Question

Comparison with Industry Averages

Heartland Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Heartland has decided that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested Heartland's most recent financial statements as part of the loan package.

The industry in which Heartland operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the competitors belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for this purpose.

Heartland's controller is aware that the bank has access to this survey and is very concerned about how the company fared this past year compared with the rest of the industry. The ratios included in the publication and the averages for the past year are as follows:

Ratio	Industry Average
Current ratio	1.23
Acid-test (quick) ratio	0.75
Accounts receivable turnover	33	times
Inventory turnover	29	times
Debt-to-equity ratio	0.53
Times interest earned	8.65	times
Return on sales	6.57	%
Asset turnover	1.95	times
Return on assets	12.81	%
Return on common stockholders’ equity	17.67	%

The financial statements to be submitted to the bank in connection with the loan follow.

Heartland Inc. Statement of Income and Retained Earnings For the Year Ended December 31, 2017 (thousands omitted)
Sales revenue		$542,750
Cost of goods sold		(435,650)
Gross profit		$107,100
Selling, general, and administrative expenses		$(65,780)
Loss on sales of securities		(220)
Income before interest and taxes		$41,100
Interest expense		(9,275)
Income before taxes		$31,825
Income tax expense		(12,730)
Net income		$19,095
Retained earnings, January 1, 2017		58,485
		$77,580
Dividends paid on common stock		(12,000)
Retained earnings, December 31, 2017		$65,580

Heartland Inc. Comparative Statements of Financial Position (thousands omitted)
		December 31, 2017		December 31, 2016
Assets
Current assets:
Cash		$1,135		$750
Marketable securities		1,250		2,250
Accounts receivable, net of allowances		15,650		12,380
Inventories		12,680		15,870
Prepaid items		385		420
Total current assets		$31,100		$31,670
Long-term investments		$425		$425
Property, plant, and equipment:
Land		$32,000		$32,000
Buildings and equipment, net of accumulated depreciation		216,000		206,000
Total property, plant, and equipment		$248,000		$238,000
Total assets		$279,525		$270,095
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term notes		$8,750		$12,750
Accounts payable		20,090		14,380
Salaries and wages payable		1,975		2,430
Income taxes payable		3,130		2,050
Total current liabilities		$33,945		$31,610
Long-term bonds payable		$80,000		$80,000
Stockholders’ equity:
Common stock, no par		$100,000		$100,000
Retained earnings		65,580		58,485
Total stockholders’ equity		$165,580		$158,485
Total liabilities and stockholders’ equity		$279,525		$270,095

Required:

1. Prepare a columnar report for the controller of Heartland Inc. comparing the industry averages for the ratios published by the trade association with the comparable ratios for Heartland. For Heartland, compute the ratios as of December 31, 2017, or for the year ending December 31, 2017, whichever is appropriate. Round each ratio for Heartland, Inc. to match the rounding used for each of the industry averages presented.

Heartland, Inc.
Comparison to Industry Averages
For the year ending December 31, 2017
Ratio	Industry Average	Heartland Inc.
Current ratio	1.23
Acid-test (quick) ratio	0.75
Accounts receivable turnover	33 times	times
Inventory turnover	29 times	times
Debt-to-equity ratio	0.53
Times interest earned	8.65 times	times
Return on sales	6.57 %	%
Asset turnover	1.95 times	times
Return on assets	12.81 %	%
Return on common stockholders' equity	17.67 %	%

Answer 1

Compute the ratios as follows: Current assets Current ratio= Current liabilities $ 31,100 $ 33.945 = 0.92:1 Current assets - Inventories - Prepaid items Quick ratio = Current liabilities $ 31,100 - $ 12,680 - $ 385 $ 33,945 = 0.53:1 Accounts receivable turnover ratio= Net credit sales Average accounts receivable $ 542,750 S 15,650 + $ 12,380 $ 542.750 $ 14.015 = 38.73 times Cost of goods sold Inventory turnover ratio = - Average inventory S 435.650 S 12.680 + $ 15,870 S 435,650 S 14,275 = 30.52 times

Debt-Equity ratio= = Total debts Total shareholder's equity $ 113,945 $ 165,580 $ 435,650 $ 14,275 = 0.69:1 Net income + Interest expense + Income tax expense Times interested earned ratio = = Interest expense $19,095 +$9,275 +$12.730 S 9.275 $ 41,100 $ 9,275 = 4.43 times Return on sales = et income + Interest expense, net of tax Net sales $19.095+$9,275 x 0.60 $ 542.750 $ 24,660 $ 542,750 =4.54 % Net sales Assets turnover ratio = - Average total assets $ 542.750 $ 279,525 +$ 270,095 $ 542,750 $ 274.810 = 1.98 times

Return on assets ratio = Net income + Interest expense. Net of tax Average total assets $ 19,095+ (S 9,275 x 0.60) $ 279,525 + $ 270,095 $ 24,660 $ 274,810 = 8.97% Return on common stockholder's ratio= Net income - Preferred dividends Average common stockholder's equity S 19.095-SO $ 165,580 + $ 158,485 $ 19,095 $ 162,032.50 = 11.78% Prepare a columnar report as follows: Heartland. Inc Comparison to Industry Averages For the year ending December 31, 2017 Industry Heartland Above Ratio average Inc. Below Current ratio $1.2 0.92 Below Acid-test (quick) ratio S0.75 0.53 Below Accounts receivable turnover 33 times 38.73 times Above Inventory turnover 29 times 30.52 times Above Debt-to-equity ratio $0.53 0.69 Above Times interest earned 8.65 times 4.43 times Below Return on sales 6.57% 4.54% Below Asset turnover 1.95 times 1.98 times Above Return on assets 12.81% 8.97% Below Return on common stockholders' equity 17.67% 11.78% Below