management accounting concept and application by cabrera pdf

8/10/2019 management accounting concept and application by cabrera pdf

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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

CHAPTER 5

FINANCIAL STATEMENTS ANALYSIS - II

I. Questions

1. By looking at trends, an analyst hopes to get some idea of whether asituation is improving, remaining the same, or deteriorating. Suchanalyses can provide insight into what is likely to happen in the future.Rather than looking at trends, an analyst may compare one company toanother or to industry averages using common-size financial statements.

. Ratios highlight relationships, movements, and trends that are verydifficult to perceive looking at the raw underlying data standing alone.!lso, ratios make financial data easier to grasp "y putting the data intoperspective. !s to the limitation in the use of ratios, refer to page 1#.

$. %rice-earnings ratios are determined "y how investors see a firm&s futureprospects. 'urrent reported earnings are generally considered to "e usefulonly so far as they can assist investors in (udging what will happen in thefuture. )or this reason, two firms might have the same current earnings,"ut one might have a much higher price-earnings ratio if investors view itto have superior future prospects. In some cases, firms with very smallcurrent earnings en(oy very high price-earnings ratios. *his is simply"ecause investors view these firms as having very favora"le prospects forearnings in future years. By definition, a stock with current earnings of%+ and a price-earnings ratio of would "e selling for % per share.

+. ! manager&s financing responsi"ilities relate to the acuisition of assetsfor use in his or her company. *he acuisition of assets can "e financed ina num"er of ways, including through issue of ordinary shares, throughissue of preference shares, through issue of long-term de"t, throughleasing, etc. ! manager&s operating responsi"ilities relate to how theseassets are used once they have "een acuired. *he return on total assetsratio is designed to measure how well a manager is discharging his or heroperating responsi"ilities. It does this "y looking at a company&s income

"efore any consideration is given as to how the income will "e distri"utedamong capital resources, i.e., "efore interest deductions.

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Chapter 5 Financial Statement Analysis II

/. )inancial leverage, as the term is used in "usiness practice, means

o"taining funds from investment sources that reuire a fi0ed annual rateof return, in the hope of enhancing the well-"eing of the ordinaryshareholders. If the assets in which these funds are invested earn at a rategreater that the return reuired "y the suppliers of the funds, then leverageis positive in the sense that the e0cess accrues to the "enefit of theordinary shareholders. If the return on assets is less than the returnreuired "y the suppliers of the funds, then leverage is negative in thesense that part of the earnings from the assets provided "y the ordinaryshareholders will have to go to make up the deficiency.

. 2ow a shareholder would feel would depend in large part on the sta"ilityof the firm and its industry. If the firm is in an industry that e0perienceswide fluctuations in earnings, then shareholders might "e very pleased thatno interest-paying de"t e0ists in the firm&s capital structure. In hardtimes, interest payments might "e very difficult to meet, or earnings might"e so poor that negative leverage would result.

3. 4o, the stock is not necessarily overpriced. Book value represents thecumulative effects on the "alance sheet of past activities evaluated usinghistorical prices. *he market value of the stock reflects investors& "eliefsa"out the company&s future earning prospects. )or most companiesmarket value e0ceeds "ook value "ecause investors anticipate futuregrowth in earnings.

. ! company in a rapidly growing technological industry pro"a"ly would

have many opportunities to invest its earnings at a high rate of return5thus, one would e0pect it to have a low dividend payout ratio.

#. It is more difficult to o"tain positive financial leverage from preferenceshares than from long-term de"t due to the fact that interest on long-termde"t is ta0 deducti"le, whereas dividends paid on preference shares are notta0 deducti"le.

1. *he current ratio would pro"a"ly "e highest during 6anuary, when "othcurrent assets and current lia"ilities are at a minimum. 7uring peakoperating periods, current lia"ilities generally include short-term"orrowings that are used to temporarily finance inventories andreceiva"les. !s the peak periods end, these short-term "orrowings are paidoff, there"y enhancing the current ratio.

11. ! -to-1 current ratio might not "e adeuate for several reasons. )irst, thecomposition of the current assets may "e heavily weighted toward slow-

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Financial Statement Analysis II Chapter 5

turning inventory, or the inventory may consist of large amounts of

o"solete goods. Second, the receiva"les may "e large and of dou"tfulcollecti"ility, or the receiva"les may "e turning very slowly due to poorcollection procedures.

