Financial Statement Ratio Analysis

Medium Practice Test

Introduction to Accounting

Financial Statement Ratio Analysis

Medium Practice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Compute the following ratios using the financial statements for Target Corporation.

A. Current Ratio
B. Quick Ratio:
C. Accounts Receivable Turnover:
D. Average Collection Period:
E. Inventory Turnover:
F. Days Inventory in Warehouse:
G. Debt to Total Assets:
H. Debt to Equity:
I. Return on Stockholder’s Equity:
J. Return on Assets:
K. Profit Margin:
L. Earnings Per Share:
M. Price-Earnings Ratio:

The fair market value of one share of Target Corporation common stock on January 29, 201X was $62.

Target Corporation: Consolidated Statements of Operations



(millions, except per share data)		201X			200X			20XX
Sales		$	65,786		$	63,435		$	62,884
Credit card revenues			1,604			1,922			2,064
Total revenues			67,390			65,357			64,948
Cost of sales			45,725			44,062			44,157
Selling, general and administrative expenses			13,469			13,078			12,954
Credit card expenses			860			1,521			1,609
Depreciation and amortization			2,084			2,023			1,826
Earnings before interest expense and income taxes			5,252			4,673			4,402
Net interest expense
	Nonrecourse debt collateralized by credit card receivables		83			97			167
	Other interest expense		677			707			727
	Interest income		(3	)		(3	)		(28	)

Net interest expense			757			801			866
Earnings before income taxes			4,495			3,872			3,536
Provision for income taxes			1,575			1,384			1,322
Net earnings		$	2,920		$	2,488		$	2,214
Basic earnings per share		$	4.03		$	3.31		$	2.87
Diluted earnings per share		$	4.00		$	3.30		$	2.86
Weighted average common shares outstanding
	Basic		723.6			752.0			770.4
	Diluted		729.4			754.8			773.6

See accompanying Notes to Consolidated Financial Statements.

Target Corporation: Consolidated Statements of Financial Position



(millions, except footnotes)		January 29, 201X			January 30, 200X

Assets
Cash and cash equivalents, including marketable securities of $1,129 and $1,617		$	1,712		$	2,200
Credit card receivables, net of allowance of $690 and $1,016			6,153			6,966
Inventory			7,596			7,179
Other current assets			1,752			2,079

	Total current assets		17,213			18,424
Property and equipment
	Land		5,928			5,793
	Buildings and improvements		23,081			22,152
	Fixtures and equipment		4,939			4,743
	Computer hardware and software		2,533			2,575
	Construction-in-progress		567			502
	Accumulated depreciation		(11,555	)		(10,485	)

	Property and equipment, net		25,493			25,280
Other noncurrent assets			999			829

Total assets		$	43,705		$	44,533

Liabilities and shareholders’ investment
Accounts payable		$	6,625		$	6,511
Accrued and other current liabilities			3,326			3,120
Unsecured debt and other borrowings			119			796
Nonrecourse debt collateralized by credit card receivables			—			900

	Total current liabilities		10,070			11,327
Unsecured debt and other borrowings			11,653			10,643
Nonrecourse debt collateralized by credit card receivables			3,954			4,475
Deferred income taxes			934			835
Other noncurrent liabilities			1,607			1,906

	Total noncurrent liabilities		18,148			17,859
Shareholders’ investment
	Common stock		59			62
	Additional paid-in-capital		3,311			2,919
	Retained earnings		12,698			12,947
	Accumulated other comprehensive loss		(581	)		(581	)

	Total shareholders’ investment		15,487			15,347

Total liabilities and shareholders’ investment		$	43,705		$	44,533

Answer

A. Current Ratio:

17,213 = 1.71
10,070

B. Quick Ratio:

$1,712 + $6,153
$10,070

= 0.78

C. Accounts Receivable Turnover:

6,966 + 6,153 / 2 = $6,560

$65,786 / $6,560 = 10.03 x per year

D. Average Collection Period:

365 / 10.03 = 36.4 days to collect

E. Inventory Turnover:

7,179 + 7,596 / 2 = 7,388

$45,725 / $7,388 = 6.2 x per year

F. Days Inventory in Warehouse:

365 / 6.2 = 59 days in the warehouse

G. Debt to Total Assets:

28,218 = 64.5%
43,765

H. Debt to Equity:

28,818 = 186%
15,487

I. Return on Stockholder’s Equity:

15,487 + 15,347 / 2 = 15,417

$2,920 / $15,417 = 18.9%

J. Return on Assets:

43,705 + 44,533 / 2 = 44,119

$2,920 / $44,119 = 6.6%

K. Profit Margin:

$2,920 / $67,390 = 4.3%

L. Earnings Per Share:

$2,920 – $0
723.6 = $4.03 per share

M. Price-Earnings Ratio:

$62 / $4.03 = 15.4 x

2. Compute the following ratios using the financial statements for Chipotle Mexican Grill, Inc. for the year ended 201X.

A. Current Ratio
B. Quick Ratio:
C. Accounts Receivable Turnover:
D. Average Collection Period:
E. Inventory Turnover:
F. Days Inventory in Warehouse:
G. Debt to Total Assets:
H. Debt to Equity:
I. Return on Stockholder’s Equity:
J. Return on Assets:
K. Profit Margin:
L. Earnings Per Share:
M. Price-Earnings Ratio:

The fair market value of one share of common stock of Chipotle Mexican Grill was $180 on December 31, 201X.

CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)

	December 31
	201X			200X
Assets
Current assets:
Cash and cash equivalents	$	224,838		$	219,566
Accounts receivable, net of allowance for doubtful accounts of $102 and $339 as of December 31, 201X and 200X, respectively		5,658			4,763
Inventory		7,098			5,614
Current deferred tax asset		4,317			3,134
Prepaid expenses and other current assets		16,016			14,377
Income tax receivable		23,528			—
Investments		124,766			50,000
Total current assets		406,221			297,454
Leasehold improvements, property and equipment, net		676,881			636,411
Other assets		16,564			5,701
Goodwill		21,939			21,939
Total assets	$	1,121,605		$	961,505
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	33,705		$	25,230
Accrued payroll and benefits		50,336			41,404
Accrued liabilities		38,892			31,216
Current portion of deemed landlord financing		121			96
Income tax payable		—			4,207
Total current liabilities		123,054			102,153
Deferred rent		123,667			106,395
Deemed landlord financing		3,661			3,782
Deferred income tax liability		50,525			38,863
Other liabilities		9,825			6,851
Total liabilities		310,732			258,044
Shareholders’ equity:
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares outstanding as of December 31, 201X and 200X		—			—
Common stock, $0.01 par value, 230,000 shares authorized, 33,959 and 33,473 shares issued as of December 31, 201X and 200X, respectively		340			335
Additional paid-in capital		594,331			539,880
Treasury stock, at cost, 2,885 and 1,990 shares at December 31, 201X and 200X, respectively		(240,918	)		(114,316	)
Accumulated other comprehensive income		606			29
Retained earnings		456,514			277,533
Total shareholders’ equity		810,873			703,461
Total liabilities and shareholders’ equity	$	1,121,605		$	961,505

CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)


	Years ended December 31
	201X			200X			20XX
Revenue	$	1,835,922		$	1,518,417		$	1,331,968
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage and packaging		561,107			466,027			431,947
Labor		453,573			385,072			351,005
Occupancy		128,933			114,218			98,071
Other operating costs		202,904			174,581			164,018
General and administrative expenses		118,590			99,149			89,155
Depreciation and amortization		68,921			61,308			52,770
Pre-opening costs		7,767			8,401			11,624
Loss on disposal of assets		6,296			5,956			9,339
Total operating expenses		1,548,091			1,314,712			1,207,929
Income from operations		287,831			203,705			124,039
Interest and other income		1,499			925			3,469
Interest and other expense		(269	)		(405	)		(302	)
Income before income taxes		289,061			204,225			127,206
Provision for income taxes		(110,080	)		(77,380	)		(49,004	)
Net income	$	178,981		$	126,845		$	78,202
Earnings per share
Basic	$	5.73		$	3.99		$	2.39
Diluted	$	5.64		$	3.95		$	2.36
Weighted average common shares outstanding
Basic		31,234			31,766			32,766
Diluted		31,735			32,102			33,146

Answer

A. Current Ratio:

406,221 = 3.3
123,054

B. Quick Ratio:

$224,838 + $5,658 + $124,766 / $123,054 = 2.9

C. Accounts Receivable Turnover:

4,763 + 5,658 / 2 = $5,211

$1,835,922 / $5,211 = 352.3 x per year

D. Average Collection Period:

365 / 352.3 = 1 day to collect (credit cards)

E. Inventory Turnover:

5,614 + 7,098 / 2 = 6,356

$561,107 / $6,356 = 88.3

F. Days Inventory in Warehouse:

365 / 88.3 = 4.1 days in the warehouse

G. Debt to Total Assets:

310,732 = 27.7%
1,121,605

H. Debt to Equity:

310,732 = 38.3%
810,873

I. Return on Stockholder’s Equity:

(810,873 + 703,461 / 2 = 757,167)

