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Financial and Managerial Accounting 15th Edition Solution key book pdf

Financial and Managerial Accounting 15th Edition Solution key book pdf by meigs and meigs

  1. . Solution Manual Managerial Accounting 15th Edition Financial Statement Analysis Ray H. Garrison, Eric W. Noreen, Peter C. Brewer C h a p t e r – 1 5
  2. 2. 1 Chapter 15 Financial Statement Analysis Solutions to Questions 15-1 Horizontal analysis examines how a particular item on a financial statement such as sales or cost of goods sold behaves over time. Vertical analysis involves analysis of items on an income statement or balance sheet for a single period. In vertical analysis of the income statement, all items are typically stated as a percentage of sales. In vertical analysis of the balance sheet, all items are typically stated as a percentage of total assets. 15-2 By looking at trends, an analyst hopes to get some idea of whether a situation is improving, remaining the same, or deteriorating. Such analyses can provide insight into what is likely to happen in the future. Rather than looking at trends, an analyst may compare one company to another or to industry averages using common-size financial statements. 15-3 Price-earnings ratios reflect investors’ expectations concerning future earnings. The higher the price-earnings ratio, the greater the growth in earnings investors expect. For this reason, two companies might have the same current earnings and yet have quite different price-earnings ratios. By definition, a stock with current earnings of $4 and a price-earnings ratio of 20 would be selling for $80 per share. 15-4 A rapidly growing tech company would probably have many opportunities to make investments at a rate of return higher than stockholders could earn in other investments. It would be better for the company to invest in such opportunities than to pay out dividends and thus one would expect the company to have a low dividend payout ratio. 15-5 The dividend yield is the dividend per share divided by the market price per share. The other source of return on an investment in stock is increases in market value. 15-6 Financial leverage results from borrowing funds at an interest rate that differs from the rate of return on assets acquired using those funds. If the rate of return on the assets is higher than the interest rate at which the funds were borrowed, financial leverage is positive and stockholders gain. If the return on the assets is lower than the interest rate, financial leverage is negative and the stockholders lose. 15-7 If the company experiences big variations in net cash flows from operations, stockholders might be pleased that the company has no debt. In hard times, interest payments might be very difficult to meet. On the other hand, if investments within the company can earn a rate of return that exceeds the interest rate on debt, stockholders would get the benefits of positive leverage if the company took on debt. 15-8 The market value of a share of common stock often exceeds the book value per share. Book value represents the cumulative effects on the balance sheet of past activities, evaluated using historical prices. The market value of the stock reflects investors’ expectations about the company’s future earnings. For most companies, market value exceeds book value because investors anticipate future earnings growth. 15-9 A 2 to 1 current ratio might not be adequate for several reasons. First, the composition of the current assets may be heavily weighted toward slow-turning and difficult-to-liquidate inventory, or the inventory may contain large amounts of obsolete goods. Second, the receivables may be low quality, including large amounts of accounts that may be difficult to collect.
