Supplemental Instruction
IowaStateUniversity / Leader: / Chen Guo
Course: / ACCT 284
Instructor:
Date:
- 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
- Compute the gross profit percentage for each year.
- Compute the net profit margin for each year.
- 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.
- 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
- 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
- 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 / $ / / / %
- 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 / / %
- 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.
- Compute the current ratio for Year 2.
- 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 ComputationProfitability 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