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Chapter 13 Problems
|13-3a|13-5a|

Problem 15-3A Basic Financial Ratios
The accounting staff of SSTEnterprises has completedthe financial statements for the 1995 calendar year. The statement of income for the current year and the comparative statements of financial position for 1995 and 1994 follow.

SST Enterprises
Statement of Income
Year Ended December 31, 1995
(Thousands Omitted)
Revenue:
    Net sales
     Other
          Total revenue
$600,000
    45,000
$645,000
Expenses:
     Cost of goods sold
     Research and development
     Selling and administration
     Interest
          Total expenses
$405,000
   18,000
  120,000
    15,000
$558,000
Income before income taxes  $  87,000
Income Taxes      27,000
Net income $  60,000

SST Enterprises
Comparative Statements of Financial Position
December 31, 1995 and 1994
(Thousands Omitted)
  1995 1994
Assets
Current assets:
     Cash and short-term investments
     Receivables, less allowance for doubtful accounts            ($1,100 in 1995 and $1,400 in 1994)
     Inventories, at lower of FIFO cost or market
     Prepaid items and other current assets
          Total current assets
$ 27,000

36,000
35,000
          2,000
$100,000		  
$20,000

37,000
42,000
     1,000
$100,000
Property, plant, and equipment:
     Land
     Buildings and equipment, less accumulated depreciation            ($74,000 in 1995 and $62,000 in 1994)
           Total property, plant, and equipment
              Total Assets
$   9,000

 191,000
$200,000
$300,000		  
$9,000

 186,000
$195,000
$295,000
Liabilities and Stockholders' Equity
Current liabilities:
     Short-term loans
    Account payable 
     Salaries, wages, and other
          Total current liabilities
Long-term debt
          Total liabilities
$  20,000
80,000
      5,000
$105,000
    15,000
$120,000
$  15,000
68,000
     7,000
$  90,000
    40,000
$130,000
 Stockholders' equity:
     Common stock, at par
     Paid-in capital in excess of par
          Total paid-in capital
Retained earnings
     Total stockholders' equity
           Total liabilities and stockholders' equity
$  50,000
    25,000
$  75,000
  105,000
$180,000
$300,000
$  50,000
    25,000
$  75,000
    90,000
$165,000
$295,000

I. Calculate the following financial ratios for 1995 for SST Enterprises:
       a. Times interest earned
               b. Return on total assets
       c. Return on common stockholders' equity
       d. Debt-equity ratio (at December 31, 1995)
       e. Current ratio (at December 31, 1995)
       f. Quick (acid-test) ratio (at December 31, 1995)
       g. Accounts receivable turnover ratio (assume that all sales are on credit)
       h. Number of days' sales in receivables
       i. Inventory turnover ratio (assume that all purchases are on credit)
       j. Number of days' sales in inventory
       k. Number of days' in cash operating cycle
II. Prepare a few brief comments on the overall financial health of SST Enterprises. For each comment, indicate any information not provided in the problem that you would need to fully evaluate the company's financial health.

Problem 15-5A Comparison with Industry Averages
Midwest, Inc., is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Midwest has decided that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested its most recent financial statements as part of the loan package.
The industry in which Midwest operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the competitors belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for this purpose.
Midwest's controller is aware that the bank has access to this survey and is very concerned about how the company fared this past year compared with the rest of the industry. The ratios included in the publication, and the averages for the past year, are as follows:

Ratio Industry Average
Current ratio
Acid-test (quick) ratio
Inventory turnover
Debt-to-equity ratio
Times interest earned
Reurn on sales
Asset turnover
Return on common stockholders' equity

1.20
0.50
35 times
0.50
25 times
3%
3.5 times
20%

The financial statements to be submitted to the bank in connection with the loan follow:

Midwest, Inc.
Statement of Income and Retained Earnings
For the Year Ended December 31, 1995
(thousands omitted)
Sales revenue
Cost of goods sold
     Gross margin
Selling, general, and administrative expense
     Income before interest and taxes
Interest expense
Income before taxes
Income tax expense
Net income
Retained earnings, January 1, 1995

Dividends paid on common stock
Retained earnings, December 31, 1995		  $420,000  
 (300,000)
$ 120,000 
 $ (85,000)
$   35,000 
     (8,600)
$   26,900 
   (12,000)
$   14,900 
     12,400 
$   27,300 
   (11,200)
$ 16,100

Midwest, Inc.
Comparative Statements of Financial Position
(thousands omitted)
  December 31, 1995 December 31, 1994
Assets
Current Assets:
     Cash
     Marketable securities
     Accounts receivable, net of allowances
     Inventories
     Prepaid items
          Total current assets
Long-term investments
Property, plant, and equipment:
     Land
     Buildings and equipment, net of accumulated depreciation
          Total property, plant, and equipment
Total assets
$    1,790
1,200
400
8,700
          350
$  12,440
$       560

$  12,000
    87,000
$  99,000
$112,000		  
$    2,600
1,700
600
7,400
         400
$  12,700
$       400

$  12,000
    82,900
$  94,900
$108,000
Liabilities and Stockholders' Equity    
Current liabilities:
       Short-term notes
       Accounts payable
       Salaries and wages payable
       Income taxes payable
              Total current liabilities
Long-term bonds payable
Stockholders' equity:
       Common stock, no par
       Retained earnings
              Total stockholders' equity
Total liabilities and stockholders' equity
$       800
6,040
1,500
      1,560
$    9,900
$  36,000

$  50,000
    16,100
$  66,100
$112,000
$       600
6,775
1,200
      1,025
$    9,600
$  36,000

$  50,000
    12,400
$  62,400
$108,000

I. Prepare a columnar report for the controller of Midwest, Inc., comparing the industry averages for the ratios published by the trade association with the comparable ratios for Midwest. For Midwest, compute the ratios as of December 31, 1995, or for the year ending December 31, 1995, whichever is appropriate.
II. Briefly evalaute Midwest's ratios relative to the industry.
III. Do you think that the bank will approve the loan? Explain your answer.