  3. 3. Managerial Accounting, 15th Edition The Foundational 15 1. The earnings per share is computed as follows: Net income Earnings per share = Average number of common shares outstanding $92,400 = = $0.77 per share 120,000 shares 2. The price-earnings ratio is computed as follows: Market price per share Price-earnings ratio = Earnings per share $2.75 = = 3.57 (rounded) $0.77 3. The dividend payout ratio is computed as follows: Dividends per share Dividend payout ratio = Earnings per share $0.55 = = 71% (rounded) $0.77 The dividend yield ratio is computed as follows: Dividends per share Dividend yield ratio = Market price per share $0.55 = = 20% $2.75
  4. 4. 3 The Foundational 15 (continued) 4. The return on total assets is computed as follows: Net income + [Interest expense × (1 – Tax rate)] Return on total assets = Average total assets $92,400 + [$8,000 × (1 – 0.30)] = =21.5% $450,000 + $460,000 /2 5. The return on equity is computed as follows: Net incomeReturn on = equity Average stockholders’ equity $92,400 = = 28% ($320,000 + $340,000)/2 6. The book value per share is computed as follows: Total stockholders’ equity Book value per share = Number of common shares outstanding $320,000 = = $2.67 per share (rounded) 120,000 shares 7. The working capital and current ratio are computed as follows: Working capital = Current assets – Current liabilities = $150,000 – $60,000 = $90,000 Current assets Current ratio = Current liabilities $150,000 = = 2.50 $60,000
  5. 5. Managerial Accounting, 15th Edition The Foundational 15 (continued) 8. The acid-test ratio is computed as follows: Cash + Marketable securities + Accounts receivable + Short-term notes Acid-test ratio = Current liabilities $35,000 + $0 + $60,000 + $0 = = 1.58 (rounded) $60,000 9. The accounts receivable turnover is calculated as follows: Sales on accountAccounts receivable = turnover Average accounts receivable balance $700,000 = = 12.73 (rounded) ($60,000 + $50,000)/2 The average collection period is computed as follows: 365 days Average collection period = Accounts receivable turnover 365 days = = 28.67 days (rounded) 12.73 10. The inventory turnover is computed as follows: Cost of goods sold Inventory turnover = Average inventory balance $400,000 = = 6.96 (rounded) ($55,000 + $60,000)/2 The average sale period is computed as follows: 365 days Average sale period = Inventory turnover 365 days = = 52.44 days (rounded) 6.96
  6. 6. 5 The Foundational 15 (continued) 11. The operating cycle is computed as follows: Operating cycle = Average sale period + Average collection period = 52.44 days + 28.67 days = 81.11 days 12. The total asset turnover is computed as follows: Sales Total asset turnover = Average total assets $700,000 = = 1.54 (rounded) ($450,000 + $460,000)/2 13. The times interest earned ratio is computed as follows: Earnings before interest expense and income taxesTimes interest = earned ratio Interest expense $140,000 = = 17.5 $8,000 14. The debt-to-equity ratio is computed as follows: Total liabilities Debt-to-equity ratio = Stockholders’ equity $130,000 = = 0.41 (rounded) $320,000 15. The equity multiplier is computed as follows: Average total assets Equity multiplier = Average stockholders’ equity ($450,000 + $460,000)/2 = = 1.38 (rounded) ($320,000 + $340,000)/2
  7. 7. Managerial Accounting, 15th Edition Exercise 15-1 (15 minutes) 1. This Year Last Year Sales…………………………………………….. 100.0% 100.0% Cost of goods sold…………………………… 62.3 58.6 Gross margin………………………………….. 37.7 41.4 Selling and administrative expenses: Selling expenses …………………………… 18.5 18.2 Administrative expenses …………………. 8.9 10.3 Total selling and administrative expenses 27.4 28.5 Net operating income……………………….. 10.3 12.9 Interest expense …………………………….. 1.2 1.4 Net income before taxes …………………… 9.1% 11.5% 2. The company’s major problem seems to be the increase in cost of goods sold, which increased from 58.6% of sales last year to 62.3% of sales this year. This suggests that the company is not passing the increases in costs of its products on to its customers. As a result, cost of goods sold as a percentage of sales has increased and gross margin has decreased. This change has been offset somewhat by reduction in administrative expenses as a percentage of sales. Note that administrative expenses decreased from 10.3% to only 8.9% of sales over the two years. However, this decrease was not enough to completely offset the increased cost of goods sold, so the company’s net income decreased as a percentage of sales this year.