1. 80penses 9including the cost of goods sold: have "een increasing at aneven faster rate than net sales. *hus Sunday is apparently havingdifficulty in effectively controlling its e0penses.

1$. If the company&s earnings are very low, they may "ecome almostinsignificant in relation to stock price. ;hile this means that the p


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earning 1= on the original investment, "ut this is interesting history

rather than useful decision-making information.

13. ! corporate net income of %1 million would "e unreasona"ly low for alarge corporation, with, say, %1 million in sales, %/ million in assets,and %+ million in euity. ! return of only %1 million for a company ofthis size would suggest that the owners could do much "etter "y investingin insured "ank savings accounts or in government "onds which would "evirtually risk-free and would pay a higher return.

@n the other hand, a profit of %1 million would "e unreasona"ly high for acorporation which had sales of only %/ million, assets of, say, %$ million,and euity of perhaps one-half million pesos. In other words, the netincome of a corporation must "e (udged in relation to the scale of

operations and the amount invested.

II. True or False

1. *rue $. *rue /. *rue 3. *rue #. )alse. *rue +. )alse . *rue . *rue 1. )alse

III. Problems

"ro#le$ 1 (Co$$on Si%e In&o$e State$ents)

'ommon size income statements for / and A

2006 2005Sales................................................. 1= 1='ost of goods sold............................. 3ross profit....................................... $+= $$=@perating e0penses........................... #4et income........................................ = +=*he changes from / to are all favora"le. Sales increased and thegross profit per peso of sales also increased. *hese two factors led to asu"stantial increase in gross profit. !lthough operating e0penses increased inpeso amount, the operating e0penses per peso of sales decreased from # centsto cents. *he com"ination of these three favora"le factors caused netincome to rise from + cents to cents out of each peso of sales.

"ro#le$ (Measures o' Liuiit*)

Requirement (a)

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'urrent assetsA

'ash % +3,Carketa"le securities 13/,+!ccounts receiva"le $,/+Inventory 13#,Dne0pired insurance +,/

*otal current assets %$3,'urrent lia"ilitiesA

4otes paya"le % 3,!ccounts paya"le 1/,+$Salaries paya"le 3,/3Income ta0es paya"le 1+,Dnearned revenue 1,

*otal current lia"ilities %3,

Requirement (b)

*he current ratio is . to 1. It is computed "y dividing the current assets of%$3, "y the current lia"ilities of %3,. *he amount of workingcapital is %+#,, computed "y su"tracting the current lia"ilities of%3, from the current assets of %$3,.

*he company appears to "e in a strong position as to short-run de"t-payinga"ility. It has almost three pesos of current assets for each peso of currentlia"ilities. 8ven if some losses should "e sustained in the sale of themerchandise on hand or in the collection of the accounts receiva"le, it appears

pro"a"le that the company would still "e a"le to pay its de"ts as they fall duein the near future. @f course, additional information, such as the credit termson the accounts receiva"le, would "e helpful in a careful evaluation of thecompany&s current position.

"ro#le$ ! (Co$$on-Si%e In&o$e State$ent)

Requirement 12006 2005

Sales........................................................................................................................1. = 1. =Eess cost of goods sold............................................................................................$. .ross margin...........................................................................................................$. +.Selling e0penses.......................................................................................................1. 13./!dministrative e0penses..........................................................................................1$. 1+.*otal e0penses....................................................................................................... ..$1. $.14et operating income.............................................................................................../. 3.#Interest e0pense.......................................................................................................1.+ 1.

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4et income "efore ta0es...........................................................................................$. = .# =

Requirement 2

*he company&s ma(or pro"lem seems to "e the increase in cost of goods sold,which increased from .= of sales in / to $.= of sales in . *hissuggests that the company is not passing the increases in costs of its productson to its customers. !s a result, cost of goods sold as a percentage of saleshas increased and gross margin has decreased. Selling e0penses and intereste0pense have "oth increased slightly during the year, which suggests that costsgenerally are going up in the company. *he only e0ception is theadministrative e0penses, which have decreased from 1+.= of sales in / to1$.= of sales in . *his pro"a"ly is a result of the company&s efforts toreduce administrative e0penses during the year.