$178,981 / $757,167 = 23.6%

J. Return on Assets:

1,121,605 + 961,505 / 2 = 1,041,555

$178,981 / $1,041,555 = 17.2%

K. Profit Margin:

$178,981 / $1,835,922 = 9.75%

L. Earnings Per Share:

$178,981 – $0 / 31,234 = $5.73 per share

M. Price-Earnings Ratio:

$180 / $5.73 = 31.4 x

3. Compute the following ratios using the financial statements for Netflix, Inc.

A. Current Ratio
B. Quick Ratio:
C. Accounts Receivable Turnover:
D. Average Collection Period:
E. Inventory Turnover:
F. Days Inventory in Warehouse:
G. Debt to Total Assets:
H. Debt to Equity:
I. Return on Stockholder’s Equity:
J. Return on Assets:
K. Profit Margin:
L. Earnings Per Share:
M. Price-Earnings Ratio:

The fair market value of one share of common stock of Netflix, Inc. on December 31, 201X was $200.

NETFLIX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)


	As of December 31,
	201X		200X
Assets
Current assets:
Cash and cash equivalents	$	194,499	$	134,224
Short-term investments		155,888		186,018
Current content library, net		181,006		37,329
Prepaid content		62,217		26,741
Other current assets		47,357		26,701

Total current assets		640,967		411,013
Content library, net		180,973		108,810
Property and equipment, net		128,570		131,653
Deferred tax assets		17,467		15,958
Other non-current assets		14,090		12,300

Total assets	$	982,067	$	679,734

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	222,824	$	92,542
Accrued expenses		36,489		33,387
Current portion of lease financing obligations		2,083		1,410
Deferred revenue		127,183		100,097

Total current liabilities		388,579		227,436
Long-term debt		200,000		200,000
Lease financing obligations, excluding current portion		34,123		36,572
Other non-current liabilities		69,201		16,583

Total liabilities		691,903		480,591
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 201X and 200X; no shares issued and outstanding at December 31, 201X and 200X		—		—
Common stock, $0.001 par value; 160,000,000 shares authorized at December 31, 201X and 200X; 52,781,949 and 53,440,073 issued and outstanding at December 31, 201X and 200X, respectively		53		53
Additional paid-in capital		51,622		—
Accumulated other comprehensive income		750		273
Retained earnings		237,739		198,817

Total stockholders’equity		290,164		199,143

Total liabilities and stockholders’ equity	$	982,067	$	679,734

NETFLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)


	Year ended December 31,
	201X			200X			20XX
Revenues	$	2,162,625		$	1,670,269		$	1,364,661

Cost of revenues:
Subscription		1,154,109			909,461			761,133
Fulfillment expenses		203,246			169,810			149,101

Total cost of revenues		1,357,355			1,079,271			910,234

Gross profit		805,270			590,998			454,427

Operating expenses:
Technology and development		163,329			114,542			89,873
Marketing		293,839			237,744			199,713
General and administrative		70,555			51,333			49,662
Gain on disposal of DVDs		(6,094	)		(4,560	)		(6,327	)

Total operating expenses		521,629			399,059			332,921

Operating income		283,641			191,939			121,506
Other income (expense):
Interest expense		(19,629	)		(6,475	)		(2,458	)
Interest and other income		3,684			6,728			12,452

Income before income taxes		267,696			192,192			131,500
Provision for income taxes		106,843			76,332			48,474

Net income	$	160,853		$	115,860		$	83,026

Net income per share:
Basic	$	3.06		$	2.05		$	1.36

Diluted	$	2.96		$	1.98		$	1.32

Weighted-average common shares outstanding:
Basic		52,529			56,560			60,961

Diluted		54,304			58,416			62,836

Answer

A. Current Ratio:

640,967 = 1.65
388,579

B. Quick Ratio:

$194,499 + $155,888 / $388,579 = 0.90

C. Accounts Receivable Turnover:

Not applicable; no accounts receivable
Customers pay before the service is receive

D. Average Collection Period:

Not applicable; no accounts receivable
Customers pay before the service is receive

E. Inventory Turnover:

37,329 + 181,006 / 2 = 109,168

$1,154,104 / $109,168 = 10.57 x

F. Days Inventory in Warehouse

365 / 10.57 = 34.5 days in the warehouse

G. Debt to Total Assets:

691,903 = 70.5%
982,067

H. Debt to Equity:

691,903 = 239%
290,164

I. Return on Stockholder’s Equity:

290,164 + 199,143 / 2 = 244,654

$160,853 / $244,654 = 65.7%

J. Return on Assets:

982,067 + 679,734 / 2 = 830,901

$160,853 / $830,901 = 19.4%

K. Profit Margin:

$160,853 / $2,162,625 = 7.4%

L. Earnings Per Share:

$160,853 – 0 / 52,529 = $3.06 per share

M. Price-Earnings Ratio:

$200 / $3.06 = 65.4 x

Financial Statement Ratio Analysis

Medium Practice Test

Introduction to Accounting