com
CHAPTER 13
FINANCIAL STATEMENTS ANALYSIS
[Problem 1]
Twig Company
Comparative Balance Sheet
December 31, 2006 and 2007
ASSETS
Cash
2007
P
Increase (Decrease)
Amount
Percentage
2006
3,000 P
5,000 P
(2,000)
(40.0)
60.0
Accounts Receivable
40,000
25,000
15,000
Inventory
27,000
30,000
(3,000 )
Long-term investments
15,000
15,000
0.0
100,000
75,000
25,000
33.3
10,000
10,000
0.0
5,000
20,000
(15,000)
(75.0)
P 200,000
P 165,000
35,000
21.2
30,000 P
47,000 P
(17,000)
(36.2)
88,000
74,000
14,000
18.9
118,000
121,000
(3,000 )
(2.5)
8% Preferred stock
10,000
9,000
1,000
11.1
Common stock
54,000
42,000
12,000
28.6
5,000
5,000
0.0
Retained earnings
13,000
(12,000)
25,000
0.0
82,000
44,000
38,000
86.4
P 200,000
P 165,000
35,000
21.2
(10.0)
Additional paid-in-capital
2.
Twig Company
Common-size Balance Sheet
December 31, 2006 and 2007
ASSETS
Cash
Accounts Receivable
Inventory
Long-term investments
1.50 %
3.03%
20.00
13.50
35.00
15.15
18.18
36.36
7.50
0.00
equipment (net)
Intangibles
50.00
5.00
45.46
6.06
2.50
12.12
100.00
100.00
Current liabilities
15.00
28.48
Long-term liabilities
Total liabilities
8% Preferred stock
Common stock
44.00
59.00
5.00
27.00
44.85
73.33
5.46
25.45
Additional paid-in-capital
Retained earnings
2.50
6.50
3.03
(7.27)
41.00
26.67
Other assets
Total
LIABILITIES and STOCKHOLDERS EQUITY
100.00 %
100.00%
3. Comments
Based on the data as calculated, the following may be derived:
a. The companys financial position is becoming stronger and more
stable as its total revenues increase by 21.2% coupled with a decline
in liabilities of 25% with an overall impact in stockholders equity of
86.4% increase.
b. The increase in the overall net wealth of the company is engineered
by reducing investments of working capital assets to 35.0% from
36.36% and a decrease in the contra-working capital liabilities from
28.48% to 15.0%.
c. The companys working capital strategy is to increase its accounts
receivable to customers while reducing inventory and accounts
payable at the same time. This strategy apparently pays off as the
net income increases to the benefit of stockholders and other
stakeholders.
d. The increase in non-current assets, particularly, land, buildings, and
equipment is financed by long-term creditors and sets the overall
tone of the firms financial structure.
[Problem 2]
1.
Metro Company
Comparative Income Statement
For the years ended, December 31, 2006 and 2007
(in thousands)
Increase (Decrease)
2007
Sales
45,000
2006
P
50,000 P
Amount
(5,000)
(10.00)
1,000
2,000
(1,000)
(50.00)
Net sales
44,000
48,000
(4,000)
(8.33)
24,000
35,000
(11,000)
31.43
Gross profit
20,000
13,000
7,000
53.85
12,000
10,000
2,000
20.00
Operating income
8,000
3,000
5,000
166.67
3,000
3,500
(500)
(14.29)
5,000
(500)
4,500
2,000
(200)
2,200
3,000
(300 ) P
3,300
110.00
2.
Metro Company
Common-size Income Statement
For the years ended, December 31, 2006 and 2007
2007
102.27%
2.27
100.00
2006
104.17%
4.17
100.00
54.54
45.46
27.27
18.19
72.92
27.08
20.83
6.25
6.82
11.37
4.54
7.29
1.04
0.42
6.83%
0.62%
Sales
Less:Sales returns
Net sales
3. Comments
Based on the data as calculated, the following may be stated:
a. The significant improvement in the operating results of Metro
Company is primarily attributed to its ability to reduce its cost of
production by 18.38% (i.e., 72.92% - 54.54%).
b. The operating performance would have been better had the
operating expenses been contained instead of increasing it by 6.44%
(i.e., 27.27% - 20.83%).
c. The companys operating strategy is working well and may be
applied once more in the following year to produce a better return on
sales and return on assets. Albeit, the generation of sales should be
intensified to forestall the downward trend in sales.
[Problem 3]
1.
South Corporation and North Corporation
Comparative Common-size Balance Sheet
December 31, 2007
South
North
ASSETS
Current assets
Long-term investments
Land, building and equipment (net)
44 %
4
42
20%
23
44
Intangibles
Other assets
5
5
8
5
Total assets
100%
100%
13%
15%
Long-term liabilities
22
25
Deferred revenues
Total liabilities
Preferred stock
39
4
46
8
Common stock
26
17
Additional paid-in-capital
Retained earnings
Total stockholders equity
22
9
61
15
14
54
100 %
100%
2. Comments
Based on the prepared common-size balance sheet, South
Corporation presents a better financial position picture in terms of
reasonable distribution of assets (investments) and the relationship of
debt and equity. The current ratio of South Corporation also shows a
comfortable allowance to meet currently maturing obligations.
