Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 14 Financial Statement Analysis 663

The apparel retail industry average rate earned on total assets is 8.2%, and the average rate

earned on stockholders’ equity is 16.7% for fiscal year 2004 (mostly January 29, 2005-dated state-

ments).

a. Determine the rate earned on total assets for Ann Taylor for the fiscal years ended

January 29, 2005, and January 31, 2004. Round to one decimal place.

b. Determine the rate earned on stockholders’ equity for Ann Taylor for the fiscal years

ended January 29, 2005, and January 31, 2004. Round to one decimal place.

c. Evaluate the two-year trend for the profitability ratios determined in (a) and (b).

d. Evaluate Ann Taylor’s profit performance relative to the industry.

The Imagination Studios, Inc., produces television shows. The company earned $300,000 and

$400,000 in 2006 and 2007, respectively. The company had total assets of $4,000,000 and total

liabilities of $1,000,000 on January 1, 2006. The company had no investing or financing transac-

tions during 2006. On July 1, 2007, the company purchased studio property for $3,000,000 by is-

suing debt for the same amount.

a. Determine the average total assets and average stockholders’ equity for 2006 and 2007.

b. Calculate the rate earned on total assets and rate earned on stockholders’ equity for 2006

and 2007. Round to one decimal place.

c. Why did the profits increase from 2006 to 2007, but the rate earned on total assets

decrease?

d. Why did the difference between the rate earned on stockholders’ equity and rate earned

on total assets increase from 2006 to 2007?

The chief financial officer (CFO) of Beacon Publishing Company has asked for a DuPont analy-

sis of the company over the last two years. The CFO has requested that the rate earned on total

assets be broken into its profit margin and asset turnover components. The following informa-

tion is available, from the financial statements:

2006 2007

Sales $360,000 $700,000

Net income 28,800 77,000

December 31, December 31, December 31,

2005 2006 2007

Total assets $120,000 $200,000 $360,000

a. Perform a DuPont analysis for 2006 and 2007.

b. Analyze the change in the rate earned on total assets for the two years.

Bed Bath and Beyond, Inc., is a major retailer of bed and bath products. During two recent

fiscal years, the company reported the following information from the income statement (in

millions):

Exercise 14-8

Profitability ratios

Goal 2

b. 2006 rate earned on total
assets, 7.2%

Exercise 14-9

DuPont formula

Goal 3

a. 2006 rate earned on total
assets, 18%

Exercise 14-10

DuPont formula

Goal 3

a. Profit margin, fiscal 2005,

9.81%

For the Year Ended

Feb. 26, 2005 Feb. 2 8 , 2004

Sales $5,147.7 $4,478.0

Net income 505.0 399.5