accounting samples

INDEX

	CONTENT
		0 - Ecomputerl@and
		0 - Starbucks
		1 - Financial ratios e-computerl@and
		2 - Performance measures Starbucks
		3 - Test
		4. More financial ratios tasks

O. E-computerl@and

		Table: Financial Statements e-computerl@and
		BALANCE SHEET								P&L
			2018	2019	2020						2018	Var	2019	Var	2020	Var
		Current assets:	2,620	4,733	8,084
		Cash and marketable securities	286	50	50		ROA			Sales	10,000	100%	20,000	100%	30,000	100%			a. Return on assets
		Accounts receivable	1,667	3,333	6,667					Cost of goods sold	8,000	80%	16,200	81%	24,600	82%			b. Operating profit margin
		Inventories	667	1,350	1,367					Gross margin	2,000	20%	3,800	19%	5,400	18%			c. Sales to assets ratio
		Fixed assets:	5,000	5,500	6,000					Wages	200	2%	1,000	5%	1,800	6%			d. Inventory turnover
		Net fixed assets	5,000	5,500	6,000					Overhead costs	100	1%	385	2%	470	2%			e. Debt equity ratio
		TOTAL ASSETS	7,620	10,233	14,084					EBITDA	1,700	17%	2,415	12%	3,130	10%			f. Working capital
		Liabilities and Shareholders equity								Depreciation	500	5%	550	3%	600	2%			g. Quick ratio
		Current liabilities	990	3,057	6,011					EBIT	1,200	12%	1,865	9%	2,530	8%
		Accounts payable	720	1,407	2,051					Financial expenses	300	3%	370	2%	536	2%
		Other current liabilities taxes	270	448	598					EBT	900	9%	1,495	7%	1,994	7%
		Bank credit line	0	1,202	3,362					Taxes (30%)	270	3%	449	2%	598	2%
		Long term liabilities	3,000	2,500	2,000					Profit	630	6%	1,047	5%	1,396	5%
		Long term bank debt	3,000	2,500	2,000
		Other long term liabilities	3,630	4,676	6,072
		Shareholders equity	3,000	3,630	4,676
		Profit of the year	630	1,046	1,396
		TOTAL LIABILITIES	7,620	10,233	14,083
					Interest or Financial expenses					300
					Tax on interest					90
					After tax interest					210
					EBIT					1,200
					After tax interest + net income					1,410
					Total Assets					7,620
					ROA					19%
					Net income or EBIT					1,200
					Sales					10,000
					Profit margin					12%
					Sales					10,000
					Total Assets					7,620
					Asset Turn ratio					131%
					Cost of goods sold					8,000
					Inventory					667
					Inventory turnover					11.9940029985
					(quite high )
					Inventory					667
					Daily cost of goods sold					21.9178082192
					Inventory period =					30.431875
					Long term debt					3,000
					Equity					3,630
					Long term debt equity					83%
					Current assets					2,620
					Current liabilities					990
					Net working capital					1,630
					Cash and Mark. Securi					286
					Receivables					1,667
					Current liabilities					990
					Quick ratio					288
		What is the shareholder´s equity in 2019?				4,676

ROA= (after tax interest + net income)/ total assets

ROA= EBIT/ Total assets

Profit margin= net income/sales

It measures the proportion of sales that finds its way into profits

Income available to debt and equity investors per dollar of the firm´s total assets

Asset Turnover ratio= Sales/Total assets at start of year

How much sales volumen is generated by each dollar of total assets. It measures how hard the firm´s assets are working. How efficiently the business is using its entire asset base

