demonstration problem chapter 11 – problem 13 ratio analysis – comprehensive problem accounting...
TRANSCRIPT
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Demonstration Problem
Chapter 11 – Problem 13
Ratio Analysis – Comprehensive Problem
AccountingWhat the Numbers Mean 10e
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Problem Definition• Presented below are summarized data from the balance sheets and
income statements of Wiper, Inc.:
WIPER, INC.Condensed Balance Sheets
December 31, 2014, 2013, and 2012
2014 2013 2012
Current assets . . . . . . . . . . . . . $ 677 $ 891 $ 736Other assets. . . . . . . . . . . . . . . 2,413 1,920 1,719 $3,090 $2,811 $2,455
Current liabilities . . . . . . . . . . . . $ 562 $ 803 $ 710Other liabilities. . . . . . . . . . . . . . 1,521 982 827Stockholders’ equity. . . . . . . . . . 1,007 1,026 918 $3,090 $2,811 $2,455
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Problem Definition
WIPER, INC.Selected Income Statement Data and Other Data For the Years Ended December 31, 2014 and 2013
(in millions)
Income statement data: 2014 2013
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,050 $2,913 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 296 310 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 84 65 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 187Other data: Average number of common shares outstanding. . . . . 41.3 46.7 Total dividends paid . . . . . . . . . . . . . . . . . . . . . . . $ 50.0 $ 52.3
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a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in part e.
Problem Definition
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g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.
j. Calculate the times interest earned ratio for 2014 and 2013.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
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a.
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
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2014 ROI =
Problem Solution
ROI = Margin x Turnover
Net income Net income . Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050)
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2013 ROI =
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2013 ROI = ($187 / $2,913)
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI
2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover = 7.1% ROI
Problem Solution
ROI = Margin x Turnover
Net income Net income Sales Average total assets Sales Average total assets
a.
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a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in part e.
Problem Definition
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b.
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE =
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE = $192 / (($1,007 + $1,026) / 2)
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE =
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE = $187
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE = $187 / (($1,026 + $918) / 2)
Problem Solution
ROE = Net income / Average stockholders’ equity
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b.
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE = $187 / (($1,026 + $918) / 2) = 19.2%
Problem Solution
ROE = Net income / Average stockholders’ equity
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a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for
each of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in part e.
Problem Definition
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Problem Solution
c. 2014 2013 2012
Current assets . . . . . . . . . . . . . $677 $891 $736
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Problem Solution
c. 2014 2013 2012
Current assets . . . . . . . . . . . . . $677 $891 $736
Current liabilities . . . . . . . . . . (562) (803) (710)
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Problem Solution
c. 2014 2013 2012
Current assets . . . . . . . . . . . . . $677 $891 $736
Current liabilities . . . . . . . . . . (562) (803) (710)
Working capital (CA –CL) . . . $115 $ 88 $ 26
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Problem Solution
c. 2014 2013 2012
Current assets . . . . . . . . . . . . . $677 $891 $736
Current liabilities . . . . . . . . . . (562) (803) (710)
Working capital (CA –CL) . . . $115 $ 88 $ 26 Current ratio (CA / CL) . . . . . 1.2 1.1 1.0
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a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in part e.
Problem Definition
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d.
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS =
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192 / 41.3
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192 / 41.3 = $4.65
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192 / 41.3 = $4.65
2013 EPS =
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192 / 41.3 = $4.65
2013 EPS = $187
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192 / 41.3 = $4.65
2013 EPS = $187 / 46.7
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
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d.
2014 EPS = $192 / 41.3 = $4.65
2013 EPS = $187 / 46.7 = $4.00
Problem Solution
EPS = Net income / Weighted-average number of shares outstanding
![Page 41: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/41.jpg)
a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at
the end of 2014, what was the market price of the stock?
f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.
Problem Definition
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e.
Problem Solution
Price/Earnings Ratio = Market Price / Earnings Per Share
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e.
13 =
Problem Solution
Price/Earnings Ratio = Market Price / Earnings Per Share
![Page 44: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/44.jpg)
e.
13 = $???
Problem Solution
Price/Earnings Ratio = Market Price / Earnings Per Share
![Page 45: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/45.jpg)
e.
13 = $??? / $4.65
Problem Solution
Price/Earnings Ratio = Market Price / Earnings Per Share
![Page 46: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/46.jpg)
e.
13 = $??? / $4.65
Market price =
Problem Solution
Price/Earnings Ratio = Market Price / Earnings Per Share
![Page 47: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/47.jpg)
e.
13 = $??? / $4.65
Market price = $60.45
Problem Solution
Price/Earnings Ratio = Market Price / Earnings Per Share
![Page 48: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/48.jpg)
a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.
b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each
of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and
the dividend yield based on the market price calculated in part e.
Problem Definition
![Page 49: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/49.jpg)
f.
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
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f.
$50 million
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
![Page 51: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/51.jpg)
f.
$50 million / 41.3 million
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
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f.
$50 million / 41.3 million = $1.21
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
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f.
$50 million / 41.3 million = $1.21
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
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f.
$50 million / 41.3 million = $1.21
$1.21 per share
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
![Page 55: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/55.jpg)
f.
$50 million / 41.3 million = $1.21
$1.21 per share / $60.45 per share
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
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f.
$50 million / 41.3 million = $1.21
$1.21 per share / $60.45 per share = 2%
Problem Solution
Cash dividends per share = Total cash dividends /
Weighted average shares outstanding
Dividend yield = Cash dividends per share / Market price per share
![Page 57: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/57.jpg)
g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.
j. Calculate the times interest earned ratio for 2014 and 2013.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
![Page 58: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/58.jpg)
g.
