P15-1 Comparative statement data for Douglas Company and Maulder Company, two competitors, appear below. All balance sheet data are as of December 31, 2009, and December 31, 2008.
Douglas Company Maulder Company
2009 2008 2009 2008
Net sales $1,549,035 $339,038
Cost of goods sold 1,080,490 241,000
Operating expenses 302,275 79,000
Interest expense 8,980 2,252
Income tax expense 54,500 6,650
Current assets 325,975 $ 312,410 83,336 $ 79,467
Plant assets (net) 521,310 500,000 139,728 125,812
Current liabilities 65,325 75,815 35,348 30,281
Long-term liabilities 108,500 90,000 29,620 25,000
Common stock, $10 par 500,000 500,000 120,000 120,000
Retained earnings 173,460 146,595 38,096 29,998
Instructions
(a) Prepare a vertical analysis of the 2009 income statement data for Douglas Company and Maulder Company in columnar form.
(b) Comment on the relative profitability of the companies by computing the return on assets and the return on common stockholders’ equity ratios for both companies.
P15-6 The comparative statements of Dillon Company are presented below.
DILLON COMPANY
Income Statement
For Year Ended December 31
2009 2008
Net sales (all on accounts) $ 600,000 $ 520,000
Expenses
Cost of goods sold 415,000 354,000
Selling and administrative 120,800 114,800
Interest Expense 7,800 6,000
Income tax expense 18,000 $ 14,000
Net income 561,600 488,800
$ 38,400 $ 31,200
DILLON COMPANY
Balance Sheet
December 31
Assets 2009 2008
Current assets
Cash 21,000 18,000
Short term investments 18,000 15,000
Accounts receivable (net) 86,000 74,000
Inventory 90,000 70,000
Total Current assets 215,000 177,000
Plant assets (net) 423,000 383,000
Total assets $ 638,000 $ 560,000
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 122,000 $ 110,000
Income taxes payable 23,000 20,000
Total current liabilities $ 145,000 $ 130,000
Long term liabilities
Bonds payable 120,000 80,000
Total liabilities $ 265,000 $ 210,000
Stockholders’' equity
Common stock ($5 par) 150,000 150,000
Retained earnings 223,000 200,000
Total stockholder' equity 373,000 350,000
Total liabilities & stockholders equity $ 638,000 $ 560,000
Additional data:
The common stock recently sold at $19.50 per share.
The year-end balance in the allowance for doubtful accounts was $3,000 for 2009 and $2,400 for 2008.
Instructions
Compute the following ratios for 2009.
(a) Current. (h) Return on common stockholders’ equity.
(b) Acid-test. (i) Earnings per share.
(c) Receivables turnover. (j) Price-earnings.
(d) Inventory turnover. (k) Payout.
(e) Profit margin. (l) Debt to total assets.
(f) Asset turnover. (m) Times interest earned.
(g) Return on assets.
Chosen by Asker
Cash flows from operating activities-
Cash received from customers $230,000
Cash paid for merchandise (115,000)
Cash paid for wages and other operating expenses (81,000)
Cash paid for interest (10,000)
Cash paid for taxes (12,000)
Net cash provided by operating activities 12,000
Prepare a vertical analysis of the 2009 income statement data for Douglas Company and
Maulder Company in columnar form.
To compute the ratios requested in the question, you first need to understand what each ratio represents and how to calculate it. Here's an explanation of each ratio and the formula to calculate it:
(a) Current Ratio:
The current ratio measures a company's ability to pay its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities.
Current Ratio = Current Assets / Current Liabilities
(b) Acid-Test Ratio:
The acid-test ratio, also known as the quick ratio, is a more stringent measure of a company's ability to pay its short-term liabilities. It excludes inventory from current assets since inventory may be more difficult to quickly convert to cash. It is calculated by dividing the sum of cash, short-term investments, and accounts receivable by current liabilities.
Acid-Test Ratio = (Cash + Short-term Investments + Accounts Receivable) / Current Liabilities
(c) Receivables Turnover:
The receivables turnover ratio measures how quickly a company collects its accounts receivable during a period. It is calculated by dividing net credit sales by the average accounts receivable balance.
Receivables Turnover = Net Credit Sales / Average Accounts Receivable
(d) Inventory Turnover:
The inventory turnover ratio measures how efficiently a company manages its inventory. It is calculated by dividing cost of goods sold by the average inventory balance.
Inventory Turnover = Cost of Goods Sold / Average Inventory
(e) Profit Margin:
The profit margin ratio measures the profitability of a company by indicating how much net income is generated for each dollar of net sales. It is calculated by dividing net income by net sales.
Profit Margin = Net Income / Net Sales
(f) Asset Turnover:
The asset turnover ratio measures how efficiently a company uses its assets to generate sales. It is calculated by dividing net sales by average total assets.
Asset Turnover = Net Sales / Average Total Assets
(g) Return on Assets:
The return on assets ratio measures the profitability of a company by indicating how much net income is generated for each dollar of assets. It is calculated by dividing net income by average total assets.
Return on Assets = Net Income / Average Total Assets
(h) Return on Common Stockholders' Equity:
The return on common stockholders' equity ratio measures the profitability of a company from the perspective of common stockholders. It is calculated by dividing net income minus preferred stock dividends by average common stockholders' equity.
Return on Common Stockholders' Equity = (Net Income - Preferred Stock Dividends) / Average Common Stockholders' Equity
(i) Earnings Per Share:
The earnings per share ratio measures the profitability of a company on a per share basis. It is calculated by dividing net income minus preferred stock dividends by the weighted average number of common shares outstanding.
Earnings Per Share = (Net Income - Preferred Stock Dividends) / Weighted Average Number of Common Shares Outstanding
(j) Price-Earnings Ratio:
The price-earnings ratio compares the market price per share of a company's stock to its earnings per share. It is calculated by dividing the market price per share by earnings per share.
Price-Earnings Ratio = Market Price Per Share / Earnings Per Share
(k) Payout Ratio:
The payout ratio measures the percentage of earnings that is distributed to shareholders as dividends. It is calculated by dividing dividends per share by earnings per share.
Payout Ratio = Dividends Per Share / Earnings Per Share
(l) Debt to Total Assets:
The debt to total assets ratio measures the proportion of a company's assets that are financed by debt. It is calculated by dividing total liabilities by total assets.
Debt to Total Assets = Total Liabilities / Total Assets
(m) Times Interest Earned:
The times interest earned ratio measures a company's ability to cover its interest expense with its operating income. It is calculated by dividing operating income by interest expense.
Times Interest Earned = Operating Income / Interest Expense
Now that you understand what each ratio represents and how to calculate it, you can use the given data to compute these ratios for 2009 for the Dillon Company.