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RATIO ANALYSIS
Ratio analysis expresses the relationship among selected items of financial statement data.
A ratio expresses the mathematical relationship between one quantity and another. For analysis of the
primary financial statements, we classify ratios as follows.
Illustration 2-9
Financial ratio classifications
A single ratio by itself is not very meaningful. Accordingly, in this and the following chapters, we will use
various comparisons to shed light on company performance:
1. Intracompany comparisons covering two years for the same company.
2. Industry-average comparisons based on average ratios for particular industries.
3. Intercompany comparisons based on comparisons with a competitor in the same industry
Question 1
Using these data from the comparative balance sheet of Rosalez Company, perform horizontal
analysis. (If amount and percentage are a decrease show the numbers as negative, e.g. 55,000, -20% or (55,000), (20%). Round percentages to 0 decimal places, e.g. 12%.)
Increase or (Decrease)
Amount
Percentage
Dec. 31, 2012 Dec. 31, 2011
Accounts receivable
$ 484,600
$ 395,100
Inventory
$ 809,100
$ 634,700
Total assets
$3,156,200
%
$
%
$
$2,836,700 $
%
Question 2
Using these data from the comparative balance sheet of Rosalez Company, perform vertical
analysis. (Round percentages to 1 decimal place, e.g. 12.5%.)
Dec. 31, 2012
Amount
Percentage
Dec. 31, 2011
Amount
Percentage
Accounts receivable
$ 509,600
%
$ 386,300
%
Inventory
$ 780,300
%
$ 563,000
%
RATIO ANALYSIS
Ratio analysis expresses the relationship among selected items of financial statement data.
A ratio expresses the mathematical relationship between one quantity and another. For analysis of the
primary financial statements, we classify ratios as follows.
Total assets
$3,150,300
% $2,723,100
%
Question 3
Vertical analysis (common-size) percentages for Vallejo Company’s sales, cost of goods sold, and
expenses are listed here.
Vertical Analysis
Sales
2012
100 %
2011
100 %
2010
100 %
Cost of goods sold
60.1
64.0
65.3
Expenses
24.8
27.5
28.6
Did Vallejo’s net income as a percent of sales increase, decrease, or remain unchanged over the 3year period? Provide numerical support for your answer.
Question 4
Horizontal analysis (trend analysis) percentages for Spartan Company’s sales, cost of goods sold, and
expenses are listed here.
Horizontal Analysis
Sales
2012
96.2 %
2011
104.8 %
2010
100.0 %
Cost of goods sold
101.0
98.0
100.0
Expenses
105.6
95.4
100.0
Explain whether Spartan’s net income increased, decreased, or remained unchanged over the 3-year
period.
Question 5
RATIO ANALYSIS
Ratio analysis expresses the relationship among selected items of financial statement data.
A ratio expresses the mathematical relationship between one quantity and another. For analysis of the
primary financial statements, we classify ratios as follows.
These selected condensed data are taken from recent balance sheets of Bob Evans Farms (in
thousands).
2009
Cash
2008
$ 13,606
$ 7,669
Accounts receivable
23,045
19,951
Inventories
31,087
31,345
Other current assets
12,522
11,909
Total current assets
$ 80,260
$ 70,874
Total current liabilities
$245,805
$326,203
(a)
Compute the current ratio for each year. (Round answers to 2 decimal places, e.g. .12 : 1.)
2009
Current ratio:
2008
:1
:1
Question 6
Staples, Inc. is one of the largest suppliers of office products in the United States. It had net income
of $738.7 million and sales of $24,275.5 million in 2009. Its total assets were $13,073.1 million at the
beginning of the year and $13,717.3 million at the end of the year. What is Staples, Inc.’s asset
turnover ratio and profit margin ratio? (Round answers to 2 decimal places, e.g. 1.25 or
2.05%.)
Asset turnover ratio
times
Profit margin ratio
%
Question 7
Selected data taken from a recent year’s financial statements of trading card company Topps
Company, Inc. are as follows (in millions).
Net sales
$326.7
Current liabilities, beginning of year
41.1
Current liabilities, end of year
62.4
Net cash provided by operating activities
10.4
RATIO ANALYSIS
Ratio analysis expresses the relationship among selected items of financial statement data.
A ratio expresses the mathematical relationship between one quantity and another. For analysis of the
primary financial statements, we classify ratios as follows.
Total liabilities, beginning of year
65.2
Total liabilities, end of year
73.2
Capital expenditures
3.7
Cash dividends
6.2
Compute these ratios: current cash debt coverage ratio, cash debt coverage ratio, and free cash flow.
Provide a brief interpretation of your results. (Round answers to 2 decimal places, e.g. 0.12.)
Current cash debt coverage ratio
times
Cash debt coverage ratio
times
Free Cash Flow
$
millions