"ro#le$ + (Co$parin, Operatin, esults .ith A/era,e "er'or$an&e inthe Inustr*)

Requirement (a)Ms. Freeze,

Inc.Industry Averae

Sales 9net: 1= 1='ost of goods sold +# /3ross profit on sales /1= +$=@perating e0pensesA

Selling 1= 1=

eneral and administrative 13 *otal operating e0penses $= $=@perating income 1$= 3=Income ta0es $4et income........................................ 3= +=

Requirement (b)

Cs. )reeze&s operating results are significantly "etter than the averageperformance within the industry. !s a percentage of sales revenue, Cs.)reeze&s operating income and net income after nearly twice the average forthe industry. !s a percentage of total assets, Cs. )reeze&s profits amount toan impressive $= as compared to 1+= for the industry.

*he key to Cs. )reeze&s success seems to "e its a"ility to earn a relativelyhigh rate of gross profit. Cs. )reeze&s e0ceptional gross profit rate 9/1=:pro"a"ly results from a com"ination of factors, such as an a"ility to command

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a premium price for the company&s products and production efficiencies which

lead to lower manufacturing costs.

!s a percentage of sales, Cs. )reeze&s selling e0penses are five points higherthan the industry average 91= compared to 1=:. 2owever, these highere0penses may e0plain Cs. )reeze&s a"ility to command a premium price forits products. Since the company&s gross profit rate e0ceeds the industryaverage "y percentage points, the higher-than-average selling costs may "epart of a successful marketing strategy. *he company&s general andadministrative e0penses are significantly lower than the industry average,which indicates that Cs. )reeze&s management is a"le to control e0penseseffectively.

"ro#le$ 5 (Co$$on-Si%e State$ents)

Requirement 1

*he income statement in common-size form would "eA

2006 2005Sales......................................................... 1.= 1.=Eess cost of goods sold............................. /. .ross margin............................................ $/. +.Eess operating e0penses............................ .$ $.+4et operating income............................. ... .3 #.Eess interest e0pense................................ 1. 1.4et income "efore ta0es............................ 3./ .

Eess income ta0es 9$=:.......................... .$ .+4et income......................... ................... ... /.$= /.=

*he "alance sheet in common-size form would "eA

2006 2005'urrent assetsA

'ash..........................................................

.= /.1=

!ccounts receiva"le, net..........................................................

1/. 1.1

Inventory..........................................................

$.1 1/.

%repaid e0penses..........................................................

1. 1.$

*otal current assets +.1 $1.

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%lant and euipment................................. /1.# .+

*otal assets............................................... 1.= 1.=

Eia"ilitiesA'urrent lia"ilities............................... /.1= 1.3=Bonds paya"le, 1=........................... .1 /.$

*otal lia"ilities............................. +/.1 $.8uityA

%reference shares, =, %1 par 1/. 1#.

@rdinary shares, %/ par 1. 1.3

Retained earnings #. $.+

*otal euity /+.# .

*otal lia"ilities and euity......................... 1.= 1.=

Note2 'olumns do not total down in all cases due to rounding differences.

Requirement 2

*he company&s cost of goods sold has increased from percent of sales in/ to / percent of sales in . *his appears to "e the ma(or reason thecompany&s profits showed so little increase "etween the two years. Some"enefits were realized from the company&s cost-cutting efforts, as evidenced "ythe fact that operating e0penses were only .$ percent of sales in ascompared to $.+ percent in /. Dnfortunately, this reduction in operatinge0penses was not enough to offset the increase in cost of goods sold. !s aresult, the company&s net income declined from /. percent of sales in / to/.$ percent of sales in .

"ro#le$ 0 (Sol/en&* o' Ala#an, Super$ar3et)

Requirement (a)(!es"s inMi##i"ns)

'urrent assetsA'ash % 3+.

Receiva"les 1/.3Cerchandise inventories 1,1#1.%repaid e0penses #/ ./

*otal current assets %1,/1+ .

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Fuick assetsA'ash % 3+.Receiva"les 1/ .3

*otal uick assets % 3 ./

Requirement (b)

91: 'urrent ratioA'urrent assets 9Re. a: %1,/1+.'urrent lia"ilities %1,#$#.

'urrent ratio 9%1,/1+. %1,#$#.: . to 1

9: Fuick ratioAFuick assets 9Re. a: % 3./'urrent lia"ilities %1,#$#.

Fuick ratio 9%3./ %1,#$#.: .1 to 1

9$: ;orking capitalA'urrent assets 9Re. a: %1,/1+.EessA 'urrent lia"ilities %1,#$#.

