Horngren’s Financial & Managerial Accounting 4/e Solutions Manual: Chapter 15: Northeast Lakeview College - ACCOUNTING 1sm_15Chapter 15 Financial Statement Analysis - $10.49   Add to cart

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Horngren’s Financial & Managerial Accounting 4/e Solutions Manual: Chapter 15: Northeast Lakeview College - ACCOUNTING 1sm_15Chapter 15 Financial Statement Analysis

Northeast Lakeview College - ACCOUNTING 1sm_15Chapter 15 Financial Statement Analysis Review Questions 1. The three main ways to analyze financial statements are horizontal analysis, vertical analysis, and ratio analysis. 2. An annual report (10-K) is a report required by the Securities and Exchange Commission that provides information about a company’s financial condition. The annual report includes the following: • An overview of the business • Management’s discussion and analysis • The report of an independent registered public accounting firm • Financial statements • Notes to financial statements 3. The horizontal analysis is the study of percentage changes in comparative financial statements. It is calculated using this formula: (Dollar amount of change / Base period amount) x 100. 4. The trend analysis is a form of horizontal analysis in which percentages are computed by selecting a base period as 100% and expressing amounts for following periods as a percentage of the base period amount. (Any period amount / Base period amount) x 100. 5. The vertical analysis of a financial statement shows the relationship of each item to its base amount, which is the 100% figure. Every other item on the statement is then reported as a percentage of the base. For the income statement, net sales is the base. For the balance sheet, total assets is the base. 6. A common-size statement reports only percentages—the same percentages that appear in a vertical analysis. By only reporting percentages, it removes dollar value bias when comparing one company to another company. 7. Benchmarking is the practice of comparing a company with other leading companies. The two main types of benchmarking in financial statement analysis are: benchmarking against a key competitor and benchmarking against the industry average. 8. The ratios that are used to evaluate the ability of a company to pay its current liabilities are: • Working capital: Current assets – Current liabilities • Current ratio: Current assets / Total current liabilities • Cash ratio: (Cash Cash equivalents) / Total current liabilities • Acid-Test (or Quick) ratio: (Cash Short-term investments Net current receivables) / Total current liabilities 9. The ratios that are used to evaluate a company’s ability to sell merchandise inventory and collect receivables are: • Inventory turnover—measures the number of times a company sells its average level of merchandise inventory during a period. Cost of goods sold/ Average merchandise inventory. • Days’ sales in inventory measures the average number of days merchandise inventory is held by the company: 365 days / Inventory turnover • Gross profit percentage measures the profitability of each net sales dollar above the cost of goods sold and is computed as: Gross profit / Net sales revenue. • Accounts receivable turnover measures the number of times the company collects the average receivables balance in a year: Net credit sales / Average net accounts receivable. • Days’ sales in receivables is also called the collection period. This ratio indicates how many days it takes to collect the average level of receivables: 365 days / Accounts receivable turnover. 10. The ratios that can be used to evaluate a company’s ability to pay long-term debt are: • Debt ratio—Shows the proportion of assets financed by debt: Total liabilities / Total assets. • Debt to Equity ratio—Shows the proportion of total debt to equity: Total liabilities / Total equity. • Times-Interest-Earned ratio—Evaluates the business’s ability to pay interest expense. It is calculated as: EBIT (Net income Income tax expense Interest expense) / interest expense. 11. The ratios that can be used to evaluate a company’s profitability are: • Profit margin ratio—Shows how much net income is earned on every dollar of sales: Net income / Net sales. • Rate of return on total assets—Measures the success a company has in using its assets to earn income: (Net income Interest expense) / Average total assets. • Asset turnover ratio—Measures how efficiently a business uses its average total assets to generate sales: Net sales / Average total assets. • Rate of return on common stockholder’s equity—Shows the relationship between net income available to common stockholders and their average common equity invested in the company: (Net income – Preferred dividends) / Average common stockholder’s equity. • Earnings per share—Measures the amount of a company’s net income (loss) for each share of its outstanding common stock: (Net income – Preferred dividends) / Weighted average number of common shares outstanding. 12. The ratios that can be used to evaluate a company’s stock as an investment are: • Price / earnings ratio—The market price of a share of common stock in relation to the company’s earnings per share. It measures the value that the stock market places on $1 of a company’s earnings: Market price per share of common stock / Earnings per share. • Dividend yield—The ratio of annual dividends per share of stock to the stock’s market price per share. It measures the percentage of a stock’s market value that is returned annually as dividends to stockholders: Annual dividend per share / Market price per share. • Dividend payout—The ratio of dividends declared per common share relative to the earnings per share of the company: Annual dividend per share / Earnings per share. 