bkmsol_ch19 - CHAPTER 19: FINANCIAL STATEMENT ANALYSIS 1....

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTER 19: FINANCIAL STATEMENT ANALYSIS 1. ROE = Net profits/Equity = Net profits/Sales Sales/Assets Assets/Equity = Net profit margin Asset turnover Leverage ratio = 5.5% 2.0 2.2 = 24.2% 2. ROA = ROS ATO The only way that Crusty Pie can have an ROS higher than the industry average and an ROA equal to the industry average is for its ATO to be lower than the industry average. 3. ABCs Asset turnover must be above the industry average. 4. ROE = (1 Tax rate) [ROA + (ROA Interest rate)Debt/Equity] ROE A > ROE B Firms A and B have the same ROA. Assuming the same tax rate and assuming that ROA > interest rate, then Firm A must have either a lower interest rate or a higher debt ratio. 5. SmileWhite has higher quality of earnings for the following reasons: SmileWhite amortizes its goodwill over a shorter period than does QuickBrush. SmileWhite therefore presents more conservative earnings because it has greater goodwill amortization expense. SmileWhite depreciates its property, plant and equipment using an accelerated depreciation method. This results in recognition of depreciation expense sooner and also implies that its income is more conservatively stated. SmileWhites bad debt allowance is greater as a percent of receivables. SmileWhite is recognizing greater bad-debt expense than QuickBrush. If actual collection experience will be comparable, then SmileWhite has the more conservative recognition policy. 19-1 6. a. Equity Assets Assets Sales Sales profits Net Equity profits Net ROE = = = Net profit margin Total asset turnover Assets/equity % 92 . 9 0992 . 140 , 5 510 Sales profits Net = = = 66 . 1 100 , 3 140 , 5 Assets Sales = = 41 . 1 200 , 2 100 , 3 Equity Assets = = b. % 2 . 23 41 . 1 66 . 1 % 92 . 9 200 , 2 100 , 3 100 , 3 140 , 5 140 , 5 510 ROE = = = c.g = ROE plowback = 23.2% % 1 . 16 96 . 1 60 . 96 . 1 % 2 . 23 =- = 7. a. Palomba Pizza Stores Statement of Cash Flows For the year ended December 31, 1999 Cash Flows from Operating Activities Cash Collections from Customers $250,000 Cash Payments to Suppliers (85,000) Cash Payments for Salaries (45,000) Cash Payments for Interest (10,000 ) Net Cash Provided by Operating Activities $110,000 Cash Flows from Investing Activities Sale of Equipment 38,000 Purchase of Equipment (30,000) Purchase of Land (14,000 ) Net Cash Used in Investing Activities (6,000) Cash Flows from Financing Activities Retirement of Common Stock (25,000) Payment of Dividends (35,000 ) Net Cash Used in Financing Activities (60,000 ) Net Increase in Cash 44,000 Cash at Beginning of Year 50,000 Cash at End of Year $94,000 19-2 b. The cash flow from operations (CFO) focuses on measuring the cash flow generated by operations and not on measuring profitability. If used as a measure of performance, CFO is less subject to distortion than the net income figure....
View Full Document

Page1 / 10

bkmsol_ch19 - CHAPTER 19: FINANCIAL STATEMENT ANALYSIS 1....

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online