;orking capital %9++.:

Requirement (c)

4o. It is difficult to draw conclusions from the a"ove ratios. !la"angSupermarket&s current ratio and uick ratio are well "elow GsafeH levels,according to traditional rules of thum". @n the other hand, some largecompanies with steady ash flows are a"le to operate successfully with currentratios lower than !la"ang Supermarket&s.

Requirement (d)

7ue to characteristics of the industry, supermarkets tend to have smalleramounts of current assets and uick assets than other types of merchandising

companies. !n inventory of food has a short shelf life. *herefore, theinventory of a supermarket usually represents only a few weeks& sales. @thermerchandising companies may stock inventories representing several months&sales. !lso, supermarkets sell primarily for cash. *hus, they have relatively

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few receiva"les. !lthough supermarkets may generate large amounts of cash,

it is not profita"le for them to hold assets in this form. *herefore, they arelikely to reinvest their cash flows in "usiness operations as uickly aspossi"le.

Requirement (e)

In evaluating !la"ang Supermarket&s liuidity, it would "e useful to review thecompany&s financial position in prior years, statements of cash flows, and thefinancial ratios of other supermarket chains. @ne might also ascertain thecompany&s credit rating from an agency such as 7un Bradstreet.

$"te t" Instruct"rA %rior to the year in which the data for this pro"lem wascollected, !la"ang Supermarket had reported a negative retained earnings"alance in its "alance sheet for several consecutive periods. *he fact that!la"ang Supermarket has only recently removed the deficit from its financialstatements is also worrisome.

"ro#le$ (6alan&e Sheet Measures o' Liuiit* an Creit is3)

Requirement (a)

91: Fuick assetsA'ash % +3,/+Carketa"le securities 9short-term: //,#!ccounts receiva"le $,//$

*otal uick assets %13,$

9: 'urrent assetsA'ash % +3,/+Carketa"le securities 9short-term: //,#!ccounts receiva"le $,//$Inventories $,1%repaid e0penses /,3$

*otal current assets %1+,#+#

9$: 'urrent lia"ilitiesA

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4otes paya"le to "anks 9due within one year: % ,

!ccounts paya"le /,#17ividends paya"le 1,++!ccrued lia"ilities 9short-term: 1,/$Income ta0es paya"le ,+$

*otal current lia"ilities % //,$

Requirement (b)

91: Fuick ratioAFuick assets 9Re. a: %13,$'urrent lia"ilities 9Re. a: % //,$

Fuick ratio 9%13,$ %//,$: .$ to 1

9: 'urrent ratioA'urrent assets 9Re. a: %1+,#+#'urrent lia"ilities 9Re. a: % //,$

'urrent ratio 9%1+,#+# %//,$: $. to 1

9$: ;orking capitalA'urrent assets 9Re. a: %1+,#+#EessA 'urrent lia"ilities 9Re. a: //,$

;orking capital %1#,+$

9+: 7e"t ratioA*otal lia"ilities 9given: % 1,$*otal assets 9given: %$/$,1

7e"t ratio 9%1,$ %$/$,1: $.1=

Requirement (c)

91: )rom the viewpoint of short-term creditors, Bon"on Sweets& appear%i%#y liuid. Its uick and current ratios are well a"ove normal rules ofthum", and the company&s cash and marketa"le securities alone are almosttwice its current lia"ilities.

9: Eong-term creditors also have little to worry a"out. 4ot only is thecompany highly liuid, "ut creditors& claims amount to only 2&.1' oftotal assets. If Bon"on Sweets& were to go out of "usiness and liuidate

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its assets, it would have to raise only $ cents from every peso of assets

for creditors to emerge intact.

9$: )rom the viewpoint of shareholders, Bon"on Sweets& appears overlyliuid. 'urrent assets generally do not generate high rates of return.*hus, the company&s relatively large holdings of current assets dilutes itsreturn on total assets. *his should "e of concern to shareholders. IfBon"on Sweets is una"le to invest its highly liuid assets moreproductively in its "usiness, shareholders pro"a"ly would like to see themoney distri"uted as dividends.

