Review -V

Prof. Jijo Lukose P.J., IIM Kozhikode

 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250 Common stock market price, December 31, 2018 $30.00
Long-term notes payable secured 98,500 101,500 83,500 Common stock market price, December 31, 2017 $28.00
by mortgages on plant assets
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(1) Compute the return on equity.

Return on Equity
Net income - Preferred dividends Return on Equity
Average Stockholders' Equity
2018 $31,100 / ($268,250 + $294,600) / 2
$31,100 / $281,425 11.1%

2017 $29,375 / ($242,750 + $268,250) / 2

$29,375 / $255,500 11.5%
 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250
Long-term notes payable secured 98,500 101,500 83,500
by mortgages on plant assets
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(2) Calculate the company's profit margin ratio.

Profit Margin Ratio
Net income / Net sales Profit Margin Ratio
2018 $31,100 / $673,500 4.6%
2017 $29,375 / $532,000 5.5%

Gross Margin, and EBIT Margin (operating Margin)

 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250
Long-term notes payable secured 98,500 101,500 83,500
by mortgages on plant assets
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(3) Compute the total asset turnover.

Total asset turnover
Net sales / Average total assets Total asset turnover
2018 $673,500 / ($445,000 + $523,000) / 2
$673,500 / $484,000 1.4 times

2017 $532,000 / ($377,500 + $445,000) / 2

$532,000 / $411,250 1.3 times
 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250
Long-term notes payable secured 98,500 101,500 83,500
by mortgages on plant assets
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(1) Compute days' sales uncollected (Use 365 days per year). Days' Sales Uncollected
AR/ Net Sales x 365 Days' Sales Uncollected
(2) Compute accounts receivable turnover. 2018 $89,500 / $673,500 x 365 = 48.5 days
2017 $62,500 / $532,000 x 365 = 42.9 days

Accounts Receivable Turnover

Net Sales / Average Accounts Receivable Accounts Receivable Turnover
2018 $673,500 / ($89,500 + $62,500) / 2
$673,500 / $76,000 8.9 times
2017 $532,000 / ($62,500 + $50,200) / 2
$532,000 / $56,350 9.4 times
 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250 Inventory Turnover
Long-term notes payable secured 98,500 101,500 83,500 COGS/ Average Inventory Inventory Turnover
by mortgages on plant assets 2018 $411,225 / ($112,500 + $82,500) / 2 4.2 times
Common stock, $10 par value 163,500 163,500 163,500 $411,225 / $97,500
Retained earnings 131,100 104,750 79,250 2017 $345,500 / ($82,500 + $54,000) / 2
Total liabilities and equity $523,000 $445,000 $377,500 5.1 times
$345,500 / $68,250

Days' Sales in Inventory

(3) Compute inventory turnover. Ending Inventory / Cost of goods sold x 365 Days' Sales in Inventory
(4) Compute days' sales in inventory (Use 365 days per year). 2018 $112,500 / $411,225 x 365 = 99.9 days
2017 $82,500 / $345,500 x 365 = 87.2 days
(4) Compute Inventory Holding Period(Use 365 days per year).

Days' Sales in Inventory

Average Inventory / COGS x 365 Inventory Holding Period
2018 (1/ 4.2)x 365 = 86.9 days
2017 (1/5.1)x 365 = 71.6 days
 SIMON COMPANY
Comparative Balance Sheets
December 31, 2016 - 2018
2018 2017 2016
Assets
Cash $31,800 $35,625 $37,800 2018 2017 2016
Accounts receivable, net 89,500 62,500 50,200
Merchandise inventory 112,500 82,500 54,000 Total CA $244,500 $190,000 $147,000
Prepaid expenses 10,700 9,375 5,000 $129,900 $75,250 $51,250
Total CL
Plant assets, net 278,500 255,000 230,500
Total assets $523,000 $445,000 $377,500 (1)Current ratio 1.88 2.53 2.87
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250 2018 2017 2016
Long-term notes payable secured 98,500 101,500 83,500
by mortgages on plant assets Quick CA $121,300 $98,125 $88,000
Common stock, $10 par value 163,500 163,500 163,500 Total CL $129,900 $75,250 $51,250
Retained earnings 131,100 104,750
Total liabilities and equity $523,000 $445,000 $377,500 (2) Acid-test ratio 0.93 1.30 1.72

(3) Debt-to-Equity Ratio Debt-to-Equity Ratio

Total debt / Total equity Debt-to-Equity Ratio
2018 $228,400 / $294,600 77.5% (or .78 to 1)
2017 $176,750 / $268,250 65.9% (or .66 to 1)
 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250
Long-term notes payable secured 98,500 101,500 83,500
by mortgages on plant assets
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(4) Times Interest Earned (Interest Coverage Ratio)

Times Interest Earned

Income before interest and taxes Times Interest Earned
Interest Expense
2018 $52,725 / $12,100 4.4 times
2017 $51,520 / $13,300 3.9 times
 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250 Price Per Share, December 31, 2018 $30.00
Long-term notes payable secured 98,500 101,500 83,500 Price Per Share, December 31, 2017 $28.00
by mortgages on plant assets
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(2) Calculate the company's price-earnings ratio on December 31.

