Demonstration Problem Accounting What the Numbers Mean 10e Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem

Condensed Balance Sheets Problem Definition Presented below are summarized data from the balance sheets and income statements of Wiper, Inc.: WIPER, INC. Condensed Balance Sheets December 31, 2014, 2013, and 2012 2014 2013 2012 Current assets . . . . . . . . . . . . . $ 677 $ 891 $ 736 Other assets. . . . . . . . . . . . . . . 2,413 1,920 1,719 $3,090 $2,811 $2,455 Current liabilities . . . . . . . . . . . . $ 562 $ 803 $ 710 Other liabilities. . . . . . . . . . . . . . 1,521 982 827 Stockholders’ equity. . . . . . . . . . 1,007 1,026 918 $3,090 $2,811 $2,455

Problem Definition Income statement data: 2014 2013 WIPER, INC. Selected Income Statement Data and Other Data For the Years Ended December 31, 2014 and 2013 (in millions) Income statement data: 2014 2013 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,050 $2,913 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 296 310 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 84 65 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 187 Other data: Average number of common shares outstanding. . . . . 41.3 46.7 Total dividends paid . . . . . . . . . . . . . . . . . . . . . . . $ 50.0 $ 52.3

Problem Definition Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation. Calculate return on equity for 2014 and 2013. Calculate working capital and the current ratio for each of the past three years. Calculate earnings per share for 2014 and 2013. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2014, what was the market price of the stock? f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Definition Calculate the dividend payout ratio for 2014. Assume that accounts receivable at December 31, 2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013. Calculate the times interest earned ratio for 2014 and 2013. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

Problem Solution a. ROI = Margin x Turnover Net income Net income . Sales Average total assets Sales Average total assets 2014 ROI =

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050)

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2013 ROI =

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2013 ROI = ($187 / $2,913)

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover

Problem Solution a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets 2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover = 7.1% ROI

Problem Definition Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation. Calculate return on equity for 2014 and 2013. Calculate working capital and the current ratio for each of the past three years. Calculate earnings per share for 2014 and 2013. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2014, what was the market price of the stock? f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Solution b. ROE = Net income / Average stockholders’ equity

Problem Definition Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation. Calculate return on equity for 2014 and 2013. Calculate working capital and the current ratio for each of the past three years. Calculate earnings per share for 2014 and 2013. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2014, what was the market price of the stock? f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Solution c. 2014 2013 2012 Current assets . . . . . . . . . . . . . $677 $891 $736

Problem Solution c. 2014 2013 2012 Current assets . . . . . . . . . . . . . $677 $891 $736 Current liabilities . . . . . . . . . . (562) (803) (710)

Problem Solution c. 2014 2013 2012 Current assets . . . . . . . . . . . . . $677 $891 $736 Current liabilities . . . . . . . . . . (562) (803) (710) Working capital (CA –CL) . . . $115 $ 88 $ 26

Problem Solution c. 2014 2013 2012 Current assets . . . . . . . . . . . . . $677 $891 $736 Current liabilities . . . . . . . . . . (562) (803) (710) Working capital (CA –CL) . . . $115 $ 88 $ 26 Current ratio (CA / CL) . . . . . 1.2 1.1 1.0

Problem Definition Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation. Calculate return on equity for 2014 and 2013. Calculate working capital and the current ratio for each of the past three years. Calculate earnings per share for 2014 and 2013. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2014, what was the market price of the stock? f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Solution d. EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 / 41.3 EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 / 41.3 = $4.65 EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 / 41.3 = $4.65 2013 EPS = EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 / 41.3 = $4.65 2013 EPS = $187 EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 / 41.3 = $4.65 2013 EPS = $187 / 46.7 EPS = Net income / Weighted-average number of shares outstanding

Problem Solution d. 2014 EPS = $192 / 41.3 = $4.65 2013 EPS = $187 / 46.7 = $4.00 EPS = Net income / Weighted-average number of shares outstanding

Problem Definition Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation. Calculate return on equity for 2014 and 2013. Calculate working capital and the current ratio for each of the past three years. Calculate earnings per share for 2014 and 2013. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2014, what was the market price of the stock? f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Solution e. Price/Earnings Ratio = Market Price / Earnings Per Share

Problem Solution e. 13 = Price/Earnings Ratio = Market Price / Earnings Per Share

Problem Solution e. 13 = $??? Price/Earnings Ratio = Market Price / Earnings Per Share

Problem Solution e. 13 = $??? / $4.65 Price/Earnings Ratio = Market Price / Earnings Per Share

Problem Solution e. 13 = $??? / $4.65 Market price = Price/Earnings Ratio = Market Price / Earnings Per Share

Problem Solution e. 13 = $??? / $4.65 Market price = $60.45 Price/Earnings Ratio = Market Price / Earnings Per Share

Problem Definition Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation. Calculate return on equity for 2014 and 2013. Calculate working capital and the current ratio for each of the past three years. Calculate earnings per share for 2014 and 2013. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2014, what was the market price of the stock? f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Solution f. Cash dividends per share = Total cash dividends / Weighted average shares outstanding

Problem Solution f. $50 million Cash dividends per share = Total cash dividends / Weighted average shares outstanding

Problem Solution f. $50 million / 41.3 million Cash dividends per share = Total cash dividends / Weighted average shares outstanding