= 2.925
/P200,000]
=
4. A/Rec turnover = (P 1,000,000/P245,000)
=
Collection period = (360 days/4.08)
=
5. Invty. turnover = (P 750,000/P220,000)
=
Inventory days = (360 days/3.41)
=
6. Gross profit rate = (P250,000P1,000,000)
=
7. BV per common share = (P600,000/3,000 shares) =
8. Return on sales = (P90,000/P1,000,000)
=
9. Earnings per share = (P90,000/3,000 shares)
=
10. Return on invested capital = (P90,000/P920,000) =
11. Debt-to-equity ratio = (P320,000/P600,000)
=
12. Debt ratio = (P320,000/P920,000)
=
1.775
4.08
8 days
3.41
106 days
25%
P 200
9%
P 30
9.8%
0.53
35%
[Problem 5]
Old Management
1. Return on sales
2. Return on assets
3. Return on stockholders
equity
4. Debt-to-equity
New Management
1 ROS = P 483,000 = 8.59%
P5,620,000
P 715,000
P 2,870,000
P 715,000
P 996500
P 715,000
P 996,500
= 36.36%
= 188%
[Problem 6]
Sales
2006
2005
2004
2003
1.35
1.20
1.15
1.08
100.00
Cash
0.80
0.90
1.10
1.15
100.00
Accounts Receivable
0.85
0.88
0.90
0.95
100.00
Inventory
1.22
1.66
1.10
1.05
100.00
1.90
1.80
1.00
1.01
100.00
Current assets
[Problem 7]
Financing ratios
East Company
West Company
a. Debt ratio
P 200,000 =
P 500,000
40%
P 300,000 =
P 500,000
60%
b. Equity ratio
P 300,000 =
P 500,000
60%
P 200,000 =
P 500,000
40%
c. Debt-equity ratio
P 200,000 =
P 300,000
66.67% P 300,000 =
P 200,000
133.33%
d. Equity multiplier
P 500,000 =
P 300,000
P 10,000 =
P 2,000
166.67%P 500,000 =
P 200,000
5x
P 12,000 =
P 6,000
250%
f. Financial leverage =
P 10.000
2x
P 12,000
[Problem 8]
Profitability ratios
1.
a.
ROS
P 7,000
P 350,000
2%
b.
ROA
P 7,000
P 120,000
35%
c.
ROE
d.
e.
f.
g.
2.
ROA
70%
AT
=
=
=
3.
ROE =
ROE =
166.67 =
EM
=
Debt ratio
P
P
7,000
8,400
83.33%
P 7,000 = 58.33
P 120
P
6,880,000 =
200,000 shares
P 40,000 =
P 12,000
P 34.40
3.33
35% x 2
=
70%
5% x Asset turnover
70%/5%
=
14
833.33% x 2 =
166.67%
ROS x Asset turnover x Equity multiplier
6% x 20 x EM
166.67%
=
1.3889
120%
=
1 - _1_
EM
=
1 - __1__
1.3889
=
28%
P
P
2. Payout ratio
P
P
200 = 4:1
50
20 = 40%
50
P90 = 3:1
P30
P25 = 833.33%
30
3. Yield ratio
20 = 10%
200
40,000 sh x P 120
40,000 sh
= P120
P25 = 27.78%
P90
40,000 sh x P 150
40,000 sh
P150
DPS
=
=
3.
Inventory days
b. Receivable turnover =
Collection period
c. Payables turnover =
Payment period
d. Operating cycle
JS Corporation
DV Corporation
P110,000 =
2,750
40
P180,000 = 25
7,200
360 days =
40
9 days
P190,000 =
P 9,500
20
360days=14.4 days
25
P240,000 = 15
P 16,000
CA
P 12,850
Cliab
(2,400)
Net WC P 10,450
CA
P 24,000
Cliab
(3,500)
Net WC P 20,500
g. WC turnover
P200,000 = 19.14
P 10,450
P285,000 =
P 20,500
13.90
h. Cash turnover
P18,000 =
P 600
P17,600 =
P 800
22
Days in operating =
expenses
i. Asset turnover
30
P200,000 =
P 80,000
P285,000 =
P 95,000
2.5
P 10,000 = 10x
P 1,000
P 10,800 =
P 1,200
9x
360 days =
9
40 days
P 42,000 =
P 1,400
30x
360 days =
30
12 days
P 30,800 = 14x
P 2,200
P 40,000 =
P 2,500
16x
3. FG Invty turnover =
2007
FG Invty days
360 days =
16
23 days
4. Cash turnover
P
P
P
P
8x
Days in cash
=
operating expenses
4,320 = 8.64x
500
3,240 =
400
360 days =
8
45 days
5. Current asset
turnover
P 56,400 = 6.13
P 9,200
P 53,720 =
P 10,100
5.32
P
P
P
P
1.90
7. Defensive-interval =
ratio
P
5,100 = 425
(P4,320/360)
5,100 =
2,100
2.43
4,800 =
2,525
P
4,800 = 533
(P3,240/360)
Leverage
and Equity
Mix
Stockholders'
Equity Mix
600,000
600,000
600,000
300,000
600,000
600,000
300,000
180,000
180,000
180,000
Net Income
420,000
420,000
120,000
150,000
420,000
270,000
120,000
4,000,000
2,500,000
1,500,000
10.50%
10.80 %
8.00%