Chapter 13
Supplemental Instruction
IowaStateUniversity / Leader: / Chen Guo
Course: / ACCT 284
Instructor:
Date:
  1. The average price of a gallon of gas in 2005 jumped $0.42 (22.34 percent) from $1.88 in 2004 (to $2.3 in 2005). Let's see whether these changes are reflected in the income statement of Chevron Corp. for the year ended December 31, 2005 (amounts in millions).

2005 / 2004
Total revenues / $ / 198,500 / $ / 160,500
Costs of crude oil and products / 141,000 / 103,700
Other operating costs / 32,900 / 29,300
Income before income tax expense / 24,600 / 27,500
Income tax expense / 10,824 / 9,625
Net income / $ / 13,776 / $ / 17,875
  1. Compute the gross profit percentage for each year.
  1. Compute the net profit margin for each year.
  1. Chevron reported average net fixed assets of $52,400 million in 2005 and $46,000 million in 2004. Compute the fixed asset turnover ratios for both years.
  1. Chevron reported average stockholders' equity of $53,800 million in 2005 and $39,600 million in 2004. Compute the return on equity ratios for both years. 6
  1. The average cost of low-end laptops fell about $200 (25 percent) from $800 in 2005 to $600 in 2006. Let's see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2006.

2005 / 2006
Sales revenues / $ / 122,800 / $ / 101,509
Cost of goods sold / 70,650 / 59,160
Operating expenses / 36,885 / 36,894
Interest expense / 486 / 555
Income before income tax expense / 14,779 / 4,900
Income tax expense / 6,411 / 2,328
Net income / $ / 8,368 / $ / 2,572
  1. Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages.

Computer Tycoon, Inc.
Horizontal Analysis of Income Statement
For the Years Ended December 31
2006 / 2005 / Change in Dollars / Percentage
Net Sales / $ / 101,509 / $ / 122,800 / $ / / / %
Cost of goods sold / 59,160 / 70,650 / / / %
Gross Profit / 42,349 / 52,150 / / / %
Operating Expenses / 36,894 / 36,885 / / / %
Income from operations / 5,455 / 15,265 / / / %
Interest expense / 555 / 486 / / / %
Income before income taxes / 4,900 / 14,779 / / / %
Income Tax Expense / 2,328 / 6,411 / / / %
Net Income / $ / 2,572 / $ / 8,368 / $ / / / %
  1. Conduct a vertical analysis by expressing each line as a percentage of total revenues.8

Computer Tycoon, Inc.
Vertical Analysis of Income Statement
For the Years Ended December 31
2006 / 2005
Net Sales / $ / 101,509 / / % / $ / 122,800 / / %
Cost of goods sold / 59,160 / / % / 70,650 / / %
Gross Profit / 42,349 / / % / 52,150 / / %
Operating Expenses / 36,894 / / % / 36,885 / / %
Income from operations / 5,455 / / % / 15,265 / / %
Interest expense / 555 / / % / 486 / / %
Income before income taxes / 4,900 / / % / 14,779 / / %
Income Tax Expense / 2,328 / / % / 6,411 / / %
Net Income / $ / 2,572 / / % / $ / 8,368 / / %
  1. Cintas Corporation is the largest uniform supplier in North America. More than five million people wear Cintas clothing each day. Selected information from a recent balance sheet follows. For Year 2, the company reported sales revenue of $2,662,013 and cost of goods sold of $1,563,166.

Cintas / Year 2 / Year 1
Balance Sheet (amounts in thousands)
Cash / $ / 33,814 / $ / 48,649
Accounts receivable, less allowance of $7,141 and $9,436 / 274,773 / 227,366
Inventories / 222,950 / 162,628
Prepaid expenses / 7,576 / 7,222
Other current assets / 25,978 / 54,050
Accounts payable / 53,693 / 60,612
Wages payable / 25,862 / 28,860
Income taxes payable / 69,067 / 73,586
Accrued liabilities / 128,887 / 130,166
Long-term debt due within one year / 27,935 / 17,577

Assuming that 60 percent of sales are on credit.

  1. Compute the current ratio for Year 2.
  1. Compute the inventory turnover ratio and accounts receivable turnover ratio for Year 2. 10

. Table: Fill in the company names in the header row and complete for most recent fiscal year.

Ratio/Item / Basic Computation
Profitability Ratios:
1. / Net Profit margin / Net Income
Net sales revenue
2. / Gross Profit Ratio / Net Sales Revenue – Cost of Goods Sold
Net Sales Revenue
3. / Asset turnover ratio / Net sales revenue
Average total assets
4. / Fixed asset turnover ratio / Net sales revenue
Average net fixed assets
5. / Return on equity (ROE) / Net Income
Average stockholders’ equity
6. / Earnings per share / Net income
Weighted average number of shares of
common shares outstanding
7. / Quality of income / Cash flow from operating activities
Net income
8. / Price/earnings ratio / Stock price per share
Earnings per share
Liquidity Ratios:
9. / Receivable turnover / Net sales revenue
Average net receivables
10. / Days to collect / 365
Receivables turnover ratio
11. / Inventory turnover / Cost of goods sold
Average inventory
12. / Days to sell / 365
Inventory turnover ratio
13. / Current ratio / Current assets
Current liabilities
Solvency Ratios:
14. / Debt-to-assets ratio / Total liabilities
Total assets