The companies are in the same line of business and are direct competitors in a l
ID: 2579800 • Letter: T
Question
The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years and each has had steady growth. Despite these similarities, the management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, “We avoid what we consider to be undue risk.” Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. No shares were issued in the current year and neither company is publicly held. Blair Company has an annual audit by a CPA, but Armstrong Company does not. Assume the end-of-year total assets and net equipment balances approximate the year’s average and all sales are on account.
Calculate the following ratios.
TIP: To calculate EPS, use the balance in Common Stock to determine the number of shares outstanding. Common Stock equals the par value per share times the number of shares. (Use 365 days in a year. Round your intermediate calculations and your final answers to 2 decimal places.)
The financial statements for Armstrong and Blair companies are summarized here:Explanation / Answer
Calcuation of Ratios:
Ratio
Calculation
Armstrong
Blair
Net profit Margin
Net Profit / Sales
8.69%
10.43%
Gross Profit Margin
Gross Profit / Sales (NOTE 1)
189,000 / 426,000 = 44.37%
389,000 / 786,000 = 49.49%
Fixed Asset Turnover
Net Sales / Average Fixed Assets (NOTE 2)
426,000 / 164,000 = 2.59
786,000 / 284,000 = 2.76
Return on Equity
Net Income / Shareholder’s equity (NOTE 3)
37,000 / 216,000 = 17.13%
82,000 / 356,000 = 23.03%
EPS
Net income / Outstanding common stock
37,000 / 14,200 = 2.6 per share
82,000 / 19,200 = 4.27 per share
Price/ Earnings Ratio
Current Market Price / EPS
18 / 2.6 = 6.92 times
27 / 4.27 = 6.32 times
Receivables Turnover Ratio
Net Credit Sales / Average Accounts receivable (NOTE 4)
426,000 / 22,000 = 19.36
786,000 / 26,000 = 30.23
Days to collect
Total days / Receivable turnover ratio
365 / 19.36 = 18.85
365 / 30.23 = 12.07
Inventory Turnover Ratio
Cost of goods sold / Average Inventory (NOTE 5)
237,000 / 84,000 = 2.82
397,000 / 30,500 = 13.01
Days to sell
Total Days / Inventory turnover
365 / 2.82 = 129.43
365 / 13.01 = 28.05
Current Ratio
Current Assets / Current Liabilities
180,000 / 84,000 = 2.14
460,000 / 34,000 = 13.53
NOTE 1: Calculation of Gross Profit
Gross Profit = Sales – Cost of goods sold
Armstrong GP = $426,000 – 237,000 = $189,000
Blair GP = $786,000 – 397,000 = $389,000
NOTE 2: Other Assets given in the question are considered to be current assets. Moreover, since the value of assets was same in previous years also, average of assets is same as current year amount only and hence is not calculated.
NOTE 3: Calculation of shareholder’s equity
Shareholder’s Equity = Assets – Liabilities
Armstrong equity = $344,000 – 128,000 = $216,000
Blair’s Equity = $744,000 – 388,000 = $356,000
NOTE 4: Calculation of Average Accounts Receivable
Armstrong Receivable = ($12,000 + $32,000) / 2 = $22,000
Blair’s Receivable = (30,000 + 22,000) / 2 = 26,000
NOTE 5: Calculation of average inventory
Armstrong inventory = (84,000 + 84,000) / 2 = $84,000
Blair Inventory = (37,000 + 24,000) / 2 = $30,500
Ratio
Calculation
Armstrong
Blair
Net profit Margin
Net Profit / Sales
8.69%
10.43%
Gross Profit Margin
Gross Profit / Sales (NOTE 1)
189,000 / 426,000 = 44.37%
389,000 / 786,000 = 49.49%
Fixed Asset Turnover
Net Sales / Average Fixed Assets (NOTE 2)
426,000 / 164,000 = 2.59
786,000 / 284,000 = 2.76
Return on Equity
Net Income / Shareholder’s equity (NOTE 3)
37,000 / 216,000 = 17.13%
82,000 / 356,000 = 23.03%
EPS
Net income / Outstanding common stock
37,000 / 14,200 = 2.6 per share
82,000 / 19,200 = 4.27 per share
Price/ Earnings Ratio
Current Market Price / EPS
18 / 2.6 = 6.92 times
27 / 4.27 = 6.32 times
Receivables Turnover Ratio
Net Credit Sales / Average Accounts receivable (NOTE 4)
426,000 / 22,000 = 19.36
786,000 / 26,000 = 30.23
Days to collect
Total days / Receivable turnover ratio
365 / 19.36 = 18.85
365 / 30.23 = 12.07
Inventory Turnover Ratio
Cost of goods sold / Average Inventory (NOTE 5)
237,000 / 84,000 = 2.82
397,000 / 30,500 = 13.01
Days to sell
Total Days / Inventory turnover
365 / 2.82 = 129.43
365 / 13.01 = 28.05
Current Ratio
Current Assets / Current Liabilities
180,000 / 84,000 = 2.14
460,000 / 34,000 = 13.53
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