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	$21,000	$15,000
Accounts receivable (net)	58,000	46,000
Inventory	123,000	108,000
Prepaid expenses	20,000	14,000
Plant and other assets (net)	471,000	411,000
Total Assets	$693,000	$594,000
Liabilities and Stockholders' Equity
Current liabilities	$93,000	$85,000
10% Bonds payable	228,000	163,000
9% Preferred stock, $50 Par Value	78,000	78,000
Common stock, $10 Par Value	200,000	200,000
Retained earnings	94,000	68,000
Total Liabilities and Stockholders' Equity	$693,000	$594,000

WAVERLY COMPANY Income Statements (Thousands of Dollars)
	2013	2012
Sales revenue	$823,000	$681,000
Cost of goods sold	544,200	436,920
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	25,500	19,000
Income before income taxes	81,900	75,880
Income tax expense	22,900	21,300
Net income	$59,000	$54,580
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
Current ratio:	Answer	Answer
Quick ratio:	Answer	Answer
Operating-cash-flow-to-current-liabilities ratio:	Answer	Answer
Inventory turnover:	Answer	Answer
Debt-to-equity ratio:	Answer	Answer
Times-interest-earned ratio:	Answer	Answer
Return on assets:	Answer%	Answer%
Return on common stockholders' equity:	Answer%	Answer%

b. Round answers to one decimal place.

Common-Size Percentages
	2013	2012
Sales revenue	Answer%	Answer%
Cost of goods sold	Answer%	Answer%
Gross profit on sales	Answer%	Answer%
Selling and administrative expenses	Answer%	Answer%
Income before interest expense and income taxes	Answer%	Answer%
Interest expense	Answer%	Answer%
Income before income taxes	Answer%	Answer%
Income tax expense	Answer%	Answer%
Net income	Answer%	Answer%

Answer 1

Part 1)

Current Ratio:

The current ratio can be calculated with the use of following formula:

Current Ratio = Total Current Assets/Total Current Liabilties

Current Ratio (2013) = (21,000 + 58,000 + 123,000 + 20,000)/93,000 = 2.39

Current Ratio (2012) = (15,000 + 46,000 + 108,000 + 14,000)/85,000 = 2.15

_____

Quick Ratio:

The quick ratio for each year is calculated as below:

Quick Ratio = Total Quick Assets/Total Current Liabilities

Quick Ratio (2013) = (21,000 + 58,000)/93,000 = .85

Quick Ratio (2012) = (15,000 + 46,000)/85,000 = .72

_____

Operating Cash Flow to Current Liabilities Ratio

The value of operating flow to current liabilities ratio is determined as follows:

Operating Cash Flow to Current Liabilities Ratio = Cash Provided by Operating Activities/Total Current Liabilities

Operating Cash Flow to Current Liabilities Ratio (2013) = 65,200/93,000 = .70

Operating Cash Flow to Current Liabilities Ratio (2012) = 60,500/85,000 = .71

_____

Inventory Turnover Ratio:

The value of inventory turnover ratio can be arived with the use of formula given below:

Inventory Turnover Ratio = Cost of Goods Sold/(Average Inventory)

Inventory Turnover Ratio (2013) = 544,200/[(123,000 + 108,000)/2] = 4.71

Inventory Turnover Ratio (2012) = 436,920/[(108,000 + 87,000)/2] = 4.48

_____

Debt to Equity Ratio

The debt to equity ratio can be calculated with the use of following formula:

Debt to Equity = Total Debt/Total Equity

Debt to Equity (2013) = (93,000 + 228,000)/(78,000 + 200,000 + 94,000) = .86

Debt to Equity (2012) = (85,000 + 163,000)/(78,000 + 200,000 + 68,000) = .72

_____

Times Interest Earned Ratio

The times interest earned ratio can be calculated with the use of following formula:

Times Interest Earned Ratio = EBIT/Interest Expense

Times Interest Earned Ratio (2013) = 107,400/25,500 = 4.21

Times Interest Earned Ratio (2012) = 94,880/19,000 = 4.99

_____

Return on Assets

The value of return on assets for each year is calculated as follows:

Return on Assets = Net Income/Average Total Assets*100

Return on Assets (2013) = 59,000/[(693,000 + 594,000)/2]*100 = 9.17%

Return on Assets (2012) = 54,580/(594,000 + 493,000)/2]*100 = 10.04%

_____

Return on Common Stockholder's Equity

The value of return on common stockholder's equity is determined as below:

Return on Common Stockholder's Equity = (Net Income - Preferred Dividend)/(Average Total Common Stockholder's Equity)*100

Return on Common Stockholder's Equity (2013) = (59,000 - 6,750)/[(200,000 + 94,000 + 200,000 + 68,000)/2]*100 = 18.59%

Return on Common Stockholder's Equity (2012) = (54,580 - 6,750)/[(200,000 + 68,000 + 236,000)/2]*100 = 18.98%

_____

Tabular Representation as Required in Question:

	2013	2012
Current Ratio	2.39	2.15
Quick Ratio	0.85	0.72
Operating-Cash-Flow-to-Current-Liabilities Ratio	0.70	0.71
Inventory Turnover Ratio	4.71	4.48
Debt to Equity Ratio	0.86	0.72
Times Interest Earned Ratio	4.21	4.99
Return on Assets	9.17%	10.04%
Return on Common Stockholder's Equity	18.59%	18.98%

_____

Part 2)

The common size percentages are calculated as below:

Common Size Percentages
	2013	Percentages	2012	Percentages
Sales revenue	823,000	100.00% (823,000/823,000*100)	681,000	100% (681,000/681,000*100)
Cost of goods sold	544,200	66.12% (544,200/823,000*100)	436,920	64.16%(436,920/681,000*100)
Gross profit on sales	278,800	33.88% (278,800/823,000*100)	244,080	35.84% (244,080/681,000*100)
Selling and administrative expenses	171,400	20.83% (171,400/823,000*100)	149,200	21.91% (149,200/681,000*100)
Income before interest expense and income taxes	107,400	13.05% (107,400/823,000*100)	94,880	13.93% (94,880/681,000*100)
Interest expense	25,500	3.10% (25,500/823,000*100)	19,000	2.79% (19,000/681,000*100)
Income before income taxes	81,900	9.95% (81,900/823,000*100)	75,880	11.14% (75,880/681,000*100)
Income tax expense	22,900	2.78% (22,900/823,000*100)	21,300	3.13% (21,300/681,000*100)
Net income	59,000	7.17% (59,000/823,000*100)	54,580	8.01% (54,580/681,000*100)

_____

Tabular Representation as Required in Question:

Common Size Percentages
	2013	2012
Sales revenue	100.00%	100.00%
Cost of goods sold	66.12%	64.16%
Gross profit on sales	33.88%	35.84%
Selling and administrative expenses	20.83%	21.91%
Income before interest expense and income taxes	13.05%	13.93%
Interest expense	3.10%	2.79%
Income before income taxes	9.95%	11.14%
Income tax expense	2.78%	3.13%
Net income	7.17%	8.01%

____

Notes:

The common size percentage for each component of the income statement is calculating by taking sales for the year as the basis.