13. Some of the common red flags in financial statement analysis are: • Unexpected or inconsistent movements among sales, merchandise inventory, and receivables • Earnings problems • Decreased cash flow • Too much debt • Inability to collect receivables • Buildup of merchandise inventory 14A. The disposal of a segment of a business would be reported under discontinued operations, net of the tax impact. 15A. Losses from natural disasters (floods, earthquakes, and tornadoes) and the taking of company assets by a foreign government (expropriation) are generally considered to be extraordinary items. They are reported separately from continuing operations because of their infrequent and unusual nature. Short Exercises S15-1 Larry should complete a review of the company’s performance across several periods of time. The horizontal analysis, vertical analysis, and standard financial ratios should be completed for the company. They should be compared from year to year with a competing company and with the same industry as a whole. He should also review the auditor’s opinion, management’s discussion and analysis, and notes to financial statements in the annual report. S15-2 Increase (Decrease) (Amounts in millions) 2016 2015 2016 2015 2014 Amount Percent Amount Percent Revenues $9,575 $9,300 $8,975 $275 3.0% $325 3.6% Cost of Goods Sold 6,000 5,975 5,900 Gross profit $3,575 $3,325 $3,075 $250 7.5% $250 8.1% S15-3 Requirement 1 2016 2015 2014 2013 Revenue $ 9,910 $ 9,700 $ 9,210 $ 9,110 Trend Percentages 109% 106% 101% 100% Net Income $7,475 $7,400 $5,495 $4,690 Trend Percentages 159% 158% 117% 100% Requirement 2 Net income increased faster than revenue during 2014 – 2016. S15-4 2015 2014 Amount Percent Amount Percent Cash and Receivables $ 54,530 26.6% $ 46,860 28.4% Merchandise Inventory 42,435 20.7 32,670 19.8 Property, Plant and Equipment, Net 108,035 52.7 85,470 51.8 Total Assets $ 205,000 100.0% $165,000 100.0% S15-5 Requirement 1 Martinez Rosado Net Sales 100.0% 100.0% Cost of Goods Sold 60.9 72.7 Other Expense 33.4 22.5 Net Income 5.7% 4.8% Requirement 2 Rosado earns more net income. Requirement 3 Martinez has a higher net income as a percentage of net sales. S15-6 Requirement 1 Current ratio = Total current assets Total current liabilities 2015: $54,300,000 = 1.65 $33,000,000 2014: $25,200,000 = 1.92 $13,100,000 Requirement 2 Win’s Companies’ current ratio deteriorated from 2014 to 2015. S15-7 Requirement 1 Inventory turnover = Cost of goods sold Average merchandise inventory 2015: $28,400,000 = [($6,900,000 $8,200,000) / 2] $28,400,000 = 3.76 $7,550,000 Days’ sales in inventory = 365 days Inventory turnover 2015: 365 days = 97 days 3.76 Gross profit percentage = Gross profit Net sales revenue 2015: ($50,200,000 – 28,400,000) = $50,200,000 2015: $21,800,000 $50,200,000 = 0.434 = 43.4% S15-7, cont. Requirement 2 Accounts receivable turnover ratio = Net credit sales Average net accounts receivables 2015: $50,200,000 = [($7,400,000 $5,300,000) / 2] 2015: $50,200,000 $6,350,000 = 7.9 Days’ Sales in Receivables = 365 days Accounts receivable turnover ratio 2015: 365 days = 46 days 7.9 Requirement 3 Win’s Companies’ have a high amount of inventory on hand and a low inventory turnover ratio. This could be an area to look at and compare to the prior year and industry average. They have a high gross profit percentage, which is a good indicator. The amount of time it takes to collect receivables seems high, but this would depend on the credit terms. S15-8 Requirement 1 Debt ratio = Total liabilities Total assets 2015: $45,300,000 = 0.513 = 51.3% $88,300,000 Debt to equity ratio = Total liabilities Total equity 2015: $45,300,000 = 1.05 $43,000,000 S15-8, cont. Requirement 2 Win’s debt ratio and debt to equity ratio are not very high, which indicates it’s in a strong position to pay its liabilities. S15-9 Requirement 1 Profit margin ratio = Net income Net sales 2015: $15,500,000 = 0.309 = 30.9% $50,200,000 Requirement 2 Rate of return on total assets = Net income Interest expense Average total assets 2015: ($15,500,000 $500,000) = [($88,300,000 $51,200,000) / 2] 2015: $16,000,000 69,750,000 = 0.229 = 22.9% Requirement 3 Asset turnover ratio = Net sales Average total assets 2015: $50,200,000 = [($88,300,000 $51,200,000) / 2] 2015: $50,200,000 69,750,000 = .72 times S15-9, cont. Requirement 4 Rate of return on common stockholders’ equity = Net income – Preferred dividends Average common stockholders’ equity 2015: $15,500,000 – $0 = [($43,000,000 $27,500,000) / 2] 2015: $15,500,000 $35,250,000 = 0.440 = 44.0% Requirement 5 The rates of return are strong. The rate of return on total assets is 22.9% and the rate of return on common stockholder’s equity is 44.0%. S15-10 Requirement 1 Earnings per share = Net income – Preferred dividends Weighted average number of common shares outstanding 2015: $15,500,000 – $0 = $31.00 / share 500,000 shares Requirement 2 Price/earnings ratio = Market price per share of common stock Earnings per share 2015: $68.50 per share = 2.21 $31.00 per share Requirement 3 Win’s Companies’ price /earnings ratio for 2015 of 2.21 means that the company’s stock is selling at 2.21 times one year’s earnings. This is low. The high amount of earnings per share would possibly make the company a good investment opportunity. S15-11 LANDMARK MILLS Income Statement Year Ended December 31, 2015 Net Sales $ 7,200 Cost of Goods Sold 2,905 (a) Selling and Admin Expenses 1,830 Interest Expense 990 (b) Other Expenses 150 Income before Taxes $ 1,325 Income Tax Expense 533 (c) Net Income $ 792 (d) a. = Average merchandise inventory × Inventory turnover $830 × 3.50 = $2,905 b. = Net Sales – COGS − S & A – Other Expenses – Income before Taxes $7,200 – 2,905 – 1,830 – 150 – 1,325 = $990 c. = Income before Taxes – Net Income $1,325 − $792 = $533 d. = Profit Margin Ratio × Net Sales $7,200 × .11 = $792 S15-12 VINTAGE MILLS Balance Sheet December 31, 2015 Assets Liabilities Cash $ 75 Total Current Liabilities $ 1,900 Accounts Receivable (a) 685 Long-term Note Payable (e) 1,595 Merchandise Inventory 750 Other Long-term Liabilities 980 Prepaid Expenses (b) 10 Total Liabilities (f) 4,475 Total Current Assets (c) $1,520 Plant Assets, Net (d) 3,280 Stockholders’ Equity Other Assets 2,000 Stockholders’ Equity 2,325 Total Assets $ 6,800 Total Liabilities and Stockholders’ Equity (g) $ 6,800 a. = (Acid-test Ratio × Total Current Liabilities) − Cash (.40 x $1,900) – 75 = 685 b. = Total Current Assets – Cash – Accounts Receivable – Merchandise Inventory ($1,520 – 75 – 685 – 750) = 10 c. = Current Ratio × Current Liabilities .80 × 1,900 = 1,520 d. = Total Assets – Total Current Assets – Other Assets $6,800 – 1,520 – 2,000 = 3,280 e. = Total Liabilities – Other Long-Term Liabilities – Total Current Liabilities $4,475 – 980 – 1,900 = 1,595 f. = Total Liabilities and Stockholder’s Equity – Stockholder’s Equity $6,800 – 2,325 = 4,475 g. = Total Assets = Total Liabilities and Stockholder’s Equity $6,800 S15A-13 R&R CORPORATION Income Statement Year Ended December 31, 2015 Net Sales $ 177,000 Cost of Goods Sold 73,000 Gross Profit 104,000 Operating Expenses 55,000 Operating Income 49,000 Other Revenues and (Expenses): (15,000) Income Before Taxes 34,000 Income Tax Expense 10,200 Income from Continuing Operations 23,800 Discontinued Operations (less applicable tax of $3,600) 8,400 Income before Extraordinary Items 32,200 Extraordinary Item (less applicable tax saving of $2,100) (4,900) Net Income $ 27,300 S15A-14 R&R CORPORATION Income Statement Year Ended December 31, 2015 Earnings per Share of Common Stock (13,500 shares outstanding) Income from Continuing Operations ($23,800 − $3,000) / 13,500 $ 1.54 Discontinued Operations 0.62 Income before Extraordinary Items ($32,200 − $3,000) / 13,500 2.16 Extraordinary Item (0.36) Net Income ($27,300 − $3,000) / 13,500 $ 1.80 Exercises E15-15 Requirement 1 MARINER DESIGNS, INC. Comparative Income Statement Years Ended December 31, 2015 and 2014 Increase (Decrease) 2015 2014 Amount Percentage Net Sales Revenue $ 431,000 $ 372,350 $58,650 15.8% Expenses: Cost of Goods Sold 200,000 187,550 12,450 6.6 Selling and Administrative Expenses 99,000 91,050 7,950 8.7 Other Expenses 8,350 6,850 1,500 21.9 Total Expenses 307,350 285,450 21,900 7.7 Net Income $ 123,650 $ 86,900 36,750 42.3% Requirement 2 Net income increased by a higher percentage than total net sales revenue during 2015 because revenues increased at a higher rate than total expenses. E15-16 Requirement 1 2016 2015 2014 2013 2012 Net Revenue $ 1,310,000 $ 1,187,000 $ 1,110,000 $ 1,011,000 $1,045,000 Trend Percentages 125% 114% 106% 97% 100% Net Income $122,000 $113,000 $84,000 $72,000 83,000 Trend Percentages 147% 136% 101% 87% 100% Requirement 2 Net income grew at a faster rate (47%) than net revenue (25%). E15-17 BETA GRAPHICS, INC. Comparative Balance Sheet December 31, 2015 and 2014 2015 Percent of Total 2014 Percent of Total Assets Total Current Assets $ 42,750 15.0% $ 59,000 19.1% Property, Plant, and Equipment, net 208,335 73.1 215,000 69.5 Other Assets 33,915 11.9 35,500 11.5 Total Assets $ 285,000 100.0% $ 309,500 100.0% Liabilities Total Current Liabilities $ 49,020 17.2% $ 50,100 16.2 Long-term Debt 109,155 38.3 102,300 33.1 Total Liabilities $ 158,175 55.5 $ 152,400 49.2 Stockholders’ Equity Total Stockholders’ Equity $ 126,825 44.5 $ 157,100 50.8 Total Liabilities and Stockholders’ Equity $ 285,000 100.0% $ 309,500 100.0% E15-18 Requirement 1 MARINER DESIGNS, INC. Comparative Common-Size Income Statement Years Ended December 31, 2015 and 2014 2015 2014 Net Sales Revenue 100.0% 100.0% Expenses: Cost of Goods Sold 46.4 50.4 Selling and Administrative Expenses 23.0 24.5 Other Expenses 1.9 1.8 Total Expenses 71.3 76.7 Net Income 28.7% 23.3% Requirement 2 An investor would be pleased with the 2015 results. There is a decrease in cost of goods sold and selling and administrative expenses as a percentage of net sales revenue; this causes the net income to be a larger percentage of net sales revenue. E15-19 Current Assets – Current Liabilities = Working Capital Dollar amount of change Percentage of Change 2016: $510,000 – $245,000 = $265,000 $90,000 51.4% 2015: $350,000 – $175,000 = $175,000 $55,000 45.8% 2014: $240,000 – $120,000 = $120,000 Beverage Enterprises working capital has improved year over year from 2014 to 2016. It is better able to meet its short-term obligations with its current assets. E15-20 a. Total current assets Total current liabilities $172,000 $133,000 = 1.29 b. Cash Cash equivalents Total current liabilities $15,000 0 $133,000 = .11 c. Cash Short-term investments Net current receivables Total current liabilities $15,000 11,000 54,000 $133,000 = .60 d. Cost of goods sold Average merchandise inventory $315,000 ($77,000 69,000) / 2 = 4.32 e. 365 days Inventory turnover 365 days 4.32 = 84 days f. Net credit sales Average net accounts receivables $462,000 ($54,000 73,000) / 2 = 7.28 365 days Accounts receivable turnover ratio 365 days 7.28 = 50 days g. Gross Profit Net Sales Revenue ($462,000 − $315,000) $462,000 = 0.32 E15-21 2015 2014 a. Total current assets Total current liabilities $446,000 $255,000 = 1.75 $486,000 $222,000 = 2.19 b. Cash Cash equivalents Total current liabilities $58,000 0 $255,000 = 0.23 $57,000 0 $222,000 = 0.26 c. Cash Short-term investments Net current receivables Total current liabilities $58,000 31,000 110,000 $255,000 = 0.78 $57,000 0 132,000 $222,000 = 0.85 d. Total liabilities Total assets $255,000 46,000 $585,000 = 0.51 $222,000 48,000 $535,000 = 0.50 e. Total liabilities Total equity (Total assets – Total liabilities) $301,000 $585,000 − $301,000 = 1.06 $270,000 $535,000 − $270,000 = 