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. ABC’s Asset turnover must be above the industry average. 4. ROE = (1 – Tax rate) ×[ROA + (ROA – Interest rate)Debt/Equity] ROEA> ROEB 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. •SmileWhite’s 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
has intentionally blurred sections.
Sign up to view the full version.
6. a. EquityAssetsAssetsSalesSalesprofitsNet EquityprofitsNet ROE××=== Net profit margin ×Total asset turnover ×Assets/equity %92.90992.0140,5510SalesprofitsNet ===66.1100,3140,5AssetsSales==41.1200,2100,3EquityAssets==b. %2.2341.166.1%92.9200,2100,3100,3140,5140,5510ROE=××=××=c. g = ROE ×plowback %1.1696.160.096.1%2.23=−×=7. a. Palomba Pizza Stores Statement of Cash Flows For the year ended December 31, 1999 Cash Flows from Operating ActivitiesCash 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 ActivitiesSale of Equipment 38,000 Purchase of Equipment (30,000) Purchase of Land (14,000)Net Cash Used in Investing Activities Cash Flows from Financing Activities(6,000) 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 50,000Cash at End of Year $94,000 19-2