Page 721 - Accounting Principles (A Business Perspective)

17. Analysis and interpretation of financial statements

Assets Operating Sales
Income
Company 1 $ 1,404,000 $ 187,200 $ 2,059,200
Company 2 8,424,000 608,400 18,720,000
Company 3 37,440,000 4,914,000 35,100,000
a. Determine the operating margin, turnover of operating assets, and rate of return on operating assets for each
company.
b. In the subsequent year, the following changes took place (no other changes occurred):
Company 1 bought some new machinery at a cost of USD 156,000. Net operating income increased by USD

12,480 as a result of an increase in sales of USD 249,600.
Company 2 sold some equipment it was using that was relatively unproductive. The book value of the equipment
sold was USD 624,000. As a result of the sale of the equipment, sales declined by USD 312,000, and operating
income declined by USD 6,240.
Company 3 purchased some new retail outlets at a cost of USD 6,240,000. As a result, sales increased by USD
9,360,000, and operating income increased by USD 499,200.
• Which company has the largest absolute change in:
a. Operating margin ratio?
b. Turnover of operating assets?

c. Rate of return on operating assets?
• Which one realized the largest dollar change in operating income? Explain this change in relation to the
changes in the rate of return on operating assets.
Alternate problem F One of the largest spice companies in the world, McCormick & Company, Inc., produces
a diverse array of specialty foods. The following information is for McCormick & Company, Inc.:
2000 1999
(USD thousands)
Net sales $2,123,500 $2,006,900
Income before interest and taxes 225,700 174,700
Net income 137,500 98,500
Interest expense 39,700 32,400
Stockholders' equity 359,300 382,400
Common stock, no par value, November 30 175,300 173,800
Assume average common shares outstanding for 2000 and 1999 are 69,600 and 72,000 (in thousands),
respectively.
Compute the following for both 2000 and 1999. Then compare and comment. Assume stockholders' equity for
1998 was USD 388,100.
a. EPS of common stock.
b. Net income to net sales.
c. Return on average common stockholders' equity.
d. Times interest earned ratio.

Alternate problem G Parametric Technology Corporation is in the CAD/CAM/CAE industry and is the top
supplier of software tools used to automate a manufacturing company. The following consolidated balance sheet
and supplementary data are for Parametric for 2003:
Parametric Technology Corporation
Consolidated balance sheet
For 2003 September 30 (in thousands)
Assets

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