1.02 The current ratio and quick ratio are relatively high, so the company appears to have the liquidity to pay these liabilities. The debt to equity ratio and the debt ratio are also not extremely high, so the company is not overloaded with debt. E15-22 Requirement 1 Profit margin ratio = Net income Net sales 2016: $17,400 = 0.099 = 9.9% $176,000 2015: $12,600 = 0.079 = 7.9% $160,000 E15-22, cont. Requirement 2 Rate of return on total assets = Net income Interest expense Average total assets 2016: ($17,400 $9,000) = 0.134 = 13.4% [($203,000 190,000) / 2] 2015: ($12,600 $10,300) [($190,000 175,000) / 2] = 0.125 = 12.5% Requirement 3 Asset turnover ratio = Net sales Average total assets 2016: $176,000 = .90 times [($203,000 $190,000) / 2] 2015: $160,000 [($190,000 $175,000) / 2] = .88 times Requirement 4 Rate of return on common stockholders’ equity = Net income – Preferred dividends Average common stockholders’ equity 2016: $17,400 – $3,500 = 0.149 = 14.9% [($96,600 $90,100) / 2] 2015: $12,600 - $3,500 [($90,100 $79,400) / 2] = 0.107 = 10.7% E15-22, cont. Requirement 5 Earnings per share = Net income – Preferred dividends Weighted average number of common shares outstanding 2016: $17,400 – $3,500 = $0.68 / share 20,500 shares 2015: $12,600 – $3,500 = $0.47 / share [(20,500 shares 18,000 shares) / 2] Requirement 6 Dividend payout = Annual dividend per share Earnings per share ; 2016: $0.36 per share = 0.529 = 52.9% $0.68 per share Requirement 7 The company’s performance improved during 2016 based on an improvement in all ratios evaluated. E15-23 Earnings per share = Net income – Preferred dividends Weighted average number of common shares outstanding 2015: $61,000 – $12,600 = $0.61 / share 80,000 shares 2014: $52,000 – $12,600 = $0.49 / share 80,000 shares Price/earnings ratio = Market price per share of common stock Earnings per share 2015: $19.50 per share = 31.97 $0.61 per share 2014: $14.00 per share = 28.57 $0.49 per share Dividend yield = Annual dividend per share Market price per share 2015: ($26,000 / 80,000 shares) = $.325 per share = 0.017 = 1.7% $19.50 per share 2014: ($26,000 / 80,000 shares) = $.325 per share = 0.023 = 2.3% $14.00 per share Dividend payout = Annual dividend per share Earnings per share 2015: $.325 per share = 0.533 = 53.3% $.61 per share 2014: $.325 per share = 0.663 = 66.3% $.49 per share The stock’s attractiveness increased during 2015, as shown by the increase in the price/earnings ratio. If an investor is looking at the stock for dividend potential, then the stock is less attractive than last year; both the dividend yield and dividend payout decreased. E15-24 BETTY SHOPS INC. Balance Sheet December 31, 2015 Assets Liabilities Total Current Assets $1,200,000 Total Current Liabilities $ 800,000 Plant Assets $3,387,500 Long-term Liabilities 600,000 Less: Accumulated Depreciation 2,400,000 Total Liabilities 1,400,000 Plant Assets, Net 987,500 Stockholders’ Equity 787,500 Total Assets $ 2,187,500 Total Liabilities and Stockholder’s Equity $2,187,500 Current Liabilities = Current Assets / Current Ratio $1,200,000 / 1.50 = $800,000 Long-term Liabilities = Total Liabilities – Current Liabilities $1,400,000 – 800,000 = $600,000 Total Assets = Total Liabilities / Debt Ratio $1,400,000 / .64 = $2,187,500 Plant Assets, Net = Total Assets – Total Current Assets $2,187,500 – 1,200,000 = 987,500 Plant Assets = Plant Assets, Net Accumulated Depreciation $987,500 2,400,000 = 3,387,500 E15A-25 CLICK PHOTOGRAPHIC SUPPLIES, INC. Income Statement Year Ended December 31, 2015 Sales $ 480,000 Cost of Goods Sold 205,000 Gross Profit 275,000 Operating Expenses (Including Income Tax) 130,000 Income from Continuing Operations 145,000 Discontinued Operations (less applicable tax of $14,000) (21,000) Income before Extraordinary Items 124,000 Extraordinary Item (less applicable tax saving of $8,000) (12,000) Net Income $ 112,000 E15A-26 Common Shares Outstanding Earnings per Share of Common Stock Income from Continuing Operations $125,000 - $3,500 = $121,500 10,000 $ 12.15 Discontinued Operations ($5,000) 10,000 (.50) Income before Extraordinary Items 11.65 Extraordinary Item $25,000 10,000 2.50 Net Income $ 14.15 Preferred Dividends 7,000 shares x $10 × 5% = $3,500 Problems (Group A) P15-27A Requirement 1 2016 2015 2014 2013 Net Sales Revenue $ 762,000 $ 706,000 $ 637,000 $ 665,000 Trend Percentages 115% 106% 96% 100% Net Income $58,000 $44,000 $37,000 $43,000 Trend Percentages 135% 102% 86% 100% Ending Common Stockholder’s Equity $376,000 $358,000 $330,000 $304,000 Trend Percentages 124% 118% 109% 100% Requirement 2 Rate of return on common stockholders’ equity = Net income – Preferred dividends Average common stockholders’ equity 2016: $58,000 – $0 = 0.158 = 15.8% [($376,000 $358,000) / 2] 2015: $44,000 - $0 [($358,000 $330,000) / 2] = 0.128 = 12.8% 2014: $37,000 - $0 [($330,000 $304,000) / 2] = 0.117 = 11.7% P15-28A Requirement 1 MCCONNELL DEPARTMENT STORES, INC. Income Statement Year Ended December 31, 2014 Percent of Total Net Sales $ 778,000 100.0% Cost of Goods Sold 522,816 67.2 Gross Profit 255,184 32.8 Operating Expenses 161,046 20.7 Operating Income 94,138 12.1 Other Expenses 4,668 0.6 Net Income $ 89,470 11.5% MCCONNELL DEPARTMENT STORES, INC. Balance Sheet December 31, 2014 Percent of Total Current Assets $ 325,440 67.8% Fixed Assets, Net 120,960 25.2 Intangible Assets, Net 8,640 1.8 Other Assets 24,960 5.2 Total Assets $ 480,000 100.0% Current Liabilities $ 222,720 46.4% Long-term Liabilities 107,520 22.4 Total Liabilities 330,240 68.8 Stockholders’ Equity 149,760 31.2 Total Liabilities and Stockholders’ Equity $ 480,000 100.0% Requirement 2 McConnell’s gross profit percentage and profit margin ratio are both less than the industry average. They have a slightly higher investment in fixed and intangible assets than