"ro#le$ 4 (Sele&te 8inan&ial Measures 'or Short-ter$ Creitors)

Requirement 1

'urrent assets 9%, J %+, J %3/, J%1,:..............................................................................................................%1,$,

'urrent lia"ilities 9%1,$, K ./:...................................................................... /,

;orking capital.......................................................................................................% 3,Requirement 2

Requirement &

a. ;orking capital would not "e affectedA

'urrent assets 9%1,$, > %1,:.................................................................%1,,'urrent lia"ilities 9%/, > %1,:............................................................... +,;orking capital................................................................................................ .......% 3,

". *he current ratio would riseA

"ro#le$ (Sele&te 8inan&ial atios)

5-1

!cid-test ratio ?'ash J Carketa"le securities J !ccounts receiva"le

'urrent lia"ilities

!cid-test ratio ?%, J % J %+,

%/, ? 1.+ to 1 9rounded:

'urrent ratio ?'urrent assets

'urrent lia"ilities

'urrent rate ? %1,,%+, ? .# to 1 9rounded:


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1. ross margin percentageA

. 'urrent ratioA

$. !cid-test ratioA

+. !ccounts receiva"le turnoverA

/. Inventory turnoverA

. 7e"t-to-euity ratioA

3. *imes interest earnedA

5-1!

ross marginSales

%+,%,1, ? +=?

'urrent assets

'urrent lia"ilities

%+#,

%,? .+/ to 1?

Fuick assets

'urrent lia"ilities

%11,

%, ? .#1 to 1 9rounded:?

Sales!verage accounts receiva"les

%,1,%1/, ? 1+ times?

$/ days1+ times ? .1 days 9rounded:

'ost of goods sold!verage inventory

%1,,%, ? +./ times?

$/ days

+./ times? 1.1 days to turn 9rounded:

*otal lia"ilities*otal euity

%/,%, ? .$ to 1 9rounded:?

8arnings "efore interestand income ta0esInterest e0pense

%1,%$, ? . times?


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. Book value per shareA

!100,000 t"ta# ar va#ue * !5 ar va#ue er s%are + 20,000 s%ares

"ro#le$ 17 (Sele&te 8inan&ial atios 'or Orinar* Shareholers)

1. 8arnings per shareA

. 7ividend payout ratioA

$. 7ividend yield ratioA

+. %rice-earnings ratioA

"ro#le$ 11 (Sele&te 8inan&ial atios 'or Orinar* Shareholers)

1. Return on total assetsA

5-1+

8uity@rdinary shares outstanding

%,, sharesL ? %+ per share?

4et income to ordinary shares!verage ordinary shares

outstanding

%1/,, shares ? %/./ per share?

7ividends paid per share

8arnings per share

%$.1/

%/./? =?

7ividends paid per share

Carket price per share

%$.1/

%$.? /=?

Carket price per share8arnings per share

%$.%/./

? 1.?

Return on totalassets

?4et income J MInterest e0pense 0 91 > *a0 rate:N

!verage total assets

?%1/, J M%$, 0 91 > .$:N

O 9%1,1, J %1,$,:

%1,

%1,,? 1./=?


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. Return on ordinary shareholders& euityA

$. )inancial leverage was positive, since the rate of return to the ordinaryshareholders 91$.=: was greater than the rate of return on total assets91./=:. *his positive leverage is tracea"le in part to the company&scurrent lia"ilities, which may carry no interest cost, and to the "ondspaya"le, which have an after-ta0 interest cost of only 3=.

1= interest rate P 91 > .$: ? 3= after-ta0 cost.

IQ. Cases

Case 1 (Co$$on-Si%e State$ents an 8inan&ial atios 'or Creitors)

Requirement 1

%is -ear ast -ear a. 'urrent assets %,, %1,+3,

'urrent lia"ilities 1,1, ,;orking capital % #, % 3,

". 'urrent assets 9a: %,, %1,+3,'urrent lia"ilities 9": %1,1, %,'urrent ratio 9a: K 9": 1.3 to 1 .+/ to 1

c. Fuick assets 9a: %3+, %/,'urrent lia"ilities 9": %1,1, %,!cid-test ratio 9a: K 9": .3 to 1 1. to 1

d. Sales on account 9a: %3,, %,,!verage receiva"les 9": %//, %$3/,*urnover of receiva"les 9a: K 9": 1$.$ times 1. times

5-15

Return on ordinaryshareholders& euity ?

4et income > preference dividends

!verage ordinary shareholders& euity

?%1/,

O 9%3/, J %,:

%1/,

%3,/? 1$.= 9rounded:?