Problem Solution f. $50 million / 41.3 million = $1.21 Cash dividends per share = Total cash dividends / Weighted average shares outstanding

Problem Solution f. $50 million / 41.3 million = $1.21 Cash dividends per share = Total cash dividends / Weighted average shares outstanding Dividend yield = Cash dividends per share / Market price per share

Problem Solution f. $50 million / 41.3 million = $1.21 $1.21 per share Cash dividends per share = Total cash dividends / Weighted average shares outstanding Dividend yield = Cash dividends per share / Market price per share

Problem Solution f. $50 million / 41.3 million = $1.21 $1.21 per share / $60.45 per share Cash dividends per share = Total cash dividends / Weighted average shares outstanding Dividend yield = Cash dividends per share / Market price per share

Problem Solution f. $50 million / 41.3 million = $1.21 $1.21 per share / $60.45 per share = 2% Cash dividends per share = Total cash dividends / Weighted average shares outstanding Dividend yield = Cash dividends per share / Market price per share

Problem Definition Calculate the dividend payout ratio for 2014. Assume that accounts receivable at December 31, 2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013. Calculate the times interest earned ratio for 2014 and 2013. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Solution g. Dividend payout ratio = Dividends per share / Earnings per share

Problem Solution g. $1.21 per share Dividend payout ratio = Dividends per share / Earnings per share

Problem Solution g. $1.21 per share / $4.65 per share Dividend payout ratio = Dividends per share / Earnings per share

Problem Solution g. $1.21 per share / $4.65 per share = 26% Dividend payout ratio = Dividends per share / Earnings per share

Problem Definition Calculate the dividend payout ratio for 2014. Assume that accounts receivable at December 31, 2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013. Calculate the times interest earned ratio for 2014 and 2013. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Solution h. Average days’ sales = Annual sales / 365 days

Problem Solution h. $3,050 million Average days’ sales = Annual sales / 365 days

Problem Solution h. $3,050 million / 365 days Average days’ sales = Annual sales / 365 days

Problem Solution h. $3,050 million / 365 days = $8.356 million Average days’ sales = Annual sales / 365 days

Problem Solution h. $3,050 million / 365 days = $8.356 million Average days’ sales = Annual sales / 365 days Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

Problem Solution h. $3,050 million / 365 days = $8.356 million Average days’ sales = Annual sales / 365 days Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

Problem Solution h. $3,050 million / 365 days = $8.356 million $309 million / $8.356 million Average days’ sales = Annual sales / 365 days Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

Problem Solution h. $3,050 million / 365 days = $8.356 million $309 million / $8.356 million = 37.0 days Average days’ sales = Annual sales / 365 days Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

Problem Definition Calculate the dividend payout ratio for 2014. Assume that accounts receivable at December 31, 2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013. Calculate the times interest earned ratio for 2014 and 2013. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Solution i. Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207% Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207% 12/31/13 debt/equity ratio = Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207% 12/31/13 debt/equity ratio = ($803 + $982) Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207% 12/31/13 debt/equity ratio = ($803 + $982) / $1,026 Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Solution i. 12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4% 12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5% 12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207% 12/31/13 debt/equity ratio = ($803 + $982) / $1,026 = 174% Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity) Debt/equity ratio = Total liabilities / Total stockholders’ equity

Problem Definition Calculate the dividend payout ratio for 2014. Assume that accounts receivable at December 31, 2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013. Calculate the times interest earned ratio for 2014 and 2013. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Solution j. Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 / $84 Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 / $84 = 3.5 times Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 / $84 = 3.5 times For 2013 = Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 / $84 = 3.5 times For 2013 = $310 Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 / $84 = 3.5 times For 2013 = $310 / $65 Times interest earned = Operating income / Interest expense

Problem Solution j. For 2014 = $296 / $84 = 3.5 times For 2013 = $310 / $65 = 4.8 times Times interest earned = Operating income / Interest expense

Problem Definition Calculate the dividend payout ratio for 2014. Assume that accounts receivable at December 31, 2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013. Calculate the times interest earned ratio for 2014 and 2013. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Solution A young, single professional would probably be more interested in potential growth of capital rather than current dividend income, and would probably be willing to invest in a stock that represented a relatively risky investment. Based on these criteria, the significant growth in earnings per share and the relatively high financial leverage could make this stock an attractive, though risky, potential investment. (continued)

Problem Solution k. The liquidity of the company is relatively low, based on an “average” current ratio of 1.0. Without further information about the composition of current assets and current liability accounts, it is difficult to assess the firm’s liquidity. The number of days’ sales in accounts receivable indicates that the accounts receivable are relatively current, assuming that the credit terms are net 30. (continued)

Problem Solution (concluded) The company’s ROI is relatively low, and the two-year trend is down. This would be a major concern, and the reasons for this situation would be sought. The price/earnings ratio of 13 is typical for a firm with a falling ROI; the fact that the P/E ratio has remained within the “normal” range may indicate that future earnings prospects for the firm are fairly strong.

You should now have a better understanding of ratio analysis. Accounting What the Numbers Mean 10e You should now have a better understanding of ratio analysis. Remember that there is a demonstration problem for each chapter that is here for your learning benefit. David H. Marshall Wayne W. McManus Daniel F. Viele