the industry average. The percentage of debt to total assets is slightly higher than the industry. P15-29A Requirement 1 MCCONNELL DEPARTMENT STORES, INC. Common-Size Income Statement Year Ended December 31, 2014 McConnell Average Industry Average Net Sales 100.0% 100.0% Cost of Goods Sold 67.2 65.8 Gross Profit 32.8 34.2 Operating Expenses 20.7 19.7 Operating Income 12.1 14.5 Other Expenses 0.6 0.4 Net Income 11.5% 14.1% MCCONNELL DEPARTMENT STORES, INC. Common-Size Balance Sheet December 31, 2014 McConnell Average Industry Average Current Assets 67.8% 70.9% Fixed Assets, Net 25.2 23.6 Intangible Assets, Net 1.8 0.8 Other Assets 5.2 4.7 Total Assets 100.0% 100.0% Current Liabilities 46.4% 48.1% Long-term Liabilities 22.4 16.6 Total Liabilities 68.8 64.7 Stockholders’ Equity 31.2 35.3 Total Liabilities and Stockholders’ Equity 100.0% 100.0% Requirement 2 McConnell Industry Gross Profit Percentage $255,184 / $778,000 = 32.8% 34.2% Profit Margin Ratio $89,470 / $778,000 = 11.5% 14.1% McConnell’s gross profit percentage and profit margin ratio are both less than the industry average. P15-29A, cont. Requirement 3 McConnell Industry Current Ratio $325,440 / $222,720 = 1.46 1.47 Debt to Equity $330,240 / $149,760 = 2.21 1.83 McConnell’s current ratio is close to the industry average, but the debt to equity ratio is much worse. P15-30A Requirement 1 Current Assets: Current Liabilities: Cash $ 23,000 Accounts Payable $104,000 Accounts Receivable 79,000 Accrued Liabilities 40,000 Merchandise Inventory 184,000 Short-Term Notes Payable 47,000 Total Current Assets $286,000 Total Current Liabilities 191,000 Long-Term Liabilities 221,000 Total Liabilities $412,000 Current Ratio Debt Ratio Earnings per Share $286,000 / $191,000 = 1.50 $412,000 / $634,000 = 0.65 $74,000 / 60,000 = 1.23 Requirement 2 Current Ratio Debt Ratio Earnings per Share a. ($286,000 49,000) / ($191,000 49,000) = 1.40 ($412,000 49,000) / ($634,000 49,000) = 0.67 $74,000 / 60,000 = $1.23 b. ($286,000 122,000) / $191,000 = 2.14 ($412,000 122,000) / ($634,000 122,000) = 0.71 $74,000 / 60,000 = $1.23 c. ($286,000 103,000) / $191,000 = 2.04 $412,000/ ($634,000 103,000) = 0.56 $74,000 / (60,000 6,000) = $1.12 d. $286,000 / $191,000 = 1.50 $412,000 / $634,000 = 0.65 $74,000 / 60,000 = $1.23 P15-31A Requirement 1 2015 2014 a. Total current assets Total current liabilities $366,000 $225,000 = 1.63 $381,000 $246,000 = 1.55 b. Cash Cash equivalents Total current liabilities $97,000 0 $225,000 = .43 $95,000 0 $246,000 = .39 c. Net income Income tax expense Interest expense Interest expense $61,000 24,000 9,000 $9,000 = 10.44 $39,000 27,000 10,000 $10,000 = 7.60 d. Cost of Goods Sold Average Merchandise Inventory $237,000 ($145,000 163,000) / 2 = 1.54 $218,000 ($163,000 203,000) / 2 = 1.19 e. Gross Profit Net Sales $230,000 $467,000 = 49.3% $210,000 $428,000 = 49.1% f. Total Liabilities Total Equity $339,000 $238,000 = 1.42 $343,000 $217,000 = 1.58 g. Net income – Preferred dividends Average Common Stockholder’s Equity $61,000 – (3% × 108,000) ($130,000 109,000) / 2 = 48.3% $39,000 – (3% × 108,000) ($109,000 85,000) / 2 = 36.9% h. Net income – Preferred dividends Weighted average number of common shares outstanding $57,760 (12,000 10,000) / 2 = $ 5.25 $35,760 10,000 = $3.58 i. Market Price per share of common stock Earnings Per Share $86.58 $5.25 = 16.49 $46.54 $3.58 = 13.0 Requirement 2 a. Danfield is in a better position to pay debt in 2015 than in 2014. The current ratio, cash ratio, and times-interest-earned ratio all improved. The inventory turnover improved, and there was a slight increase in gross profit percentage. b. The attractiveness of Danfield’s stock has improved in 2015. The rate of return on common stockholder’s equity increased as well as the earnings per share and price/earnings ratio. P15-32A Requirement 1 Digitalized Zone Network a. Cash Cash equivalents Short-term Investments Accounts Receivable Total current liabilities ($23,000 0 38,000 38,000) $102,000 = .97 ($21,000 0 19,000 43,000) $96,000 = .86 b. Cost of Goods Sold Average Merchandise Inventory $206,000 ($64,000 80,000) / 2 = 2.86 $258,000 ($96,000 86,000) / 2 = 2.84 c. 365 Net Credit Sales / (Average net Accounts Receivable) 365 $423,035 / ($38,000 44,000) / 2 = 35 days 365 $ 493,115 / ($43,000 53,000) / 2 = 36 days d. Total Liabilities Total Assets $102,000 $266,000 = 38.3% $131,000 $326,000 = 40.2% e. Net income – Preferred dividends Weighted average number of common shares outstanding $54,000 − 0 12,000 = $4.50 $66,000 − 0 16,000 = $4.13 i. Market Price per share of common stock Earnings Per Share $76.50 $4.50 = 17.0 $94.99 $4.13 = 23.0 i. Annual Dividend per share Earnings Per Share $.50 $4.50 = 11.1% $.40 $4.13 = 9.7% Requirement 2 Digitalized would be the better investment based on the strategy of a low price earnings ratio, with financial strength. Digitalized’s price earnings ratio is only 17.0, compared to 23.0 for Zone Network, and Digitalized’s acid-test ratio and debt ratio are better than Zone. Digitalized is earning more per share and paying out a higher dividend percentage. P15-33A CLARKSON MOTORSPORTS, INC. Income Statement Year Ended November 30, 2014 Net Sales Revenue $ 834,000 Cost of Goods Sold 430,000 Gross Profit 404,000 Operating Expenses: Selling Expenses $125,000 Administrative Expenses 134,000 259,000 Operating Income 145,000 Other Revenues and (Expenses): 0 Income Before Taxes 145,000 Income Tax Expense 70,000 Income from Continuing Operations 75,000 Discontinued Operations (less applicable tax of $2,000) 3,000 Net Income $ 78,000 Earnings per Share of Common Stock (20,000 shares outstanding) Income from Continuing Operations $ 2.55 Income from Discontinued Operations 0.15 Net Income $ 2.70 Common Shares Outstanding Earnings per Share of Common Stock Income from Continuing Operations $75,000 − $24,000 = $51,000 / 20,000 $ 2.55 Income from Discontinued Operations $3,000 / 20,000 0.15 Net Income $78,000 − $24,000 = $54,000 / 20,000 $ 2.70 Preferred Dividends 6,000 shares × $4 = $24,000 Problems (Group B) P15-34B Requirement 1 2016 2015 2014 2013 Net Sales Revenue $ 759,000 $ 701,000 $ 629,000 $ 659,000 Trend Percentages 115% 106% 95% 100% Net Income $56,000 $43,000 $38,000 $48,000 Trend Percentages 117% 90% 79% 100% Ending Common Stockholder’s Equity $364,000 $356,000 $328,000 $300,000 Trend Percentages 121% 119% 109% 100% Requirement 2 Rate of return on common stockholders’ equity = Net income – Preferred dividends Average common stockholders’ equity 2016: $56,000 – $0 = 0.156 = 15.6% [($364,000 $356,000) / 2] 2015: $43,000 − $0 [($356,000 $328,000) / 2] = 0.126 = 12.6% 2014: $38,000 − $0 [($328,000 $300,000) / 2] = 0.121 = 12.1% P15-35B Requirement 1 SPECIALTY DEPARTMENT STORES, INC. Income Statement Year Ended December 31, 2014 Percent of Total Net Sales $ 782,000 100.0% Cost of Goods Sold 528,632 67.6 Gross Profit 253,368 32.4 Operating Expenses 163,438 20.9 Operating Income 89,930 11.5 Other Expenses 4,692 0.6 Net Income $ 85,238 10.9% P15-35B Requirement 1, cont. SPECIALTY DEPARTMENT STORES, INC. Balance Sheet December 31, 2014 Percent of Total Current Assets $ 303,750 67.5% Fixed Assets, Net 117,000 26.0 Intangible Assets, Net 5,850 1.3 Other Assets 23,400 5.2 Total Assets $ 450,000 100.0% Current Liabilities $ 208,800 46.4% Long-term Liabilities 102,600 22.8 Total Liabilities 311,400 69.2 Stockholders’ Equity 138,600 30.8 Total Liabilities and Stockholders’ Equity $ 450,000 100.0% Requirement 2 Specialty’s gross profit percentage and profit margin ratio are both less than the industry average. They have a slightly higher investment in fixed and intangible assets than the industry average. The percentage of debt to total assets is higher than the industry average. P15-36B Requirement 1 SPECIALTY DEPARTMENT STORES, INC. Common-Size Income Statement Year Ended December 31, 2014 Specialty Average Industry Average Net Sales 100.0% 100.0% Cost of Goods Sold 67.6 65.8 Gross Profit 32.4 34.2 Operating Expenses 20.9 19.7 Operating Income 11.5 14.5 Other Expenses 0.6 0.4 Net Income 10.9% 14.1% P15-36B Requirement 1, cont. SPECIALTY DEPARTMENT STORES, INC. Common-Size Balance Sheet December 31, 2014 Specialty Average Industry Average Current Assets 67.5% 70.9% Fixed Assets, Net 26.0 23.6 Intangible Assets, Net 1.3 0.8 Other Assets 5.2 4.7 Total Assets 100.0% 100.0% Current Liabilities 46.4% 48.1% Long-term Liabilities 22.8 16.6 Total Liabilities 69.2 64.7 Stockholders’ Equity 30.8 35.3 Total Liabilities and Stockholders’ Equity 100.0% 100.0% Requirement 2 Specialty Industry Gross Profit Percentage $253,368 / $782,000 = 32.4% 34.2% Profit Margin Ratio $85,238 / $782,000 = 10.9% 14.1% Specialty’s gross profit percentage and profit margin ratio are both less than the industry average. Requirement 3 Specialty Industry Current Ratio $303,750 / $208,800 = 1.45 1.47 Debt to Equity $311,400 / $138,600 = 2.25 1.83 Specialty’s current ratio is close to the industry average, but the debt to equity ratio is much worse. P15-37B Requirement 1 Current Assets: Current Liabilities: Cash $ 24,000 Accounts Payable $99,000 Accounts Receivable 82,000 Accrued Liabilities 39,000 Merchandise Inventory 188,000 Short-Term Notes Payable 51,000 Total Current Assets $294,000 Total Current Liabilities 189,000 Long-Term Liabilities 223,000 Total Liabilities $412,000 Current Ratio Debt Ratio Earnings per Share $294,000 / $189,000 = 1.56 $412,000 / $638,000 = 0.65 $72,000 / 20,000 = $3.60 Requirement 2 Current Ratio Debt Ratio Earnings per Share a. ($294,000 49,000) / ($189,000 49,000) = 1.44 ($412,000 49,000) / ($638,000 49,000) = 0.67 $72,000 / 20,000 = $3.60 b. ($294,000 122,000) / $189,000 = 2.20 ($412,000 122,000) / ($638,000 122,000) = 0.70 $72,000 / 20,000 = $3.60 c. ($294,000 103,000) / $189,000 = 2.10 $412,000/ ($638,000 103,000) = 0.56 $72,000 / (20,000 6,000) = $2.77 d. $294,000 / $189,000 = 1.56 $412,000 / $638,000 = 0.65 $72,000 / 20,000 = $3.60 P15-38B Requirement 1 2015 2014 a. Total current assets Total current liabilities $364,000 $227,000 = 1.60 $370,000 $240,000 = 1.54 b. Cash Cash equivalents Total current liabilities $91,000 0 $227,000 = .40 $88,000 0 $240,000 = .37 c. Net income Income tax expense Interest expense Interest expense $51,000 19,000 13,000 $13,000 = 6.38 $37,000 21,000 16,000 $16,000 = 4.63 d. Cost of Goods Sold Average Merchandise Inventory $239,000 ($144,000 158,000) / 2 = 1.58 $212,000 ($158,000 204,000) / 2 = 1.17 e. Gross Profit Net Sales $221,000 $460,000 = 48.0% $210,000 $422,000 = 49.8% f. Total Liabilities Total Equity $344,000 $237,000 = 1.45 $336,000 $210,000 = 1.60 g. Net income – Preferred dividends Average Common Stockholder’s Equity $51,000 – (3% × 92,000) ($145,000 118,000) / 2 = 36.7% $37,000 – (3% × 92,000) ($118,000 89,000) / 2 = 33.1% h. Net income – Preferred dividends Weighted average number of common shares outstanding $48,240 (12,000 10,000) / 2 = $4.39 $34,240 10,000 = $3.42 i. Market Price per share of common stock Earnings Per Share $86.58 $4.39 = 19.72 $46.54 $3.42 = 13.6 Requirement 2 a. Tanfield is in a better position to pay debt in 2015 than in 2014. The current ratio, cash ratio, and times-interest-earned ratio all improved. The inventory turnover improved, but was offset by a decrease in the gross profit percentage. b. The attractiveness of Tanfield’s stock has improved in 2015. The rate of return on common stockholder’s equity increased as well as the earnings per share and price/earnings ratio. P15-39B Requirement 1 Best Digital Every Zone a. Cash Cash equivalents Short-term Investments Accounts Receivable Total current liabilities ($25,000 0 42,000 42,000) $102,000 = 1.07 ($23,000 0 21,000 52,000) $100,000 = 0.96 b. Cost of Goods Sold Average Merchandise Inventory $210,000 ($69,000 83,000) / 2 = 2.76 $256,000 ($105,000 92,000) / 2 = 2.60 c. 365 Net Credit Sales / (Average net Accounts Receivable) 365 $420,115 / ($42,000 47,000) / 2 = 39 days 365 $ 498,955 / ($52,000 56,000) / 2 = 40 days d. Total Liabilities Total Assets $102,000 $268,000 = 38.1% $128,000 $331,000 = 38.7% e. Net income – Preferred dividends Weighted average number of common shares outstanding $48,000 − 0 15,000 = $3.20 $74,000 − 0 16,000 = $4.63 f. Market Price per share of common stock Earnings Per Share $48.00 $3.20 = 15.0 $115.75 $4.63 = 25.0 g. Annual Dividend per share Earnings Per Share $2.00 $3.20 = 62.5% $1.80 $4.63 = 38.9% Requirement 2 Best Digital would be the better investment based on the strategy of a low price earnings ratio, with financial strength. Best Digital’s price earnings ratio is only 15.0 compared to 25.0 for Every Zone, and Best Digital’s acid-test ratio, inventory turnover, and days’ sales in receivables are better than Every Zone. Best Digital has a lower earnings per share but is paying out a higher dividend percentage. P15-40B DAUGHTRY MOTORSPORTS, INC. Income Statement Year Ended November 30, 2014 Net Sales Revenue $ 839,000 Cost of Goods Sold 434,000 Gross Profit 405,000 Operating Expenses: Selling Expenses $ 120,000 Administrative Expenses 128,000 248,000 Operating Income 157,000 Other Revenues and (Expenses): 0 Income Before Taxes 157,000 Income Tax Expense 69,000 Income from Continuing Operations 88,000 Discontinued Operations (less applicable tax of $1,600) 2,400 Net Income $ 90,400 Earnings per Share of Common Stock (20,000 shares outstanding) Income from Continuing Operations $ 3.65 Income from Discontinued Operations 0.12 Net Income $ 3.77 Common Shares Outstanding Earnings per Share of Common Stock Income from Continuing Operations $88,000 − $15,000 = $73,000 / 20,000 $ 3.65 Income from Discontinued Operations $2,400 / 20,000 0.12 Net Income $90,400 − $15,000 = $75,400 / 20,000 $ 3.77 Preferred Dividends 3,000 shares × $5 = $15,000 Continuing Problem P15-41 a. Total current assets Total current liabilities $514,936 37,500 2,200 $10,000 4,100 10,667 $554,636 $24,767 = 22.39 b. Cash Cash equivalents Total current liabilities $514,936 0 $10,000 4,100 10,667 $514,936 $24,767 = 20.79 c. Total Liabilities Total Assets $425,583 $698,583 = 60.9% d. Total Liabilities Total Equity $425,583 $270,000 = 1.58 e. Net income – Preferred dividends Weighted average number of common shares outstanding $141,235 − 0 (130,000 18,000) / 2 $141,235 74,000 = $1.91 f. Market Price per share of common stock Earnings Per Share $200.00 $1.91 = 104.7 g. Net income – Preferred dividends Average Common Stockholder’s Equity $141,235 – 0 ($270,000 18,165) / 2 $141,235 $144,083 = 98.0% Critical Thinking Decision Case 15-1 Transaction Current ratio Debt ratio Rate of return on common stockholder’s equity 1. Increase Decrease No effect 2. Decrease Increase Increase 3. No effect Increase Decrease 4. Decrease No effect No effect 5. Decrease No effect No effect Decision Case 15-2 Requirement 1 Recording payments in December, but mailing the checks in January, understates Accounts Payable and Cash at year-end. This action makes the current ratio and the acid-test ratio look better than they really are—so long as the ratio values exceed 1.0. (The reverse is true if those ratios are below 1.0.) The following data illustrate the point: Assume the cash payments were not made in December Assumed amount of payment Reported amounts - assuming the cash payments were recorded Current assets = $100 = 2.0 − $10 = $100 − $10 = $90 = 2.25 Current liabilities $50 − $10 $50 − $10 $40 Quick assets = $70 = 1.4 − $10 = $70 − $10 = $60 = 1.50 Current liabilities $50 − $10 $50 − $10 $40 The debt ratio would also be affected, but to a lesser degree than the current ratio and the acid-test ratio. Requirement 2 Berkman may want to improve the current ratio because it is the most widely used ratio. Creditors and potential investors will look at that ratio first. By artificially boosting this ratio, it makes his financial position look better than it actually is. Ethical Issue 15-1 Requirement 1 Reclassifying the long-term investments as short-term will increase current assets and, therefore, increase the current ratio. Whether the company’s “true” financial position is stronger is not a clear-cut issue. On one hand, a better current ratio does, indeed, reflect a stronger financial position, as long as the ratio data is legitimate. On the other hand, how an asset is characterized (current or noncurrent) does not affect the underlying fundamentals of the financial position. Requirement 2 Reclassifying a long-term investment as current to meet a debt agreement does not necessarily brand Ross managers as unethical. The managers may have honestly intended to sell the investments in order to meet obligations. In that case, the managers took appropriate action. Reclassifying the investments from current back to long-term may suggest to some observers that managers are playing a shell game. However, the case states that sales subsequent to the first reclassification have improved the current ratio. Under these circumstances, Ross may not need to sell the investments. The managers may prefer to hold the investments beyond one year and, therefore, need to reclassify them as long-term. In that case, the managers’ action is appropriate. This case illustrates how gray accounting issues can be. Here the debt agreement depends on the current ratio, which is affected by an asset classification that managers control simply by their intentions. Because the managers’ true intentions cannot be ascertained with certainty, it would be hard to prove that the managers are behaving