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!verage age of receiva"lesA

$/ K turnover 3.+ days . days

e. 'ost of goods sold 9a: %/,+, %+,,!verage inventory 9": %1,/, %3,Inventory turnover 9a: K 9": /.1 times .$ times

*urnover in daysA $/ K turnover 31. days /3.# daysf. *otal lia"ilities 9a: %1,/, %1,$/,

8uity 9": %,1/, %1,#/,7e"t-to-euity ratio 9a: K 9": . to 1 .# to 1

g. 4et income "efore interest and ta0es 9a: %$, %+#,Interest e0pense 9": %#, %#,*imes interest earned 9a: K 9": 3. times /.+ times

Requirement 2

a. C8*R@ BDIE7I4 SD%%E'ommon-Size Balance Sheets

%is -ear ast -ear

'urrent assetsA'ash .$ = .1 =Carketa"le securities . 1./!ccounts receiva"le, net 1.$ 1.1

Inventory $./ +.%repaid e0penses ./ .

*otal current assets /1./ ++./%lant and euipment, net +./ //./*otal assets 1. = 1. =

Eia"ilitiesA'urrent lia"ilities 3./ = 1. =Bonds paya"le, 1= 1. .3

*otal lia"ilities +.$ +.#

8uityA%reference shares, %/ par, = /. .1@rdinary shares, %1 par 1./ 1/.Retained earnings $.$ $3.#

*otal euity /$. /#.1*otal lia"ilities and euity 1. = 1. =

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4oteA 'olumns do not total down in all cases due to rounding.

". C8*R@ BDIE7I4 SD%%E'ommon-Size Income Statements

%is -ear ast -ear Sales 1. = 1. =Eess cost of goods sold 33.1 .ross margin .# .Eess operating e0penses 1$.# 11.4et operating income #. .Eess interest e0pense 1.$ 1./4et income "efore ta0es 3.3 .3Eess income ta0es $.1 .34et income +. = +. =

Requirement &

*he following points can "e made from the analytical work in parts 91: and 9:a"oveA

*he company has improved its profit margin from last year. *his isattri"uta"le to an increase in gross margin, which is offset somewhat "y anincrease in operating e0penses. In "oth years the company&s net income as a

percentage of sales euals or e0ceeds the industry average of +=.

!lthough the company&s working capital has increased, its current positionactually has deteriorated significantly since last year. Both the current ratioand the acid-test ratio are well "elow the industry average, and "oth aretrending downward. 9*his shows the importance of not (ust looking at theworking capital in assessing the financial strength of a company.: iven thepresent trend, it soon will "e impossi"le for the company to pay its "ills asthey come due.

*he drain on the cash account seems to "e a result mostly of a large "uildup inaccounts receiva"le and inventory. *his is evident "oth from the common-size"alance sheet and from the financial ratios. 4otice that the average age of thereceiva"les has increased "y / days since last year, and that it is now # daysover the industry average. Cany of the company&s customers are not takingtheir discounts, since the average collection period is 3 days and collectionterms are


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customers, or sales to customers who are poor credit risks. %erhaps the

company has "een too aggressive in e0panding its sales.

*he inventory turned only / times this year as compared to over times lastyear. It takes three weeks longer for the company to turn its inventory than theaverage for the industry 931 days as compared to / days for the industry:.*his suggests that inventory stocks are higher than they need to "e.

In the authors& opinion, the loan should "e approved on the condition that thecompany take immediate steps to get its accounts receiva"le and inventory"ack under control. *his would mean more rigorous checks ofcreditworthiness "efore sales are made and perhaps paring out of slow payingcustomers. It would also mean a sharp reduction of inventory levels to a moremanagea"le size. If these steps are taken, it appears that sufficient fundscould "e generated to repay the loan in a reasona"le period of time.

Case (8inan&ial atios 'or Orinar* Shareholers)

Requirement 1

a. %is -ear ast -ear 4et income %$+, %+,Eess preference dividends 1, 1,4et income remaining for ordinary 9a:

%$, %+,!verage num"er of ordinary shares 9":

/, /,8arnings per share 9a: K 9": %.1 %+.+

". @rdinary dividend per share 9a:L %.1 %1.Carket price per share 9": %+/. %$.7ividend yield ratio 9a: K 9": +.= $.$$=

L%1, K /, shares ? %.15%, K /, shares ? %1.

c. @rdinary dividend per share 9a:...............................................................................%.1 %1.8arnings per share 9":...................................................................................... .......%.1 %+.+

7ividend payout ratio 9a: K 9":................................................................................$/.1= .=

d. Carket price per share 9a:.......................................................................................%+/. %$.