Inventory turnover= cost of goods sold/ inventory at start of year

Efficient company´s hold only a relatively small level of inventories

Inventory period= inventory at start of year/daily cost of goods sold

How many days of output are represented by inventories

Long term debt equity ratio

Net working capital = current assets – current liabilities

Quick (Acid Test) Ratio

Cash + marketable securities + receivables

Current liabilities

A low cash ratio may not matter if the firm can borrow on short notice

O. Starbucks

		Table: Financial Statements Starbucks
		BALANCE SHEET					P&L
			2014	2015				2014	Var
		Current assets:	4,168	5,472
		Cash and marketable securities	1,844	3,234			Sales	16,448	100%
		Accounts receivable	948	839			Cost of goods sold	6,859	42%
		Inventories	1,091	1,111			Gross margin	9,589	58%
		Other current assets	285	288			Selling, general administration expenses	5,655
		Fixed assets:	6,583	6,046			Depreciation	710	4%
		Net fixed assets	3,519	3,201			EBITDA	3,224	20%
		Other long term assets	3,064	2,845			Interest expense	64	0%
		TOTAL ASSETS	10,751	11,518			Taxable income	3,160	19%
		Liabilities and Shareholders equity					Tax	1,092	7%
		Current liabilities	3,039	5,378			Net income	2,068	13%
		Accounts payable	2,244	1,940			Dividends	783	5%
		Other current liabilities	795	3,438			Addition to retained earnings	1,285	8%
		Long term liabilities	2,048	1,299
		Long term bank debt	2,048	1,299
		Other long term liabilities	5,664	4,841
		Other long term liabilities	392	360
		Shareholders equity	5,272	4,481
		Profit of the year
		TOTAL LIABILITIES	10,751	11,518
	At the end of fiscal 2014, Starbucks had 748 million shares outstanding with a share price of 81.25$.
	Calculate: a. Market value added. b. Market-to-book ratio. c. Economic value added. d. Return on start-of-the-year capital
	a	Market value added		Number of shares outstanding * market share
		Market value added				60,775,000,000
	b	Market to book ratio
		Market to book ratio		Market value of equity / Book value of equity
		Market to book ratio				60,775,000,000	12
						5,272,000,000
		The company has multiplied the value of its shareholder´s investments 12 time
	c	Economic value added
	c.1	Economic Value		Total capitalization = Long term debt + shareholder´s equity
		Long term debt		2,440
		Shareholder´s equity		5,272
		EV		7,712			Cumulative amount that has been invested in the past by debt and shareholders
	c.2	Economic value added		Net income + after tax interest - cost of capital * capital
		Net income		2,068
		Interest		64
		Tax interest		22.4
		After tax interest		42
		Total capitalization or capital		7,712
		We assume cost of capital 3%
		Capital * cost of capital		231.36			How many dollars a business is earning after deducting the cost of capital
		Economic value added		1,878			A firm creates value for its investors only if it can earn more than its cost of capital, more tan its investors can earn by investing on their own
	d	Return on capital start-of-the-year 2015		2,068			total profits that the company has earned for its debt and shareholders

1.Financial ratios E

		Performance measures
	TASKS 1:
	1.1	Table 1 from 0. Financial Statements spreadsheet gives abbreviated balance sheets and income statements for e-computerl@and.
		Calculate the following using balance-sheet figures from year 2018/2019 and 2020:
		a. Return on assets
		b. Operating profit margin
		c. Sales to assets ratio
		d. Inventory turnover
		e. Debt equity ratio
		f. Current ratio
		g. Quick ratio
	1.2	What is the shareholder´s equity in 2019?
		See solutions in E- Computerl@and excel spreadsheet

2. Performance Measures S

		Performance measures
	TASKS 2:
	2.1	Look at 0.Starbuck´s spreadsheet. At the end of fiscal 2014, Starbucks had 748 million shares outstanding with a share price of 81.25$.
		The company’s weighted�average cost of capital was about 9%.
		Calculate: a. Market value added. b. Market-to-book ratio. c. Economic value added. d. Return on start-of-the-year capital
		See solutions in 0. Starbucks excel spreadsheet

3. Test

Test Financial ratios

TASK 3:

3.1.

There are no universally accepted definitions of financial ratios, but five of the following ratios are clearly incorrect. Substitute the correct definitions

a. Debt–equity ratio  =  (long-term debt  +  value of leases)/(long-term debt  +  value of leases + equity)

Debt ratio = total liabilities / total assets

b. Return on equity = (EBIT − tax)/average equity

Net income /equity

c. Profit margin = net income/sales

CORRECT

d. Days in inventory = sales/(inventory/365)

inventory at start of year/daily cost of goods sold

e. Current ratio = current liabilities/current assets

Current assets /current liabilities

f. Sales-to-net-working-capital = average sales/average net working capital

Incorrect // Net working capital / total assets = Net working capital to total assets

g. Quick ratio = (current assets − inventories)/current liabilities

(cash + marketable securities + receivables)/ current liabilities

h. Times-interest-earned = interest earned × long-term debt

EBIT/interest payments

3.2.

Financial ratios True or false?

a. A company’s debt–equity ratio is always less than 1.

False

b. The quick ratio is always less than the current ratio

True

Quick ratio (cash + marketable securities + receivables)/ current liabilitites

Current ratio (current assets /current liabilities)

c. The return on equity is always less than the return on assets

False

Return on equity = net income /net equity

Return on assets = after tax interests + net income / total capital

d. Book rates of return Keller Cosmetics maintains an operating profit margin of 8% and a sales-to-assets ratio of 3. It has assets of $500,000 and equity of $300,000. Interest payments are $30,000 and the tax rate is 35%

a. What is the return on assets? b. What is the return on equity?

