F2M8 - Ratio and Variance Analysis

The following information was taken from Baxter Department Store's financial statements:

Inventory at January 1 100,000

Inventory at December 31 300,000

Net sales 2,000,000

Net purchases 700,000

What was Baxter's inventory turnover for the year ending December 31?

A. 3.5

B. 2.5

C. 10

D. 5

CPA exam shortcut

Ratio	Formula
Inventory turnover	COGS ÷ Average inventory
Accounts receivable turnover	Net credit sales ÷ Average A/R
Total asset turnover	Net sales ÷ Average total assets
Days in inventory	365 ÷ Inventory turnover

Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent's debt-to-equity ratio?

A. 2.63

B. 0.52

C. 1.08

D. 0.48

CPA exam shortcut

Ratio	Formula
Debt-to-equity	Total liabilities ÷ Total equity
Debt ratio	Total liabilities ÷ Total assets
Equity ratio	Total equity ÷ Total assets
Equity multiplier	Total assets ÷ Total equity

Interpretation: A debt-to-equity ratio of 1.08 means Stent has approximately $1.08 in liabilities for every $1 of stockholders' equity.

CPA exam tip: When a question provides total assets, capital stock, and retained earnings, calculate equity first, then subtract equity from assets to find liabilities.

If Hutton Inc. sold $100 of inventory for $100 of cash on December 31, Year 2, which of the following ratios would decrease?

A. Return on assets

B. Working capital turnover

C. Net profit margin

D. Return on equity

Mẹo nhớ cho CPA exam:

Sales tăng + Net income không đổi → Net profit margin giảm.

Còn Working capital turnover tăng vì doanh thu tăng nhưng working capital không đổi.

Step 1: Analyze the transaction

Hutton Inc. sells inventory costing $100 for $100 cash.

Account	Effect
Cash	+$100
Inventory	−$100
Sales revenue	+$100
Cost of goods sold	+$100
Net income	No change
Total assets	No change
Stockholders' equity	No change

Because the inventory is sold at cost, there is no profit or loss.

Step 2: Analyze each ratio

Ratio	Formula	Effect
A. Return on assets	Net income ÷ Average total assets	No change
B. Working capital turnover	Net sales ÷ Average working capital	Increases
C. Net profit margin	Net income ÷ Net sales	Decreases
D. Return on equity	Net income ÷ Average equity	No change

Step 3: Calculate the net profit margin

From the previous question, Hutton's Year 2 results were:

• Net sales: $3,000,000

• Net income: $350,000

Before the transaction:

Net Profit Margin$350,000\$3,000,000=11.6667

Net profit margin

CPA exam shortcut

Be careful not to confuse these profitability ratios:

Ratio	Formula
Gross profit margin	Gross profit ÷ Net sales
Operating profit margin	Operating income ÷ Net sales
Net profit margin	Net income after taxes ÷ Net sales

CPA exam tip: For net profit margin, always use net income after taxes, not income before taxes.