Problem Solution
Dividend payout ratio = Dividends per share / Earnings per share
![Page 59: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/59.jpg)
g.
$1.21 per share
Problem Solution
Dividend payout ratio = Dividends per share / Earnings per share
![Page 60: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/60.jpg)
g.
$1.21 per share / $4.65 per share
Problem Solution
Dividend payout ratio = Dividends per share / Earnings per share
![Page 61: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/61.jpg)
g.
$1.21 per share / $4.65 per share = 26%
Problem Solution
Dividend payout ratio = Dividends per share / Earnings per share
![Page 62: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/62.jpg)
g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31,
2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.
j. Calculate the times interest earned ratio for 2014 and 2013.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
![Page 63: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/63.jpg)
h.
Problem Solution
Average days’ sales = Annual sales / 365 days
![Page 64: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/64.jpg)
h.
$3,050 million
Problem Solution
Average days’ sales = Annual sales / 365 days
![Page 65: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/65.jpg)
h.
$3,050 million / 365 days
Problem Solution
Average days’ sales = Annual sales / 365 days
![Page 66: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/66.jpg)
h.
$3,050 million / 365 days = $8.356 million
Problem Solution
Average days’ sales = Annual sales / 365 days
![Page 67: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/67.jpg)
h.
$3,050 million / 365 days = $8.356 million
Problem Solution
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
![Page 68: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/68.jpg)
h.
$3,050 million / 365 days = $8.356 million
$309 million
Problem Solution
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
![Page 69: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/69.jpg)
h.
$3,050 million / 365 days = $8.356 million
$309 million / $8.356 million
Problem Solution
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
![Page 70: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/70.jpg)
h.
$3,050 million / 365 days = $8.356 million
$309 million / $8.356 million = 37.0 days
Problem Solution
Average days’ sales = Annual sales / 365 days
Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales
![Page 71: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/71.jpg)
g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.
j. Calculate the times interest earned ratio for 2014 and 2013.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
![Page 72: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/72.jpg)
i.
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 73: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/73.jpg)
i.
12/31/14 debt ratio =
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 74: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/74.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521)
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 75: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/75.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 76: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/76.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 77: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/77.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio =
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 78: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/78.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982)
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 79: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/79.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 80: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/80.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
![Page 81: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/81.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 82: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/82.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio =
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 83: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/83.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521)
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 84: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/84.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 85: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/85.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 86: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/86.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio =
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 87: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/87.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio = ($803 + $982)
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 88: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/88.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio = ($803 + $982) / $1,026
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 89: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/89.jpg)
i.
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio = ($803 + $982) / $1,026 = 174%
Problem Solution
Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)
Debt/equity ratio = Total liabilities / Total stockholders’ equity
![Page 90: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/90.jpg)
g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.
j. Calculate the times interest earned ratio for 2014 and 2013.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
![Page 91: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/91.jpg)
j.
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 92: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/92.jpg)
j.
For 2014 =
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 93: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/93.jpg)
j.
For 2014 = $296
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 94: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/94.jpg)
j.
For 2014 = $296 / $84
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 95: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/95.jpg)
j.
For 2014 = $296 / $84 = 3.5 times
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 96: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/96.jpg)
j.
For 2014 = $296 / $84 = 3.5 times
For 2013 =
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 97: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/97.jpg)
j.
For 2014 = $296 / $84 = 3.5 times
For 2013 = $310
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 98: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/98.jpg)
j.
For 2014 = $296 / $84 = 3.5 times
For 2013 = $310 / $65
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 99: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/99.jpg)
j.
For 2014 = $296 / $84 = 3.5 times
For 2013 = $310 / $65 = 4.8 times
Problem Solution
Times interest earned = Operating income / Interest expense
![Page 100: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/100.jpg)
g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’ sales in receivables at that date.
i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.
j. Calculate the times interest earned ratio for 2014 and 2013.
k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.
Problem Definition
![Page 101: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/101.jpg)
k. A young, single professional would probably be more interested in potential growth of capital rather than current dividend income, and would probably be willing to invest in a stock that represented a relatively risky investment. Based on these criteria, the significant growth in earnings per share and the relatively high financial leverage could make this stock an attractive, though risky, potential investment.
(continued)
Problem Solution
![Page 102: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/102.jpg)
k. The liquidity of the company is relatively low, based on an “average” current ratio of 1.0. Without further information about the composition of current assets and current liability accounts, it is difficult to assess the firm’s liquidity. The number of days’ sales in accounts receivable indicates that the accounts receivable are relatively current, assuming that the credit terms are net 30.
(continued)
Problem Solution
![Page 103: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/103.jpg)
k. (concluded)
The company’s ROI is relatively low, and the
two-year trend is down. This would be a major concern, and the reasons for this situation would be sought. The price/earnings ratio of 13 is typical for a firm with a falling ROI; the fact that the P/E ratio has remained within the “normal” range may indicate that future earnings prospects for the firm are fairly strong.
Problem Solution
![Page 104: Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting What the Numbers Mean 10e](https://reader036.vdocuments.us/reader036/viewer/2022081503/56649e585503460f94b52148/html5/thumbnails/104.jpg)
AccountingWhat the Numbers Mean 10e
David H. MarshallWayne W. McManus
Daniel F. Viele
You should now have a better understandingof ratio analysis.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.