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8arnings per share 9":...................................................................................... .......%.1 %+.+

%rice-earnings ratio 9a: K 9":...................................................................................3.$ .

Investors regard Cetro Building Supply less favora"ly than other firms inthe industry. *his is evidenced "y the fact that they are willing to pay only3.$ times current earnings for a share of the company&s stock, ascompared to # times current earnings for the average of all stocks in theindustry. If investors were willing to pay # times current earnings forCetro Building Supply&s stock, then it would "e selling for a"out %// pershare 9# P %.1:, rather than for only %+/ per share.

e. %is -ear ast -ear 8uity......................................................................................................................%,1/, %1,#/,Eess preference shares............................................................................................. , ,@rdinary euity 9a:..................................................................................................%1,#/, %1,3/,

4um"er of ordinary shares 9":................................................................................./, /,Book value per share 9a: K 9":.................................................................................%$#. %$/.

! market price in e0cess of "ook value does not mean that the price of astock is too high. Carket value is an indication of investors& perceptionsof future earnings and


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shareholders 9a:...................................................................................................

!verage total euityL...............................................................................................%,/, %1,,Eess average preference shares................................................................................ , ,!verage ordinary euity 9":.....................................................................................%1,/, %1,,

L1 .$:........................................................................................ .+,

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%1, P 91 > .$:........................................................................................ . 3,

*otal 9a:...................................................................................................................% $+, % $,

!verage total assets 9":............................................................................................%/,$$, %+,+,Return on total assets 9a: K 9":.................................................................................= /.1=

". 4et income..............................................................................................................% , % 1,

Eess preference dividends........................................................................................ +, +,

4et income remaining for ordinary 9a:.....................................................................% $, % 1,

!verage total euity.................................................................................................%$,1, %$,,Eess average preference shares................................................................................ , ,!verage ordinary euity 9":.....................................................................................%,/, %,+,

Return on ordinary euity 9a: K 9":..........................................................................#.= +.#=

c. Eeverage is positive for this year, since the return on ordinary euity9#.=: is greater than the return on total assets 9.=:. )or last year,leverage is negative since the return on the ordinary euity 9+.#=: is lessthan the return on total assets 9/.1=:.

Requirement 2

a. 4et income remaining for ordinary 9a: % $, % 1,!verage num"er of ordinary shares 9": /, /,8arnings per share 9a: K 9": %+.+ %.+

". @rdinary dividend per share 9a: %1.++ %.3Carket price per share 9": %$. %.7ividend yield ratio 9a: K 9": +.= $.=

%is -ear ast -ear c. @rdinary dividend per share 9a: %1.++ %.3

8arnings per share 9": %+.+ %.+7ividend payout ratio 9a: K 9": $1.= $.=

d. Carket price per share 9a: %$. %.8arnings per share 9": %+.+ %.+

%rice-earnings ratio 9a: K 9": 3. .$

4otice from the data given in the pro"lem that the average %


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a %


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!verage receiva"les 9": %3/, %/,

!ccounts receiva"le turnover 9a: K 9": 3. times 3.+ times!verage age of receiva"les,

$/ K turnover / days +# days

e. 'ost of goods sold 9a: %+,, %$,$,!verage inventory 9": %1,/, %3,Inventory turnover 9a: K 9": +. times +. times4um"er of days to turn inventory,

$/ days K turnover 9rounded: #1 days 3# days

f. *otal lia"ilities 9a: %,/, %1,#,8uity 9": %$,, %$,+,7e"t-to-euity ratio 9a: K 9": .3 to 1 .$ to 1

g. 4et income "efore interest and ta0es 9a: %/, %$+,Interest e0pense 9": %1, %1,*imes interest earned 9a: K 9": +.$ times $.+ times

Requirement /

!s stated "y Ceri Ramos, "oth net income and sales are up from last year.*he return on total assets has improved from /.1= last year to .= this year,and the return on ordinary euity is up to #.= from +.#= the year "efore.But this appears to "e the only "right spot in the company&s operating picture.Qirtually all other ratios are "elow the industry average, and, more important,

they are trending downward. *he deterioration in the gross margin percentage,while not large, is worrisome. Sales and inventories have increasedsu"stantially, which should ordinarily result in an improvement in the grossmargin percentage as fi0ed costs are spread over more units. 2owever, thegross margin percentage has declined.

