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8.1. Comprehensive Illustration

At this point, it may be helpful to consider these ratios as they relate to a comprehensive illustration. Following are financial statements for Emerson Corporation. Study them carefully. Then, examine the ratio calculations for Emerson Corporation that can be found immediately following the financial statements.

8.2. Balance Sheet

EMERSON CORPORATION Comparative Balance Sheet December 31, 20X5 and 20X4

ASSETS

20X5

20X4

Current assets Cash

Accounts receivable Inventory Total current assets Property, plant & equipment Land Building Equipment

Less: Accumulated Depreciation Total property, plant & equipment Total assets

$ 700,000 850,000 180,000

$ 1,730,000

$ 800,000 1,000,000

1,050,000 $ 2,850,000

(480,000) $ 2,370,000 $ 4 100 000

$ 170,000

600,000 220,000 $ 990,000

$ 1,400,000 700,000

900,000 $ 3,000,000

(360,000) $ 2,640,000 $ 3 630 000

LIABILITIES

Current liabilities

Accounts payable

Wages payable Total current liabilities Long-term liabilities

Long-term loan payable Total liabilities

$ 270,000

20,000 $ 290,000

900,000 $ 1,190,000

$ 200,000

50,000 $ 250,000

1,800,000 $ 2,050,000

STOCKHOLDERS' EQUITY

Preferred stock Common stock ($1 par) Paid-in capital in excess of par Retained earnings Total stockholders' equity Total liabilities and equity

$ 300,000 910,000 370,000

1,330,000 $ 2,910,000 $ 4,100,000

$ -

900,000

300,000 380,000 $ 1,580,000 $ 3 630 000

8.3. Income Statement

EMERSON CORPORATION Income Statement For the Year Ending December 31, 20X5

Revenues

$ 3,250,000

Cost of goods sold

1,160,000

Gross profit

$ 2,090,000

Operating expenses

Wages

$ 450,000

Interest

100,000

Depreciation

120,000

Other operating expenses

270,000

(940,000)

Gain on sale of land

150,000

Income before income taxes

$ 1,300,000

Income taxes

300,000

Net income

$ 1 000 000

8.4. Statement of Retained Earnings

EMERSON CORPORATION Statement of Retained Earnings

For the Year Ending December 31, 20X5

Beginning retained earnings, Jan. 1

$ 380,000

Net income

1,000,000

$ 1,380,000

Less: Dividends on common

50,000

Ending retained earnings, Dec. 31

$ 1 330 000

8.5. Ratios for Emerson Corporation as of December 31, 20x5

Additional facts: No dividends were due or paid on the $300,000 of preferred stock which was issued in exchange for a building in late 20X5. Average common equity is assumed to be $2,095,000 ((($2,910,000 - $300,000) + $1,580,000)/2). Assume most other balance sheet items change uniformly throughout the year (e.g., average receivables = ($600,000 + $850,000)/2 = $725,000, etc.). The year end market value of the common stock was $10 per share, and the cash dividend was paid on shares outstanding at the end of the year ($50,000/910,000 shares = $0.055 per share).

Current Ratio

Current Assets/ Current Liabilities

$1,730,000/$290,000 = 5.97

Quick Ratio

(Cash + Short-term Investments + Accts. Receivable)/ Current Liabilities

$1,550,000/$290,000 = 5.34

Debt to Total Assets Ratio

Total Debt/ Total Assets

$1,190,000/$4,100,000 = 0.29

Debt to Total Equity Ratio

Total Debt/ Total Equity

$1,190,000/$2,910,000 = 0.41

Times Interest Earned Ratio

Income Before Income Taxes and Interest/ Interest Charges

$1,400,000/$100,000 = 14

Accounts Receivable Turnover Ratio

Net Credit Sales/ Average Net Accounts Receivable

$3,250,000/$725,000 = 4.48

Inventory Turnover Ratio

Cost of Goods Sold/ Average Inventory

$1,160,000/$200,000 = 5.8

Net Prof i t on Sales Ratio

Net Income/ Net Sales

$1,000,000/$3,250,000 = 31%

Gross Profit Margin Ratio

Gross Profit/ Net Sales

$2,090,000/$3,250,000 = 64%

Return on Assets Ratio

(Net Income + Interest Expense)/ Average Assets

$1,100,000/$3,865,000 = 28%

Return on Equity Ratio

(Net Income - Preferred Dividends)/ Average Common Equity

$1,000,000/$2,095,000 = 48%

EPS

Income Available to Common/ Weighted-Average Number of Common Shares

$1,000,000/905,000 = $1.11

P/E

Market Price Per Share/ Earnings Per Share

$10/$1.11 = 9

Dividend Rate/Yield

Annual Cash Dividend/ Market Price Per Share

$0.055/$10 = 0.55 %

Dividend Payout Ratio

Annual Cash Dividend/ Earnings Per Share

$0.055/$1.11 = 5.0%

Book Value

"Common" Equity/ Common Shares Outstanding

$2,610,000/910,000 = $2.87

In examining the ratios of Emerson, it would appear that the company is doing fairly well. Its liquidity suggests no problem in meeting obligations, the debt is at a manageable level, receivables and inventory appear to be turning reasonably well, and profits are good.

8.6. Trend Analysis

Financial statement data are often reproduced in percentage terms. For example, Emerson's cash is 17% of total assets ($700,000/$4,100,000). Such percentage data can be monitored closely, year after year. This provides sharp investors and managers with a keen sense of subtle shifts that can foretell changes in the underlying business environment.

 
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