  8. 8. 7 Exercise 15-2 (10 minutes) 1. Calculation of working capital: Current assets…………….. $25,080 Current liabilities …………. 10,400 Working capital …………… $14,680 2. Calculation of the current ratio: Current assets Current ratio = Current liabilities $25,080 = = 2.41 (rounded) $10,400 3. Calculation of the acid-test ratio: Cash + Marketable securities + Accounts receivable Acid-test ratio = Current liabilities $1,280 + $0 + $12,300 = = 1.31 (rounded) $10,400
  9. 9. Managerial Accounting, 15th Edition Exercise 15-3 (20 minutes) 1. Calculation of accounts receivable turnover: Sales on accountAccounts receivable = turnover Average accounts receivable balance $79,000 = = 7.38 (rounded) ($12,300 + $9,100)/2 2. Calculation of the average collection period: 365 days Average collection period = Accounts receivable turnover 365 days = = 49.46 days (rounded) 7.38 3. Calculation of inventory turnover: Cost of goods sold Inventory turnover = Average inventory balance $52,000 = = 5.81 (rounded) ($9,700 + $8,200)/2 4. Calculation of the average sale period: 365 days Average sale period = Inventory turnover 365 days = = 62.82 days (rounded) 5.81
  10. 10. 9 Exercise 15-3 (continued) 5. The operating cycle is computed as follows: Operating cycle = Average sale period + Average collection period = 62.82 days + 49.46 days = 112.28 days 6. The total asset turnover is computed as follows: Sales Total asset turnover = Average total assets $79,000 = = 1.64 (rounded) ($50,280 + $45,960)/2
  11. 11. Managerial Accounting, 15th Edition Exercise 15-4 (10 minutes) 1. Calculation of the times interest earned ratio: Earnings before interest expense and income taxesTimes interest = earned ratio Interest expense $6,500 = = 10.8 $600 2. Calculation of the debt-to-equity ratio: Total liabilities Debt-to-equity ratio = Stockholders’ equity $15,400 = = 0.44 $34,880 3. Calculation of the equity multiplier: Average total assets Equity multiplier = Average stockholders’ equity ($50,280 + $45,960)/2 = = 1.45 (rounded) ($34,880 + $31,660)/2
  12. 12. 11 Exercise 15-5 (10 minutes) 1. Calculation of the gross margin percentage: Gross margin Gross margin percentage = Sales $27,000 = = 34.2% $79,000 2. Calculation of the net profit margin percentage: Net income Net profit margin percentage = Sales $3,540 = = 4.5% (rounded) $79,000 3. Calculation of the return on total assets: Net income + [Interest expense × (1 – Tax rate)] Return on total assets = Average total assets $3,540 + [$600 × (1 – 0.40)] = = 8.1% ($50,280 + $45,960)/2 4. Calculation of the return on equity: Net income Return on equity = Average total stockholders’ equity $3,540 = = 10.64% ($34,880 + $31,660)/2
  13. 13. Managerial Accounting, 15th Edition Exercise 15-6 (15 minutes) 1. Calculation of the earnings per share: Net income Earnings per share = Average number of common shares outstanding $3,540 = = $4.43 per share (rounded) 800 shares 2. Calculation of the price-earnings ratio: Market price per share Price-earnings ratio = Earnings per share $18 = = 4.06 (rounded) $4.43 3. Calculation of the dividend payout ratio: Dividends per share Dividend payout ratio = Earnings per share $0.40 = = 9.03% $4.43 4. Calculation of the dividend yield ratio: Dividends per share Dividend yield ratio = Market price per share $0.40 = = 2.22% (rounded) $18.00 5. Calculation of the book value per share: Total stockholders’ equity Book value per share = Number of common shares outstanding $34,880 = = $43.60 per share 800 shares
  14. 14. 13 Exercise 15-7 (15 minutes) 1. The trend percentages are: Year 1 Year 2 Year 3 Year 4 Year 5 Sales ………………………….. 100.0 110.0 115.0 120.0 125.0 Current assets: Cash ………………………… 100.0 130.0 96.0 80.0 60.0 Accounts receivable …….. 100.0 115.0 135.0 170.0 190.0 Inventory ………………….. 100.0 110.0 115.0 120.0 125.0 Total current assets ……….. 100.0 112.6 120.3 133.7 142.1 Current liabilities …………… 100.0 110.0 130.0 145.0 160.0 2. Sales: The sales are increasing at a steady and consistent rate. Assets: The most noticeable thing about the assets is that the accounts receivable have been increasing at a rapid rate—far outstripping the increase in sales. This disproportionate increase in receivables is probably the chief cause of the decrease in cash over the five-year period. The inventory seems to be growing at a well- balanced rate in comparison with sales. Liabilities: The current liabilities are growing more rapidly than the total current assets. The reason is probably traceable to the rapid buildup in receivables in that the company doesn’t have the cash needed to pay bills as they come due.

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