Comparative statement data for Douglas Company and Maulder Company, two competit

Question

Comparative statement data for Douglas Company and Maulder Company, two competitors,
appear below. All balance sheet data are as of December 31, 2009, and December 31,
2008.

Douglas Company Maulder Company
2009 2008 2009 2008
Net sales $1,549,035 $339,038
Cost of goods sold 1,080,490 241,000
Operating expenses 302,275 79,000
Interest expense 8,980 2,252
Income tax expense 54,500 6,650
Current assets 325,975 $312,410 83,336 $ 79,467
Plant assets (net) 521,310 500,000 139,728 125,812
Current liabilities 65,325 75,815 35,348 30,281
Long-term liabilities 108,500 90,000 29,620 25,000
Common stock, $10 par 500,000 500,000 120,000 120,000
Retained earnings 173,460 146,595 38,096 29,998

Instructions
(a) Prepare a vertical analysis of the 2009 income statement data for Douglas Company and
Maulder Company in columnar form.
(b) Comment on the relative profitability of the companies by computing the return
on assets and the return on common stockholders’ equity ratios for both companies.
**************************************…

The comparative statements of Dillon Company are presented below
DILLON COMPANY
Income Statement
For Year Ended December 31
2009 2008
Net sales (all on account) $600,000 $520,000
Expenses
Cost of goods sold 415,000 354,000
Selling and administrative 120,800 114,800
Interest expense 7,800 6,000
Income tax expense 18,000 14,000
Total expenses 561,600 488,800
Net income $ 38,400 $ 31,200
Beginning-of-Year Balances
Total assets $31,416 $105,405
Total stockholders’ equity 11,132 43,623
Current liabilities 8,314 40,364
Total liabilities 20,284 61,782
Other Data
Average net receivables $4,845 $ 1,485
Average inventory 4,958 28,030
Net cash provided by operating activities 3,821 15,044
Instructions

The comparative statements of Dillon Company are presented below:

DILLON COMPANY
Balance Sheets
December 31
Assets 2009 2008
Current assets
Cash $ 21,000 $ 18,000
Short-term investments 18,000 15,000
Accounts receivable (net) 86,000 74,000
Inventory 90,000 70,000
Total current assets 215,000 177,000
Plant assets (net) 423,000 383,000
Total assets $638,000 $560,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $122,000 $110,000
Income taxes payable 23,000 20,000
Total current liabilities 145,000 130,000
Long-term liabilities
Bonds payable 120,000 80,000
Total liabilities 265,000 210,000
Stockholders’ equity
Common stock ($5 par) 150,000 150,000
Retained earnings 223,000 200,000
Total stockholders’ equity 373,000 350,000
Total liabilities and stockholders’ equity $638,000 $560,000
Additional data:
The common stock recently sold at $19.50 per share.
The year-end balance in the allowance for doubtful accounts was $3,000 for 2009 and $2,400 for
2008.

Instructions
Compute the following ratios for 2009.
(a) Current. (h) Return on common stockholders’ equity.
(b) Acid-test. (i) Earnings per share.
(c) Receivables turnover. (j) Price-earnings.
(d) Inventory turnover. (k) Payout.
(e) Profit margin. (l) Debt to total assets.
(f) Asset turnover. (m) Times interest earned.
(g) Return on assets.

Explanation / Answer

Vertical Analysis Income Statement
For the year ended December 31, 2009
                         Douglas       %     Maulder      %
Net Sales         $1,549,035  100.0   $339,038   100.0
COGS                   $1,080,490   69.8   $241,000     71.1
Gross Profit        $468,545    30.2   $98,038     28.9
Operating exp.    $302,275    19.5    $79,000     23.3
Income from op. $166,270    10.7    $19,038      5.6
Other exp. & Losses
Interest exp.        $8,980      0.6     $2,252       0.7
Income before
taxes               $157,290     10.1    $16,786     4.9
Income tax           54,500       3.5      $6,650     1.9
Net Income      $102,790       6.6    $10,136     3.0

b) Douglas company appears to be more profitable. It has comparatively higher gross profit ($468,545 against $98,038 for Maulder company), higher EBIT ($157,290 against $16,786 for Maulder company) and also higher net income after taxes ($102,790 against $10,136)

It return on assets ($102,790 / $829,848)1 12.4% is also higher than Maulder return on assets 4.7% ($10,136 / $214,172)1.

Douglas' return on common shareholder equity = $102,790 / $660,028 = 15.6% is higher than
Maulder return on common shareholder equity = $10,136 / $154,027 = 6.6%

                                      -------Douglas----    ------Maulder-------
1                                    2009        2008          2009        2008  
   Current Assests   325,975    312,410      83,336   79,467
   Plant Assets         521,310    500,000    139,728   125,812
Total Assets           847,285    812,410    223,064    205,279
Average Assets          1,659,695 / 2            428,343 / 2
                                    = 829,848                    = 214,172


                                      -------Douglas----    ------Maulder-------
2                                      2009        2008          2009        2008  
   Common Stock      500,000    500,000    120,000   120,000
   Retained Earnings 173,460    146,595      38,096     29,998
Total Assets             673,460    646,595    158,096   149,998
Average Assets          1,320,055 / 2            308,094 / 2
                                       = 660,028                 = 154,047

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