Solution to 3.2. d) Keller Cosmetics

Operating profit margin

8%

Sales to assets ratio

3

Assets

500,000

Equity

300,000

Interest payments

30,000

Tax rate

35%

Return on assets = after tax interests + net income / total capital

Tax interest payments

10500

After tax interests payments

19,500

Sales to assets or asset turnover

Sales / Total assets

3

x/500.000

Sales

3*500.000

1,500,000

Net income

120,000

Return on assets

Capital = assets

500,000

Return on assets

28%

Income available to debt and equity investors per dollar of the firm´s total assets

4. More Financial ratios

More financial ratios tasks

TASKS 4:

4.1.

Magic Flutes has total receivables of $3,000, which represent 20 days’ sales. Total assets are $75,000. The firm’s operating profit margin is 5%.

Find the firm’s sales-to-assets ratio and return on assets

4.2

Consider this simplified balance sheet for Geomorph Trading:

Other liabilities 70

Current assets 100

Current liabilities 60

Long term debt 280

Long term assets 500

Equity 190

a. Calculate the ratio of debt to equity. b. What are Geomorph’s net working capital and total long-term capital?

4.3

Receivables

On average, it takes Microlimp’s customers 60 days to pay their bills. If Micro limp has annual sales of $500 million, what is the average value of unpaid bills

4.4

Current ratio

How would the following actions affect a firm’s current ratio?

a. Inventory is sold

b. The firm takes out a bank loan to pay its suppliers.

c. The firm arranges a line of credit with a bank that allows it to borrow at any time to pay its suppliers.

d. A customer pays its overdue bills.

e. The firm uses cash to purchase additional inventories

4.5

Inflation. How would rapid inflation affect the accuracy and relevance of a manufacturing company’s balance sheet and income statement?

4.6

Look up the latest financial statements for a company that you are creating and calculate the following ratios for the latest year: a. Return on capital. b. Return on equity. c. Operating profit margin. d. Days in inventory. e. Debt ratio. f. Times-interest-earned. g. Current ratio. h. Quick ratio.

SOLUTIONS

4.1.

Sales to assets and Return on assets

Magic Flutes has total receivables of $3,000, which represent 20 days’ sales. Total assets are $75,000. The firm’s operating profit margin is 5%.

Sales to assets

Sales/ Total Assets at start of the year

Receivables

3,000

20 days sales

Total assets

75,000

Operating profit margin

5%

Net income /Sales

Net income

sales * operating profit margin

3000

Asset turnover

Sales/Assets

Profit margin

Net income/Sales

Receivables turnover

Sales/receivables

20

x/3000

60000

Sales

Sales

60,000

Net income

3,000

Return on assets

After tax interest + Net income / Total assets

ROA

4%

Assets turnover

Sales / Total assets

Asset turnover or sales to assets

80%

4.2

Balance sheet for Geomorph Trading:

Current assets

100

Current liabilities

60

Other liabilities

70

Long term assets

500

Long term debt

280

Equity

190

TOTAL ASSETS

600

TOTAL LIABILITIES

600

a. Calculate the ratio of debt to equity. b. What are Geomorph’s net working capital and total long-term capital?

Debt to equity

Total liabilities / Total assets

Debt to equity

68%

Net working capital

Net working capital / Total assets

Working capital

-30

Total Assets

600

Net working capital

-5%

Total long term capital

470

4.3

Receivables

Microlimp’s customers 60 days to pay their bills

f Micro limp has annual sales of $500 million, what is the average value of unpaid bills

Customers credit term

60

Sales

500,000,000

Receivables turnover

Sales/Receivables

60

500.000.000/x

x

8,333,333

4.4

Current ratio

How would the following actions affect a firm’s current ratio?

a. Inventory is sold

Neutral

b. The firm takes out a bank loan to pay its suppliers.

Neutral

c. The firm arranges a line of credit with a bank that allows it to borrow at any time to pay its suppliers.

Decreases

d. A customer pays its overdue bills.

Neutral

e. The firm uses cash to purchase additional inventories

Neutral

Current ratio

Current assets / current liabilities

4.5

Inflation

Inflation. How would rapid inflation affect the accuracy and relevance of a manufacturing company’s balance sheet and income statement?

By the inflation rate

4.6

Look up the latest financial statements for a company that you are creating and calculate the following ratios for the latest year: a. Return on capital. b. Return on equity. c. Operating profit margin. d. Days in inventory. e. Debt ratio. f. Times-interest-earned. g. Current ratio. h. Quick ratio.