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.
Balance Sheet
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EMERSON CORPORATION Comparative Balance Sheet December 31, 20X5 and 20X4
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ASSETS
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20X5
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20X4
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Current assets Cash
Accounts receivable Inventory Total current assets Property, plant & equipment Land Building Equipment
Less: Accumulated Depreciation Total property, plant & equipment Total assets
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$ 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
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$ 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
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LIABILITIES
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Current liabilities
Accounts payable
Wages payable Total current liabilities Long-term liabilities
Long-term loan payable Total liabilities
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$ 270,000
20,000 $ 290,000
900,000 $ 1,190,000
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$ 200,000
50,000 $ 250,000
1,800,000 $ 2,050,000
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STOCKHOLDERS' EQUITY
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Preferred stock Common stock ($1 par) Paid-in capital in excess of par Retained earnings Total stockholders' equity Total liabilities and equity
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$ 300,000 910,000 370,000
1,330,000 $ 2,910,000 $ 4,100,000
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$ -
900,000
300,000 380,000 $ 1,580,000 $ 3 630 000
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Income Statement
EMERSON CORPORATION Income Statement For the Year Ending December 31, 20X5
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Revenues
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$ 3,250,000
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Cost of goods sold
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1,160,000
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Gross profit
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$ 2,090,000
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Operating expenses
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Wages
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$ 450,000
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Interest
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100,000
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Depreciation
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120,000
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Other operating expenses
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270,000
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(940,000)
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Gain on sale of land
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150,000
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Income before income taxes
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$ 1,300,000
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Income taxes
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300,000
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Net income
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$ 1 000 000
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Statement of Retained Earnings
EMERSON CORPORATION Statement of Retained Earnings
For the Year Ending December 31, 20X5
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Beginning retained earnings, Jan. 1
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$ 380,000
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Net income
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1,000,000
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$ 1,380,000
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Less: Dividends on common
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50,000
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Ending retained earnings, Dec. 31
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$ 1 330 000
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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).
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Current Ratio
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Current Assets/ Current Liabilities
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$1,730,000/$290,000 = 5.97
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Quick Ratio
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(Cash + Short-term Investments + Accts. Receivable)/ Current Liabilities
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$1,550,000/$290,000 = 5.34
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Debt to Total Assets Ratio
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Total Debt/ Total Assets
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$1,190,000/$4,100,000 = 0.29
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Debt to Total Equity Ratio
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Total Debt/ Total Equity
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$1,190,000/$2,910,000 = 0.41
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Times Interest Earned Ratio
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Income Before Income Taxes and Interest/ Interest Charges
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$1,400,000/$100,000 = 14
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Accounts Receivable Turnover Ratio
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Net Credit Sales/ Average Net Accounts Receivable
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$3,250,000/$725,000 = 4.48
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Inventory Turnover Ratio
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Cost of Goods Sold/ Average Inventory
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$1,160,000/$200,000 = 5.8
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Net Prof i t on Sales Ratio
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Net Income/ Net Sales
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$1,000,000/$3,250,000 = 31%
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Gross Profit Margin Ratio
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Gross Profit/ Net Sales
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$2,090,000/$3,250,000 = 64%
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Return on Assets Ratio
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(Net Income + Interest Expense)/ Average Assets
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$1,100,000/$3,865,000 = 28%
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Return on Equity Ratio
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(Net Income - Preferred Dividends)/ Average Common Equity
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$1,000,000/$2,095,000 = 48%
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EPS
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Income Available to Common/ Weighted-Average Number of Common Shares
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$1,000,000/905,000 = $1.11
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P/E
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Market Price Per Share/ Earnings Per Share
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$10/$1.11 = 9
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Dividend Rate/Yield
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Annual Cash Dividend/ Market Price Per Share
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$0.055/$10 = 0.55 %
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Dividend Payout Ratio
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Annual Cash Dividend/ Earnings Per Share
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$0.055/$1.11 = 5.0%
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Book Value
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"Common" Equity/ Common Shares Outstanding
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$2,610,000/910,000 = $2.87
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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.
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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Accounting 
