ED-15 Performing horizontal analysis - income statement

Data for McCormick Designs, Inc. follow:

MCCormick Designs, INC.

Comparative Income Statement

Years Ended December 31, 2016 and 2015

2016 2015

Net Sales Revenue $431,250 $373,000

Expenses:

Cost of Goods Sold 202,000 189,000

Selling Administrative Expenses 100,050 92,550

Other Expenses 8,000 2,150

Total Expenses 310,050 283,700

Net Income $212,200 $ 89,300

Requirements

• Prepare a horizontal analysis of the comparative income statement of McCormick Designs, Inc. Round percentage changes to one decimal place.
• Why did 2016 net income increase by a higher percentage than net sales revenue?

ED-16 Computing trend analysis

Grand Oaks Realty?s net revenue and net income for the following five-year period, using 2013 as the base year, follow:

2017 2016 2015 2014 2013

Net Revenue $1,315,000 $1,188,000 $1,160,000 $1,011,000 $1,038,000

Net Income 126,000 115,000 82,000 77,000 76,000

Requirements

• Compute a trend analysis for net revenue and net income. Round to the nearest full percent.
• Which grew faster during the period, net revenue or net income?

ED-20 Computing key ratios

The financial statements of Victory?s Natural Foods include the following items:

Current Year Preceding Year

Balance Sheet:

Cash $20,000 $24,000

Short-term Investments 18,000 26,000

Net Account Receivable 50,000 78,000

Merchandise Inventory 70,000 66,000

Prepaid Expenses 12,000 10,000

Total Current Assets 170,000 204,000

Total Current Liabilities 129,000 92,000

Income Statement:

Net Credit Sales $478,000

Cost of Goods Sold 318,000

Compute the following ratios for the current year:

A. Current ratio E. Days? sales in inventory

B. Cash ratio F. Days? sales in receivables

C. Acid-test ratio G. Gross profit percentage (assume all sales are on credit)

D. Inventory turnover

ED-21 Analyzing the ability to pay liabilities

Big Bend Photo Shop has asked you to determine whether the company?s ability to pay current liabilities and total liabilities improved or deteriorated during 2016. To answer this question, you gather the following data:

2016 2015

Cash $56,000 $51,000

Short-term Investments 31,000 0

Net Accounts Receivable 134,000 136,000

Merchandise Inventory 257,000 297,000

Total Assets 540,000 550,000

Total Current Liabilities 285,000 202,000

Long-term Notes Payable 46,000 58,000

Income from Operations 170,000 178,000

Interest Expense 54,000 45,000

Compute the following ratios for 2016 and 2015, and evaluated the company?s ability to pay its current liabilities and total liabilities:

A. Current ratio D. Debt ratio

B. Cash ratio E. Debt to equity ratio

C. Acid-test ratio

Comprehensive Problem for Appendix D

Analyzing a company for its investment potential In its annual report, WRM Athletic Supply, Inc. includes the following five-year financial summary:

WRM ATHLETIC SUPPLY, INC.
Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2020	2019	2018	2017	2016	2015
Net Sales	$290,000	$215,000	$194,000	$165,000	$139,000
Net Sales Increase	35%	11%	18%	19%	17%
Domestic Comparative Store Sales Increase	5%	7%	5%	8%	10%
Other Income - Net	2,050	1,810	1,790	1,660	1,300
Cost of Goods Sold	218,660	163,400	150,350	129,360	110,227
Selling and Administrative Expenses	41,236	36,356	31,679	27,408	22,516
Interest:
Interest Expense	(1,010)	(1,360)	(1,370)	(1,060)	(870)
Interest Income	120	160	165	225	155
Income Tax Expense	4,430	3,830	3,690	3,380	2,760
Net Income	26,834	12,024	8,866	5,677	4,082
Per Share of Common Stock:
Net Income	1.80	1.50	1.40	1.20	0.98
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	$30,400	$27,500	$26,200	$24,900	$21,700
Merchandise Inventory at LIFO Cost	24,200	22,500	21,400	19,900	17,100	$ 16,400
Property, Plant, and Equipment, Net	51,100	45,600	40,700	35,200	25,900
Total Assets	105,700	95,600	88,300	80,000	64,700
Current Liabilities	32,200	27,100	28,700	25,800	16,700
Long-term Debt	22,600	21,700	17,100	18,300	12,600
Stockholders' Equity	50,900	46,800	42,500	35,900	35,400
Financial Ratios
Acid-Test Ratio	0.9	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	27.7%	14.6%	12.2%	9.3%	8.3%
Rate of Return on Common Stockholders' Equity	54.9%	26.9%	22.6%	15.9%	15.4%

