Financial Statement Ratio Analysis
Practice As You Learn
Introduction to Accounting
Financial Statement Ratio Analysis
Practice As You Learn
You will be required to calculate ratios given a balance sheet and an income statement.
Some professors will require you to memorize the formulas, others will not.
Please check with your professor for what is required for your class.
Things to remember:
Average = Beginning (last year) + Ending (current year) / 2
Liquidity ratios will always involve current assets and current liabilities and will be used to determine if the company has or will have enough cash to pay liabilities
Accounts Receivable Turnover and Inventory Turnover are used to determine how
quickly these assets will be turned into cash.
Leverage ratios are used to determine if the company has incurred too much debt.
“Return” and “Margin” are % and are always net income divided by ….
Important: Textbooks differ. Check your textbook to make sure the most common ratios on this website are the same as your textbook. If not, add the ratios that your professor wants you to know.
Practice Problem – Ratios – Financial Statement Analysis
Compute the following ratios using the financial statements and the additional information below:
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:
Prior Year Financial Information:
| Accounts Receivable | 28,000 |
| Inventory | 85,000 |
| Property, Plant, Equipment, net | 186,000 |
| Total Assets | 498,000 |
| Total Liabilities | 389,000 |
| Total Stockholder’s Equity | 109,000 |
Current Year Additional Information:
Credit sales are 10% of sales
Cash flow from operations is $289,000
Dividends paid is $50,000
|
Balance Sheet
|
||||
| Assets: | Liabilities: | |||
| Current Assets: | Current Liabilities: | |||
| Cash | 15,000 | Accounts Payable | 47,000 | |
| Accounts Receivable | 22,000 | Accrued Expenses | 9,000 | |
| Inventory | 79,000 | Unearned Revenues | 8,000 | |
| Prepaid Expenses | 12,000 | Interest Payable | 1,000 | |
| Short-term Investments | 50,000 | Short-term Notes Payable | 135,000 | |
| Total Current Assets | 178,000 | Total Current Liabilities | 200,000 | |
| Long-term Investments | 100,000 | Bonds Payable | 75,000 | |
| Long-term Notes Rec | 35,000 | Long-term Debt | 150,000 | |
| Total Liabilities | 425,000 | |||
| Property/Plant/Equipment: | ||||
| Building | 215,000 | |||
| Equipment | 76,000 | |||
| Less Accum Depreciation | (92,000) | |||
| Net P/P/E | 199,000 | Stockholder’s Equity: | ||
| Intangible Assets | Common Stock | 1,000 | ||
| Goodwill | 28,000 | Retained Earnings | 145,000 | |
| Patents, net | 6,000 | less Treasury Stock | (25,000) | |
| Total Intangible Assets | 34,000 | Total Stockholder’s Equity | 121,000 | |
| Total Assets | 546,000 | = Total Liabilities & Stockholder’s Equity |
546,000 | |
| Income Statement For the Current Year |
|
| Sales | 5,400,000 |
| – CGS |
3,200,000 |
| = Gross Profit | 2,200,000 |
| – Operating expense: | |
| Selling | 850,000 |
| General & Administrative | 400,000 |
| Research & Development | 125,000 |
| Restructuring |
180,000 |
| = Income from operations | 645,000 |
| + – Other revenues and expenses: | |
| Interest expense | (70,000) |
| Rent Income | 80,000 |
| Loss on sale of building | (15,000) |
| Unusual loss |
(130,000) |
| = Income before taxes | 510,000 |
| – Tax Expense |
(204,000) |
| = Net Income | 306,000 |
| Weighted average common shares | 250,000 |
| Fair Market Value of 1 share | $35 |
Answer
Answers to Practice Problem – Ratios – Financial Statement Analysis
A. Current Ratio:
Current Assets
Current Liabilities
$178,000 / $200,000 = 0.89
B. Quick Ratio:
Cash + Short-term Investments + Receivables (liquid assets)
Current Liabilities
$15,000 + $50,000 + $22,000 / $200,000 = 0.435
C. Accounts Receivable Turnover:
Net Sales
Average Accounts Receivables
5,400,000 x 10% = 540,000
Net credit sales (cash sales are not A/R)
28,000 + 22,000 / 2 = $25,000 average accounts receivable $540,000 / $25,000 = 21.6 x per year
D. Average Collection Period:
365
Accounts Receivable Turnover
365 / 21.6 = 16.9 days to collect
E. Inventory Turnover:
Cost of Goods Sold
Average Inventory
Average inventory = 85,000 + 79,000 / 2 = 82,000
$3,200,000 / $82,000 = 39 x per year
F. Days Inventory in Warehouse:
365
Inventory turnover
365 / 39 = 9.36 days in the warehouse
G. Debt to Total Assets:
Total Liabilities
Total Assets
$425,000 / $546,000 = 77.8%
H. Debt to Equity:
Total Liabilities
Total Stockholder’s Equity
$425,000 / $121,000 = 3.51x
I. Return on Stockholder’s Equity:
Net Income
Average Stockholder’s Equity
$306,000 / $115,000 = 266%
109,000 + 121,000 / 2 = 115,000
J. Return on Assets:
Net Income
Average Total Assets
$306,000 / $522,000 = 58.6%
498,000 + 546,000 / 2 = $522,000
K. Profit Margin:
Net Income
Sales
$306,000 / $5,400,000 = 5.67%
L. Earnings Per Share:
Net Income – Preferred Dividends
Weighted Average Number of Common Shares
$306,000 – 0 / 250,000 = $1.22 per share
M. Price-Earnings Ratio:
Market Price
Earnings Per Share
$35 / $1.22 = 28.7x