4otice particularly that the average age of receiva"les has lengthened to /daysa"out three weeks over the industry averageand that the inventoryturnover is /= longer than the industry average. @ne wonders if the increasein sales was o"tained at least in part "y e0tending credit to high-riskcustomers. !lso notice that the de"t-to-euity ratio is rising rapidly. If the%1,, loan is granted, the ratio will rise further to 1.# to 1.

In the author&s opinion, what the company needs is more euitynot morede"t. *herefore, the loan should not "e approved. *he company should "eencouraged to make another issue of ordinary stock in order to provide a"roader euity "ase on which to operate.

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Case + (State$ent e&onstru&tion Usin, atios)

Bulacan 'ompanyIncome Statement

)or the ear 8nded 7ecem"er $1, /

Sales %1+,EessA 'ost of Sales (+) +,+ross %rofit % /,$EessA 80penses +,$4et Income (1) % 1,

Bulacan 'ompanyBalance Sheet

7ecem"er $1, /

! s s e t s

'urrent !ssetsA'ash % 3,3!ccounts Receiva"le (5) ,1Cerchandise Inventory (!) 1,1

*otal 'urrent !ssets () % 33,)i0ed !ssets (4) //,*otal !ssets %1$,

Eia"ilities and 8uity

'urrent Eia"ilitiesA!ccounts %aya"le () % ++,

8uityAShare 'apital 9issued ,

shares: (0) %+,Retained 8arnings +, ,

*otal Eia"ilities and 8uity %1$,

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u"rtin "mutati"ns

91: 8arnings %er Share ?

%./ ?

T 94et Income: ? %1,

9: 'urrent !ssets %00 1.3/'urrent Eia"ilities 00 1;orking 'apital %$$, .3/

'urrent Eia"ilities ? %$$, .3/

? %++,9$: 'urrent Ratio ?

1.3 ?

T 9'urrent !ssets: ? %33,

Fuick Ratio ?

1.3 ?

T 9'urrent !ssets: ? %//,

'urrent !ssets %33,Fuick !ssets //,Inventory %1,1

9+: Inventory turnover ?

+ ?

T 9'ost of Sales: ? %+,+

5-5

4et Income

@rdinary Shares @utstanding

T

,

T

++,

T

++,

T%1,1

'urrent !ssets

'urrent Eia"ilities

Fuick !ssets

'urrent Eia"ilities

'ost of Sales

!ve. Inventory


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9/: !verage age of outstanding ?!ccounts Receiva"le

? 3$ days 9!verage age ofreceiva"les:

? /

? /

T 9Receiva"les: ? %,1

!nother CethodA

? 3$ days ? %,1 !ccounts receiva"le

9: 8arnings for the year as a percentage of Share 'apital

? /=

Share 'apital ? %+,

93: 'urrent )i0ed 'urrent Eia"ilities J!ssets !ssets ? 8uity

%33, J ./T ? %++, J T

.$3/T ? %$$,

T ? %, 8uity

9: )i0ed !ssets to 8uity

? ./

? ./

T 9)i0ed !ssets: ? %//,

5-0

%1+,

$/

%1+,

T

%1,

Share 'apital

T

%1+,

Fuick !ssets

'urrent Eia"ilities

J

$/

/

4et Sales

!verage Receiva"les

)i0ed !ssets

8uity


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Case 5 (Ethi&s an the Mana,er)

Requirement 1

*he loan officer stipulated that the current ratio prior to o"taining the loanmust "e higher than ., the acid-test ratio must "e higher than 1., and theinterest on the loan must "e no more than four times net operating income.*hese ratios are computed "elowA

*he company would fail to ualify for the loan "ecause "oth its current ratioand its acid-test ratio are too low.

Requirement 2

By reclassifying the %+/ thousand net "ook value of the old machine asinventory, the current ratio would improve, "ut there would "e no effect on theacid-test ratio. *his happens "ecause inventory is considered to "e a currentasset "ut is not included in the numerator when computing the acid-test ratio.

8ven if this tactic had succeeded in ualifying the company for the loan, we

5-

!cid-test ratio ?'ash J Carketa"le securities J !ccounts receiva"le

'urrent lia"ilities

!cid-test ratio ?%3, J % J %/,

%1+,? .3 9rounded:

4et operating income

Interest on the loan

%,

%, 0 .1 0 9


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#. ! 1#. ! #. 7 $#. '

1. B . ' $. ! +. '

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management accounting concept and application by cabrera pdf

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