Requirements

• Analyzethecompany?sfinancialsummaryforthefiscalyears2016-2020todecidewhethertoinvestinthecommonstockofWRM.Includethefollowingsectionsinyouranalysis,andfullyexplainyourfinaldecision.
  • a.Trendanalysisfornetsalesandnetincome(use2016asthebaseyear).
  • b.Profitabilityanalysis
  • c.Evaluationoftheabilitytosellmerchandiseinventory(WRMusestheLIFOmethod).
  • d.Evaluationoftheabilitytopaydebts.
  • e.Evaluationofdividends.

ED-15 Performing horizontal analysis - income statement Data for McCormick Designs, Inc. follow: MCCormick Designs, INC. Comparative Income Statement Years Ended December 31, 2016 and 2015 Net Sales Revenue Expenses: Cost of Goods Sold Selling Administrative Expenses Other Expenses Total Expenses Net Income 2016 $431,250 2015 $373,000 202,000 100,050 8,000 310,050 $212,200 189,000 92,550 2,150 283,700 $ 89,300 Requirements 1. Prepare a horizontal analysis of the comparative income statement of McCormick Designs, Inc. Round percentage changes to one decimal place. 2. Why did 2016 net income increase by a higher percentage than net sales revenue? ED-16 Computing trend analysis Grand Oaks Realty's net revenue and net income for the following five-year period, using 2013 as the base year, follow: Net Revenue Net Income 2017 $1,315,000 126,000 2016 $1,188,000 115,000 2015 $1,160,000 82,000 2014 $1,011,000 77,000 2013 $1,038,000 76,000 Requirements 1. Compute a trend analysis for net revenue and net income. Round to the nearest full percent. 2. Which grew faster during the period, net revenue or net income? ED-20 Computing key ratios The financial statements of Victory's Natural Foods include the following items: Current Year Balance Sheet: Cash Short-term Investments Net Account Receivable Merchandise Inventory Prepaid Expenses Total Current Assets Total Current Liabilities Income Statement: Net Credit Sales Cost of Goods Sold Preceding Year $20,000 18,000 50,000 70,000 12,000 170,000 129,000 $24,000 26,000 78,000 66,000 10,000 204,000 92,000 $478,000 318,000 Compute the following ratios for the current year: A. Current ratio E. Days' sales in inventory B. Cash ratio F. Days' sales in receivables C. Acid-test ratio G. Gross profit percentage (assume all sales are on credit) D. Inventory turnover ED-21 Analyzing the ability to pay liabilities Big Bend Photo Shop has asked you to determine whether the company's ability to pay current liabilities and total liabilities improved or deteriorated during 2016. To answer this question, you gather the following data: Cash Short-term Investments Net Accounts Receivable Merchandise Inventory Total Assets Total Current Liabilities Long-term Notes Payable Income from Operations Interest Expense 2016 $56,000 31,000 134,000 257,000 540,000 285,000 46,000 170,000 54,000 2015 $51,000 0 136,000 297,000 550,000 202,000 58,000 178,000 45,000 Compute the following ratios for 2016 and 2015, and evaluated the company's ability to pay its current liabilities and total liabilities: a. Current ratio b. Cash ratio c. Acid-test ratio d. Debt ratio e. Debt to equity ratio Comprehensive Problem for Appendix D Analyzing a company for its investment potential In its annual report, WRM Athletic Supply, Inc. includes the following five-year financial summary: WRM ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted) (Dollar amounts in thousands except per share data) 2020 2019 2018 2017 2016 Net Sales $290,000 $215,000 $194,000 $165,000 $139,000 Net Sales Increase 35% 11% 18% 19% 17% Domestic Comparative Store Sales Increase 5% 7% 5% 8% 10% Other Income - Net 2,050 1,810 1,790 1,660 1,300 Cost of Goods Sold 218,660 163,400 150,350 129,360 110,227 Selling and Administrative Expenses 41,236 36,356 31,679 27,408 22,516 Interest: Interest Expense (1,010) (1,360) (1,370) (1,060) (870) Interest Income 120 160 165 225 155 Income Tax Expense 4,430 3,830 3,690 3,380 2,760 Net Income 26,834 12,024 8,866 5,677 4,082 Per Share of Common Stock: Net Income 1.80 1.50 1.40 1.20 0.98 Dividends 0.40 0.38 0.34 0.30 0.26 Financial Position Current Assets, Excluding Merchandise Inventory $30,400 $27,500 $26,200 $24,900 $21,700 Merchandise Inventory at LIFO Cost 24,200 22,500 21,400 19,900 17,100 Property, Plant, and Equipment, Net 51,100 45,600 40,700 35,200 25,900 Total Assets 105,700 95,600 88,300 80,000 64,700 Current Liabilities 32,200 27,100 28,700 25,800 16,700 Long-term Debt 22,600 21,700 17,100 18,300 12,600 Stockholders' Equity Financial Ratios Acid-Test Ratio Rate of Return on Total Assets Rate of Return on Common Stockholders' Equity 50,900 46,800 42,500 35,900 35,400 0.9 27.7% 54.9% 1.0 14.6% 26.9% 0.9 12.2% 22.6% 1.0 9.3% 15.9% 1.3 8.3% 15.4% Requirements 1. Analyze the company's financial summary for the fiscal years 2016-2020 to decide whether to invest in the common stock of WRM. Include the following sections in your analysis, and fully explain your final decision. a. Trend analysis for net sales and net income (use 2016 as the base year). b. Profitability analysis c. Evaluation of the ability to sell merchandise inventory (WRM uses the LIFO method). d. Evaluation of the ability to pay debts. e. Evaluation of dividends. 2015 $ 16,400 WRM ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted) (Dollar amounts in thousands except per share data) 2020 2019 2018 2017 2016 2015 Net Sales $290,000 $215,000 $194,000 $165,000 $139,000 Net Sales Increase 35% 11% 18% 19% 17% Domestic Comparative Store Sales Increase 5% 7% 5% 8% 10% Other Income - Net 2,050 1,810 1,790 1,660 1,300 Cost of Goods Sold 218,660 163,400 150,350 129,360 110,227 Selling and Administrative Expenses 41,236 36,356 31,679 27,408 22,516 Interest: Interest Expense (1,010) (1,360) (1,370) (1,060) (870) Interest Income 120 160 165 225 155 Income Tax Expense 4,430 3,830 3,690 3,380 2,760 Net Income 26,834 12,024 8,866 5,677 4,082 Per Share of Common Stock: Net Income 1.80 1.50 1.40 1.20 0.98 Dividends 0.40 0.38 0.34 0.30 0.26 Financial Position Current Assets, Excluding Merchandise Inventory $30,400 $27,500 $26,200 $24,900 $21,700 Merchandise Inventory at LIFO Cost 24,200 22,500 21,400 19,900 17,100 $ 16,400 Property, Plant, and Equipment, Net 51,100 45,600 40,700 35,200 25,900 Total Assets 105,700 95,600 88,300 80,000 64,700 Current Liabilities 32,200 27,100 28,700 25,800 16,700 Long-term Debt 22,600 21,700 17,100 18,300 12,600 Stockholders' Equity 50,900 46,800 42,500 35,900 35,400 Financial Ratios Acid-Test Ratio 0.9 1.0 0.9 1.0 1.3 Rate of Return on Total Assets 27.7% 14.6% 12.2% 9.3% 8.3% Rate of Return on Common Stockholders' Equity 54.9% 26.9% 22.6% 15.9% 15.4%