Price-Earnings Ratio
Market Price per Common Share Price-Earnings Ratio
Earnings per Share
2018 $30.00 / $1.90 15.8
2017 $28.00 / $1.80 15.6

Exercise 13-11 page 748

 SIMON COMPANY SIMON COMPANY
Comparative Balance Sheets Income Statements
December 31, 2016 - 2018 2018 2017
2018 2017 2016 Sales $673,500 $532,000
Assets Cost of goods sold 411,225 345,500
Cash $31,800 $35,625 $37,800 Other operating expenses 209,550 134,980
Accounts receivable, net 89,500 62,500 50,200 Interest expense 12,100 13,300
Merchandise inventory 112,500 82,500 54,000 Income taxes 9,525 8,845
Prepaid expenses 10,700 9,375 5,000 Total costs and expenses 642,400 502,625
Plant assets, net 278,500 255,000 230,500 Net income $31,100 $29,375
Total assets $523,000 $445,000 $377,500
Earnings per share $1.90 $1.80
Liabilities and Equity
Accounts payable $129,900 $75,250 $51,250 Common stock market price, December 31, 2018 $30.00
Long-term notes payable secured 98,500 101,500 83,500 Common stock market price, December 31, 2017 $28.00
by mortgages on plant assets Annual cash dividends, December 31, 2018 $0.29
Common stock, $10 par value 163,500 163,500 163,500 Annual cash dividends, December 31, 2017 $0.24
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $523,000 $445,000 $377,500

(3) Calculate the company's dividend yield on December 31.

Dividend Yield
Annual cash dividends per share Dividend Yield
Market price per share
2018 $0.29 / $30.00 1.0%
2017 $0.24 / $28.00 0.9%

Exercise 13-11 page 748

 Current assets ¥1,021,135 $9,036
Total assets 1,296,902 11,477
Current liabilities 98,437 871
Net sales 504,459 4,464
Net income 16,518 146

Current Ratio ¥ $

Current assets ¥1,021,135 $9,036

Current liabilities ¥98,437 $871
Current Ratio 10.37 10.37

Net Profit Margin ¥ $

Net income ¥16,518 $146

Net sales ¥504,459 $4,464
Net Profit Margin 3.27% 3.27%

Sales-to-Total Assets ¥ $

Net sales ¥504,459 $4,464

Total assets ¥1,296,902 $11,477
Sales-to-Total Assets 0.39 0.39

Exercise 13-15 page 749

Current assets totaled $4,050 and the current ratio was 1.5. Assume that the following
transactions were completed:
(1) Purchased merchandise for $525 on short-term credit.
(2) Purchased a delivery truck for $900. Paid $225 cash, and signed a two-year interest-
bearing note for the balance.
Required:
Compute the cumulative current ratio after each transaction.

Current Assets Current Liabilities Current Ratio

(a) (b) (a ÷ b)
Beginning $4,050 ($4,050 ÷1.50) $2,700 1.50
Transaction (1) Inventory 525 Accounts Payable 525
Subtotal 4,575 3,225 1.42
Transaction (2)* Cash (225)
Total $4,350 $3,225 1.35

*Debt and truck are noncurrent items.

Best Price Corporation operates general merchandise stores that feature quality
merchandise at low prices. All stores are located in the United States. In a recent year,
the company reported average inventories of $436,924,200 and an inventory turnover
ratio of 4.6. Average total fixed assets were $365,662,200, and the fixed asset turnover
ratio was 7.5. What amount did Best Price report as gross profit in the current year?

Cost of Goods Sold = Inventory Turnover × Average Inventory

Cost of Goods Sold = 4.6 ×$436,924,200

Cost of Goods Sold = $2,009,851,320
Net Sales = Fixed Asset Turnover Ratio × Total Fixed Assets
Net Sales = 7.5 ×$365,662,200
Net Sales = $2,742,466,500

Net Sales $2,742,466,500

Less: Cost of Goods Sold 2,009,851,320
Gross profit $ 732,615,180
Unity designs and manufactures uniforms for corporations throughout the United States and Canada. The company’s
stock is traded on the NASDAQ. Selected information from the company’s financial statements follows.

UNITY
(in thousands)
Year 2 Year 1
Select Income Statement Information
Net revenue $7,413,800 $5,413,000
Cost of goods sold 3,031,630 2,030,000
Selling, general, and administrative expenses 1,000 1,500
Interest expense 100,000 250,000
Income tax expense 750,000 680,000
Net income 988,000 878,000
Select Statement of Cash Flows Information
Cash paid for interest 80,000 65,000
Cash flows from operating activities 1,200,000 2,350,000
Select Statement of Cash Flows Information
Cash and cash equivalents 70,720 77,828
Marketable securities 240,106 405,078
Accounts receivable 717,740 779,810
Inventories 463,482 396,000
Prepaid expenses and other current assets 31,562 22,326
Accounts payable 129,244 143,270
Current accrued expenses 141,526 190,726
Current portion of long-term debt 527,024 478,122
Long-term debt 8,282 53,306
Required: Compute the the following ratios for the current year:
• Receivable turnover ratio (assume that 60% of sales were credit sales)
• Inventory turnover ratio
• Current ratio
• Times interest earned ratio

Receivable Turnover Ratio

Net Credit Sales $7,413,800 x 60%
= = 5.94
Average Net Receivables ($717,740 + $779,810) ÷ 2

Inventory Turnover Ratio

Cost of Goods Sold $3,031,630
= = 7.05
Average Inventory ($463,482 + $396,000) ÷ 2

Current Ratio
Current Assets ($70,720 + $240,106 + $717,740 + $463,482 + $31,562)
= = 1.91
Current Liabilities ($129,244 + $141,526 + $527,024)

Times Interest Earned Ratio

Net Income + Interest Expense + Income Tax Expense ($988,000 + $100,000 + $750,000)
= = 18.38
Interest Expense $100,000