Income from continuing operations $264,098 $175,279 $88,819 50.67%
Less: Loss from discontinued operations $31,990 $23,574 $8,416 35.70%
Net income $232,108 $151,705 $80,403 53.00%

Table (1)

2.

To determine

To Calculate: The given risk ratios for Company AE for 2013.

2.

Expert Solution
Check Mark

Answer to Problem 12.2APFA

The given risks ratios for Company AE for 2013 are:

  1. a. Receivables turnover ratio – 80.24 times
  2. b. Average Collection period – 4.54 days
  3. c. Inventory turnover ratio – 5.95 times
  4. d. Average days in inventory – 61.34 days
  5. e. Current ratio2.61:1
  6. f. Acid-test ratio – 1.55:1
  7. g. Debt to equity ratio – 43.79%

Explanation of Solution

Risk Ratios: Risk ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the risk of a company:

  1. a. Receivables turnover ratio: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return. It is calculated by using the following formula:

    Receivables turnover ratio = Net Credit salesAverage Accounts Receivables×100

    Calculate the receivables turnover ratio for Company AE for 2013:

    Receivables turnover ratio = Net Credit salesAverage Accounts Receivables=$3,475,802$43,315.5 (1)=80.24 times

Determine the amount of average account receivables.

Average account receivables =(Opening account receivables)+(Closing account receivables)2=$40,310+$46,3212=$86,6312=$43,315.5 (1)

  1. b. Average collection period: This ratio is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

Average collection period=365 DaysReceivables turnover ratio

Calculate the average collection period for Company AE for 2013:

Average collection period=365 DaysReceivables turnover ratio=365 Days80.24 times=4.54 days

  1. c. Inventory Turnover Ratio: This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period.

    Formula: Inventory turnover ratio=Cost of Goods SoldAverage Inventory

    Calculate the inventory turnover ratio for Company AE for 2013:

    Inventory turnover ratio=Cost of Goods SoldAverage Inventory=$2,085,480$349,983 (2)=5.95 times

Determine the amount of average inventory.

Average inventory =(Opening inventory)+(Closing inventory)2=$367,514+$332,4522=$699,9662=$349,983 (2)

  1. d. Average days in inventory: This ratio is determined as the number of days a particular company takes to make sales of the inventory available with them.

    Formula: Average days in inventory = 365 daysInventory turnover ratio

    Calculate the average days in inventory for Company AE for 2013:

    Average days in inventory = 365 daysInventory turnover ratio=365 days5.95=61.34 days

  2. e. Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

    Formula:

    Current ratio = Current AssetsCurrent Liabilities

    Calculate the current ratio for Company AE for 2013:

    Current ratio = Current AssetsCurrent Liabilities=$1,141,800$435,902=2.61:1

  3. f. Acid-test Ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.

Formula:

Acid testRatio=Cash + Short-term investments + Accounts ReceivablesCurrent Liabilities

Calculate the acid test ratio for Company AE for 2013:

Acid testRatio=Cash + Short-term investments + Accounts ReceivablesCurrent Liabilities= $$509,119 + $121,873 +$46,321$435,902=$677,313$435,902=1.55:1

  1. g. Debt to equity Ratio: Debt to equity ratio is used by the company to determine how well the company is able to survive the losses without damaging the creditors’ interest. It is determined by dividing total debt and total equity. 

    Formula:

    Debt to Equity Ratio=Total Liabilities Stockholder's Equity

    Calculate the debt to equity ratio for Company AE for 2013:

    Debt to Equity Ratio=Total Liabilities Stockholder's Equity=$534,866$1,221,187=43.79%

3.

To determine

To Calculate: The given profitability ratios for Company AE for 2013.

3.

Expert Solution
Check Mark

Answer to Problem 12.2APFA

The given profitability ratios for Company AE for 2013 are:

  1. a. Gross Profit ratio – 40.00%
  2. b. Return on Assets ratio – 12.52%
  3. c. Profit margin – 6.67%
  4. d. Assets turnover ratio – 1.87 times
  5. e. Return on Equity ratio –17.59%

Explanation of Solution

Profitability ratios: In general, financial ratios are used to evaluate capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the profitability of a company:

  1. a. Gross Profit ratio: Gross profit ratio is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold. It is calculated by using the following formula:

    Gross Profit ratio = Gross ProfitNet Sales×100

    Calculate the gross profit ratio for Company AE for 2013:

    Gross Profit ratio = Gross ProfitNet Sales×100=$1,390,322$3,475,802×100=40.00%

  2. b. Return on asset ratio: Rate of return on total assets measures the profit generated from the use of total assets.

Formula:

Return on assets ratio=Net IncomeAverage total assets

Calculate the return on asset ratio for Company AE for 2013:

Return on assets ratio=Net IncomeAverage total assets×100=$232,108$1,853,427.5 (3)×100=12.52%

Determine the amount of average total assets.

Average total assets =(Opening total assets)+(Closing total assets)2=$1,950,802+$1,756,0532=$3,706,8552=$1,853,427.5 (3)

  1. c. Profit margin: Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.

    Formula: Profit Margin=Net incomeNet sales

    Calculate the profit margin ratio for Company AE for 2013:

    Profit Margin ratio=Net incomeNet sales= $232,108$3,475,802=6.67%

  2. d. Assets turnover ratio: Asset turnover ratio is used to determine the asset’s efficiency towards sales.

    Formula: Asset turnover =NetrevenueAverage total assets

    Calculate the assets turnover ratio for Company AE for 2013:

    Asset turnover =Net salesAverage total assets=$3,475,802$1,853,427.5 (3)=1.87 times

  3. e. Return on Equity ratio: Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.

    Formula:

    Return on equity ratio=Net IncomeAverage total assetsAverage total liabilities

    Calculate the return on equity ratio for Company AE for 2013:

    Return on equity ratio=Net IncomeAverage stockholder's equity×100=$232,108$1,319,019 (4)×100=17.59%

Determine the amount of average stockholders’ equity.

Average stockholders' equity =(Opening stockholders' equity)+(Closing stockholders' equity)2=$1,416,851+$1,221,1872=$2,638,0382=$1,319,019 (4)

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 12 Solutions

Financial accounting

Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education