Question

Ratios from Comparative and Common-Size Data
Consider the following financial statements for Waverly Company. During 2013, management obtained additional bond financing to enlarge its production facilities. The company faced higher production costs during the year for such things as fuel, materials, and freight. Because of temporary government price controls, a planned price increase on products was delayed several months.
As a holder of both common and preferred stock, you decide to analyze the financial statements:

WAVERLY COMPANY Balance Sheets (Thousands of Dollars)
	Dec. 31, 2013	Dec. 31, 2012
Assets
Cash and cash equivalents	$19,000	$13,000
Accounts receivable (net)	56,000	44,000
Inventory	121,000	106,000
Prepaid expenses	21,000	14,000
Plant and other assets (net)	471,000	411,000
Total Assets	$688,000	$588,000
Liabilities and Stockholders' Equity
Current liabilities	$91,000	$83,000
10% Bonds payable	226,000	161,000
9% Preferred stock, $50 Par Value	76,000	76,000
Common stock, $10 Par Value	201,000	200,000
Retained earnings	94,000	68,000
Total Liabilities and Stockholders' Equity	$688,000	$588,000

WAVERLY COMPANY Income Statements (Thousands of Dollars)
	2013	2012
Sales revenue	$821,000	$679,000
Cost of goods sold	542,200	434,920
Gross profit on sales	278,800	244,080
Selling and administrative expenses	171,400	149,200
Income before interest expense and income taxes	107,400	94,880
Interest expense	22,500	17,000
Income before income taxes	84,900	77,880
Income tax expense	23,900	21,300
Net income	$61,000	$56,580
Other financial data (thousands of dollars)
Cash provided by operating activities	$65,200	$60,500
Preferred stock dividends	6,750	6,750

Required
a. Calculate the following for each year: current ratio, quick ratio, operating-cash-flow-to-current liabilities ratio (current liabilities were $78,000,000 at January 1, 2012), inventory turnover (inventory was $87,000,000 at January 1, 2012), debt-to-equity ratio, times-interest-earned ratio, return on assets (total assets were $493,000,000 at January 1, 2012), and return on common stockholders' equity (common stockholders' equity was $236,000,000 at January 1, 2012).
b. Calculate common-size percentages for each year's income statement.

a. Round answers to two decimal places.

	2013	2012
Quick ratio:	Answer	Answer
	Answer	answer
Debt-to-equity ratio:	Answer	Answer
Return on assets:	Answer %	Answer %
Return on common stockholders' equity:	Answer %	Answer %

Answer 1

a)
Ratio	Formula	2013	result 2013	2012	result 2012
Current ratio	CA/CL	217/91	2.38	177/83	2.13
quick ratio	CA-Invent /CL	(217-121)/91	1.05	177-106/83	0.86
Operating cash flow to current liabilities ratio	Cash/CL	65/91	0.71	61/83	0.73
inventory T/O	COGS/Avg Inv.	542/(121+106)/2	1.19	435/(106+87)/2	1.13
Debt-Equity ratio	Debt/Equity	317/371	0.85	244/344	0.71
times interest earned ratio	EBIT / Interest exp	107/23	4.65	95/17	5.59
return on assets	NI/Total Assets	61/(688+588)/2	0.02	57/(588+493)/2	0.03
return on common stockholder's equity	NI/Sh Equity	61/(371+344)/2	0.04	57/(344+236)/2	0.05
b) INCOME STATEMENT :
	2013 (in %age)	2012 (in %age)
Sales	100	100
COGS	66	64
GP	34	36
S&A exp	21	22
EBIT	13	14
Interest	3	3
EBT	10	11
IT expense	3	3
NI	7	8