In: Accounting
Question 4
Comparative financial statement data of Lannister Inc. are as follows:
Lannister Inc. |
||
Comparative Income Statement |
||
Years Ended December 31, 2016 and 2015 |
||
2016 |
2015 |
|
Net sales |
$687,000 |
$595,000 |
Cost of goods sold |
375,000 |
276,000 |
Gross profit |
312,000 |
319,000 |
Operating expenses |
129,000 |
142,000 |
Income from operations |
183,000 |
177,000 |
Interest expense |
37,000 |
45,000 |
Income before income tax |
146,000 |
132,000 |
Income tax expense |
36,000 |
51,000 |
Net income |
$110,000 |
$81,000 |
Lannister Inc. |
|||
Comparative Balance Sheet |
|||
December 31, 2016 and 2015 |
|||
2016 |
2015 |
2014 |
|
Current assets: |
|||
Cash |
$45,000 |
$49,000 |
|
Current receivables, net |
212,000 |
158,000 |
$200,000 |
Inventories |
297,000 |
281,000 |
181,000 |
Prepaid expenses |
4,000 |
29,000 |
|
Total current assets |
558,000 |
517,000 |
|
Property, plant and equipment, net |
285,000 |
277,000 |
|
Total assets |
$843,000 |
$794,000 |
$700,000 |
Accounts payable |
150,000 |
105,000 |
112,000 |
Other current liabilities |
135,000 |
188,000 |
|
Total current liabilities |
$285,000 |
$293,000 |
|
Long-term liabilities |
243,000 |
231,000 |
|
Total liabilities |
528,000 |
524,000 |
|
Common shareholders’ equity, no par |
315,000 |
270,000 |
199,000 |
Total liabilities and shareholders’ equity |
$843,000 |
$794,000 |
Other information:
Market price of Lannister common stock: $102.17 at December 31, 2016; and $77.01 at December 31, 2015.
Common shares outstanding: 18,000 during 2016 and 17,500 during 2015.
All sales on credit.
Compute the following ratios for 2016 and 2015
Current ratio
Quick ratio (acid test)
Receivables turnover and days’ sales outstanding (rounded to the nearest whole day)
Inventory turnover and days inventory outstanding (rounded to the nearest whole day)
Accounts payable turnover and days’ payable outstanding (rounded to the nearest whole day).
Cash conversion cycle (in days)
Times-interest-earned ratio
Return on assets (use DuPont analysis)
Return on common shareholders’ equity (use DuPont analysis)
Earnings per share of common stock
Price/earnings ratio.
Decide whether (a) Lannister’s financial position improved or deteriorated during 2016 and (b) the investment attractiveness of Lannister’s common stock appears to have increased or decreased.
Answer of Part a:
For 2016:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $558,000 / $285,000
Current Ratio = 1.96
For 2015:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $517,000 / $293,000
Current Ratio = 1.76
Answer of Part b:
For 2016:
Acid Test Ratio = (Current Assets – Inventories – Prepaid
Expenses) / Current Liabilities
Acid Test Ratio = ($558,000 - $297,000 - $4,000) / $285,000
Acid Test Ratio = $257,000 / $285,000
Acid Test ratio = 0.90
For 2015:
Acid Test Ratio = (Current Assets – Inventories – Prepaid
Expenses) / Current Liabilities
Acid Test Ratio = ($517,000 - $281,000 - $29,000) / $293,000
Acid Test Ratio = $207,000 / $293,000
Acid Test ratio = 0.71
Answer of Part c:
For 2016:
Average Accounts Receivable = (Beginning Accounts Receivable +
Ending Accounts Receivable) /2
Average Accounts Receivable = ($158,000 + $212,000) /2
Average Accounts Receivable = $185,000
Accounts Receivable Turnover = Sales / Average Accounts
Receivable
Accounts Receivable Turnover = $687,000 / $185,000
Accounts Receivable Turnover = 3.71 times
Days Sales Outstanding = 365 days / Accounts Receivable
Turnover
Days Sales Outstanding = 365 / 3.71
Days Sales Outstanding = 98 days
For 2015:
Average Accounts Receivable = (Beginning Accounts Receivable +
Ending Accounts Receivable) /2
Average Accounts Receivable = ($200,000 + $158,000) /2
Average Accounts Receivable = $179,000
Accounts Receivable Turnover = Sales / Average Accounts
Receivable
Accounts Receivable Turnover = $595,000 / $179,000
Accounts Receivable Turnover = 3.32 times
Days Sales Outstanding = 365 days / Accounts Receivable
Turnover
Days Sales Outstanding = 365 / 3.32
Days Sales Outstanding = 110 days
Answer of Part d:
For 2016:
Average Inventory = (Beginning Inventory + Ending Inventory)
/2
Average Inventory = ($281,000 + $297,000) /2
Average Inventory = $289,000
Inventory Turnover= Cost of Goods Sold / Inventory
Inventory Turnover = $375,000 / $289,000
Inventory Turnover = 1.30 times
Days Inventory Outstanding = 365 days / Inventory Turnover
Days Inventory Outstanding = 365 / 1.30
Days Inventory Outstanding = 281 days
For 2015:
Average Inventory = (Beginning Inventory + Ending Inventory)
/2
Average Inventory = ($181,000 + $281,000) /2
Average Inventory = $231,000
Inventory Turnover= Cost of Goods Sold / Inventory
Inventory Turnover = $276,000 / $231,000
Inventory Turnover = 1.19 times
Days Inventory Outstanding = 365 days / Inventory Turnover
Days Inventory Outstanding = 365 / 1.19
Days Inventory Outstanding = 307 days