unethically. Fraud Case 15-1 Requirement 1 The sales promotion expenses would have shown a very noticeable growth trend and attracted suspicion. Furthermore, those expenses would have offset much of the bogus gross profit so investors would have noticed an increase in revenues that was not matched by an increase in net income. Requirement 2 Investors would have relied on the sales growth percentages in evaluating the company. Some may have invested based partially on that information. When the criminal complaint was filed, the stock price of the company would have dropped, hurting the investors. Once bankruptcy was declared they would have lost most of the value of their investment. Requirement 3 Allen may have been able to conceal the scheme if enough equity capital was received; but once a trend of fraudulent activity is started, it tends to build on itself and become the culture of the business. Financial Statement Case 15-1 Requirement 1 2011 2010 2009 Total net revenues $ 11,700.4 $ 10,707.4 $ 9,774.6 Trend Percentages 120% 110% 100% Net earnings $1,245.7 $945.6 $390.8 Trend Percentages 319% 242% 100% The net revenues increase is about 10% a year, while the net earnings have trended at a significantly higher percentage. This would lead an investor to believe that Starbucks is doing a good job of controlling expenses. Requirement 2 STARBUCKS CORPORATION Consolidated Balance Sheet (In millions) Oct 2, Percent of Total Oct 3, Percent of Total 2011 2010 Current Assets Cash and cash equivalents $ 1,148.1 15.6% $1,164.0 18.2% Short-term investments – available-for-sale securities 855.0 11.6 236.5 3.7 Short-term investments—trading securities 47.6 0.6 49.2 0.8 Accounts receivable, net 386.5 5.3 302.7 4.7 Inventories 965.8 13.1 543.3 8.5 Prepaid expenses and other current assets 161.5 2.2 156.5 2.5 Deferred income taxes, net 230.4 3.1 304.2 4.8 Total current assets 3,794.9 51.6 2,756.4 43.2 Long-term investments—available-for-sale securities 107.0 1.5 191.8 3.0 Equity and cost investments 372.3 5.1 341.5 5.3 Property, plant and equipment, net 2,355.0 32.0 2,416.5 37.8 Other assets 297.7 4.0 346.5 5.4 Other intangible assets 111.9 1.5 70.8 1.1 Goodwill 321.6 4.4 262.4 4.1 Total Assets $ 7,360.4 100.0% $6,385.9 100.0% Team Project 15-1 Student responses will vary depending on the companies they select. Communication Activity 15-1 Horizontal analysis compares one year of financial statements to the next. It allows a company to see the percentage change from one year to the next. The increase in sales can be compared to the increase in net income to see if they are increasing at the same percent. Vertical analysis of a financial statement shows the relationship of each item to its base amount, which is the 100% figure. Every other item on the statement is then reported as a percentage of that base. For the income statement, net sales are the base. For the balance sheet, total assets are the base. A company can see what percentage of net sales is being used for various expenses. Comprehensive Problem for Chapter 15 Requirement 1 2018 2017 2016 2015 2014 Total net revenues $ 244,524 $ 217,799 $ 191,329 $165,013 $137,634 Trend Percentages 178% 158% 139% 120% 100.0% Net earnings $8,039 $6,671 $6,295 $5,377 $4,430 Trend Percentages 181% 151% 142% 121% 100.0% Trends in net revenues and net earnings are both upward, which is positive. Requirement 2 2018 2017 2016 2015 2014 Net Income $ 8,039 $ 6,671 $ 6,295 $5,377 $4,430 Net Sales $244,524 $217,799 $191,329 $165,013 $137,634 Profit Margin Ratio 3.3% 3.1% 3.3% 3.3% 3.2% The profit margin ratio, return on assets and return on equity are relatively stable over the five years examined. The return on assets is around 10% per year and the return on equity is around 21%. Both are very respectful. Requirement 3 2018 2017 2016 2015 2014 Net Sales $244,524 $217,799 $191,329 $165,013 $137,634 Cost of Goods Sold 191,838 171,562 150,255 129,664 108,725 Gross Profit 52,686 46,237 41,074 35,349 28,909 Gross Profit Percentage 21.5% 21.2% 21.5% 21.4% 21.0% Beginning Inventory 22,614 21,442 19,793 17,076 16,497 Ending Inventory 24,891 22,614 21,442 19,793 17,076 Average Inventory 23,753 22,028 20,618 18,435 16,787 Inventory Turnover 8.08 7.79 7.29 7.03 6.48 Days’ sales in inventory 45 days 47 days 50 days 52 days 56 days Inventory turnover has increased over the period examined, which is a positive sign. The company is selling inventory more rapidly. The gross profit percentage is around 21%. Comprehensive Problem, cont. Requirement 4 2018 2017 2016 2015 2014 Total Assets $94,685 $83,527 $78,130 $70,439 $49,996 Total Equity 39,337 35,102 31,343 25,834 21,112 Total Liabilities 55,348 48,425 46,787 44,515 28,884 Debt Ratio 58.5% 58.0% 59.9% 63.3% 57.8% Debt to Equity Ratio 1.41 1.38 1.49 1.72 1.37 Net Income 8,039 6,671 6,295 5,377 4,430 Income Tax Expense 4,487 3,897 3,692 3,338 2,740 Interest Expense 1,063 1,357 1,383 1,045 803 Total 13,589 11,925 11,370 9,760 7,973 Times-interest-earned ratio 12.78 8.79 8.22 9.34 9.93 Current Ratio 1.70 1.85 1.66 1.71 2.28 Quick Ratio 0.93 1.02 0.92 0.94 1.26 The current and quick ratios are fairly high. This indicates that the company can pay its liabilities. The company has around 60% debt to total assets. This is not extraordinarily high, which will facilitate the company making all payments for debt. The times-interest-earned ratio has increased with is favorable. Requirement 5 2018 2017 2016 2015 2014 Annual Dividend per share $0.30 $0.28 $0.24 $0.20 $0.16 Earnings per share $1.81 $1.49 $1.41 $1.21 $0.99 Dividend payout 16.6% 18.8% 17.0% 16.5% 16.2% The dividends per share and earnings per share ratios are both increasing over time. These are probably the two most watched financial measures, so the stock is attractive.

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