Question

Ratios from Comparative and Common-Size Data

Consider the following financial statements for Nixon Company.

During the year, management obtained additional bond financing to enlarge its production facilities. The plant addition produced a new high-margin product, which is supposed to improve the average rate of gross profit and return on sales.

As a potential investor, you decide to analyze the financial statements:

NIXON COMPANY Balance Sheets (Thousands of Dollars)
	Dec. 31, 2019	Dec. 31, 2018
Assets
Cash	$25,000	$18,100
Accounts receivable (net)	39,000	21,400
Inventory	105,000	72,000
Prepaid expenses	1,500	4,000
Plant and other assets (net)	463,500	427,500
Total Assets	$634,000	$543,000
Liabilities and Stockholders’ Equity
Current liabilities	$80,000	$48,000
9% Bonds payable	187,500	150,000
8% Preferred stock, $50 Par Value	60,000	60,000
Common stock, $10 Par Value	225,000	225,000
Retained earnings	81,500	60,000
Total Liabilities and Stockholders’ Equity	$634,000	$543,000

NIXON COMPANY Income Statements (Thousands of Dollars)
	2019	2018
Sales revenue	$850,000	$697,500
Cost of goods sold	552,000	465,000
Gross profit on sales	298,000	232,500
Selling and administrative expenses	231,000	174,000
Income before interest expense and income taxes	67,000	58,500
Interest expense	17,000	13,500
Income before income taxes	50,000	45,000
Income tax expense	10,000	9,000
Net income	$40,000	$36,000
Other financial data (thousands of dollars)
Cash provided by operating activities	$28,000	$24,000
Preferred stock dividends	5,000	4,800

Required
a. Calculate the following for each year: current ratio, quick ratio, operating-cash-flow-to-current- liabilities ratio (current liabilities were $40,000,000 at January 1, 2018), inventory turnover (inventory was $68,000,000 at January 1, 2018), debt-to-equity ratio, times-interest-earned ratio, return on assets (total assets were $490,000,000 at January 1, 2018), and return on common stockholders’ equity (common stockholders’ equity was $265,000,000 at January 1, 2018).

b. Calculate common‑size percentage for each year’s income statement.

Round answers to two decimal places.

	2019		2018
Current ratio:
Quick ratio:
Operating-cash-flow-to-current-liabilities ratio:
Inventory turnover:
Debt-to-equity ratio:
Times-interest-earned ratio:
Return on assets:		%		%
Return on common stockholders' equity:		%		%

Round answers to one decimal place.

Consolidated Income Statements
	Year Ended 2019	Common- Size	Year Ended 2018	Common- Size
Sales revenue	$850,000		$697,500
Cost of goods sold	552,000		465,000
Gross profit on sales	298,000		232,500
Selling and administrative expenses	231,000		174,000
Income before interest expense and income taxes	67,000		58,500
Interest expense	17,000		13,500
Income before income taxes	50,000		45,000
Income tax expense	10,000		9,000
Net income	$40,000		$36,000

Answer 1

(a) Ratios for each year-

Ratios	Year 2019	Year 2018
Current ratio	2.13	2.41
Quick ratio	0.82	0.91
Operating-cash-flow-to-current-liabilities ratio	0.35	0.50
Inventory turnover	6.24	6.64
Debt-to-equity ratio	1.73	1.57
Times-interest-earned ratio	3.94	4.33
Return on assets	6.80%	6.97%
Return on common stockholders' equity	15.56%	13.06%

Workings (Amounts are in Thousands of Dollars):-

Current Ratio = Current Assets/Current Liabilities

Year 2019 = 1,70,500/80,000 = 2.13

Year 2018 = 1,15,500/48,000 = 2.41

Quick Ratio = Current Assets-Inventory/Current Liabilities

Year 2019 = 1,70,500-1,05,000/80,000 = 0.82

Year 2018 = 1,15,500-72,000/48,000 = 0.91

Operating-cash-flow-to-current-liabilities ratio = Cash Flow from Operations/Current Liabilities

Year 2019 = 28,000/80,000 = 0.35

Year 2018 = 24,000/48,000 = 0.50

Inventory turnover = Cost of Goods Sold/Average Inventory

Year 2019 = 5,52,000/88,500 = 6.24

Year 2018 = 4,65,000/70,000 = 6.64

Debt-to-equity ratio = Total Liabilities/Total Shareholder’s Equity

Year 2019 = 6,34,000/3,66,500 = 1.73

Year 2018 = 5,43,000/3,45,000 = 1.57

Times-interest-earned ratio = Earnings before Interest & Taxes/Interest Expenses

Year 2019 = 67,000/17,000 = 3.94

Year 2018 = 58,500/13,500 = 4.33

Return on assets = (Net Income/ Average Total Assets)*100

Year 2019 = (40,000/((5,43,000+6,34,000)/2))*100 = 6.80%

Year 2018 = (36,000/((4,90,000+5,43,000)/2))*100 = 6.97%

Return on common stockholders' equity = (Net Income-Preferred Dividend/Average Common Stockholder’s Equity)*100

Year 2019 = ((40,000-5,000)/((2,25,000+2,25,000)/2)*100 = 15.56%

Year 2018 = ((36,000-4,000)/((2,65,000+2,25,000)/2)*100 = 13.06%

(b) Calculation of Common Size Percentage for Each Year’s Income Statement

The Calculation of Common Size Percentage is Amount/Base Amount. In Income Statement the Base Amount is Sales Amount

Consolidated Income Statements	Year Ended 2019	Common- Size	Year Ended 2018	Common- Size
Sales revenue	$850,000	100%	$697,500	100%
Cost of goods sold	$552,000	64.94%	$465,000	66.67%
Gross profit on sales	$298,000	35.06%	$232,500	33.33%
Selling and administrative expenses	$231,000	27.18%	$174,000	24.95%
Income before interest expense and income taxes	$67,000	7.88%	$58,500	8.39%
Interest expense	$17,000	2.00%	$13,500	1.94%
Income before income taxes	$50,000	5.88%	$45,000	6.45%
Income tax expense	$10,000	1.18%	$9,000	1.29%
Net income	$40,000	4.71%	$36,000	5.16%