Week Five Assignment
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exercises_3__4-problems_1_2__3.docxExercises
1. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
|
|
20X2 |
20X1 |
|
Current Assets |
$ 76,000 |
$ 80,000 |
|
Property, Plant, and Equipment (net) |
99,000 |
90,000 |
|
Intangibles |
25,000 |
50,000 |
|
Current Liabilities |
40,800 |
48,000 |
|
Long-Term Liabilities |
143,000 |
160,000 |
|
Stockholders' Equity |
16,200 |
12,000 |
|
Net Sales |
500,000 |
500,000 |
|
Cost of Goods Sold |
332,500 |
350,000 |
|
Operating Expenses |
93,500 |
85,000 |
2. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.
3. Vertical analysis. Study the data pertaining to Mary Lynn Corporation that appear in Exercise 1. Prepare a vertical analysis for 20X1 and 20X2 and briefly evaluate the results of your work.
4. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
|
|
Edison |
Stagg |
Thornton |
|
Cash |
$4,000 |
$2,500 |
$1,000 |
|
Short-Term Investments |
3,000 |
2,500 |
2,000 |
|
Accounts Receivable |
2,000 |
2,500 |
3,000 |
|
Inventory |
1,000 |
2,500 |
4,000 |
|
Prepaid Expenses |
800 |
800 |
800 |
|
Accounts Payable |
200 |
200 |
200 |
|
Notes Payable: Short-Term |
3,100 |
3,100 |
3,100 |
|
Accrued Payables |
300 |
300 |
300 |
|
Long-Term Liabilities |
3,800 |
3,800 |
3,800 |
a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
b. Suppose Thornton is using FIFO for inventory valuation and Edison is using LIFO. Comment on the comparability of information between these two companies.
c. If all short-term notes payable are due on July 11 at 8 a.m., comment on each company's ability to settle its obligation in a timely manner.
5. Computation and evaluation of activity ratios. The following data relate to Alaska Products Inc.:
|
|
20X5 |
20X4 |
|
Net Credit Sales |
$832,000 |
$760,000 |
|
Cost of Goods Sold |
440,000 |
350,000 |
|
Cash, Dec. 31 |
125,000 |
110,000 |
|
Accounts Receivable, Dec. 31 |
180,000 |
140,000 |
|
Inventory, Dec. 31 |
70,000 |
50,000 |
|
Accounts Payable, Dec. 31 |
115,000 |
108,000 |
6. The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs.
a. Compute the accounts-receivable and inventory-turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.
b. Study the ratios from part (a) and comment on the company's ability to repay a bank loan in 90 days.
c. Suppose that Alaska's major line of business involves the processing and distribution of fresh and frozen fish throughout the United States. Do you have any concerns about the company's inventory-turnover ratio? Briefly discuss.
7. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:
|
Net sales |
$1,500,000 |
|
Interest Expense |
120,000 |
|
Income Tax Expense |
80,000 |
|
Preferred Dividends |
25,000 |
|
Net Income |
130,000 |
|
Average Assets |
1,100,000 |
|
Average Common Stockholders' Equity |
400,000 |
a. Compute the net-profit-margin ratio and the rates of return on assets and common stockholders' equity, rounding calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly explain.
8. Evaluation of selected ratios. Selected ratios of Glenwood Power Equipment Company and averages for the power equipment industry follow:
|
|
Glenwood |
Industry |
|
Current ratio |
2.21 |
1.63 |
|
Average collection period of receivables |
39 days |
21 days |
|
Inventory turnover |
4.1 |
1.9 |
|
Net-profit-margin |
7.0% |
8.8% |
|
Return on assets |
10.0% |
9.5% |
|
Debt-to-total assets |
31.7% |
39.8% |
9. Evaluate these ratios and determine whether you agree or disagree with the following statements:
a. Glenwood has better debt-paying ability than the "average" company in the power equipment industry.
b. Glenwood is performing below average in managing its inventories.
c. The amount of income generated, given the company's resources, exceeds that produced by the industry.
d. Glenwood may need to improve its management of credit and customer collections.
e. In view of the company's revenues, Glenwood's ability to produce earnings is significantly below the industry norm.
Problems
1. Horizontal and vertical analysis. The following financial statements pertain to Waterloo Corporation:
|
WATERLOO CORPORATION Comparative Balance Sheets December 31,20X5 and 20X4 |
||
|
|
20X5 |
20X4 |
|
Assets |
||
|
Current Assets |
||
|
Cash |
$ 11,250 |
$ 12,500 |
|
Accounts Receivable (net) |
18,500 |
25,000 |
|
Inventories |
38,500 |
35,000 |
|
Prepaid Expense |
__3,750 |
__3,750 |
|
Total Current Assets |
$ 72,000 |
$ 76,250 |
|
Property, Plant, and Equipment |
||
|
Buildings (net) |
$ 102,750 |
$ 101,250 |
|
Equipment (net) |
28,500 |
30,000 |
|
Vehicles (net) |
32,000 |
40,000 |
|
Total Property, Plant, and Equipment |
$ 163,250 |
$ 171,250 |
|
Trademarks (net) |
__$ 14,750 |
__$ 2,500 |
|
Total assets |
$ 250,000 |
$ 250,000 |
|
Liabilities and Stockholders' Equity |
||
|
Current Liabilities |
||
|
Accounts Payable |
$ 49,000 |
$ 70,000 |
|
Notes Payable |
13,500 |
40,000 |
|
Federal Taxes Payable |
__2,500 |
__25,000 |
|
Total Current Liabilities |
$ 65,000 |
$ 135,000 |
|
Long-Term Debt |
__$ 50,000 |
__$ 25,000 |
|
Total Liabilities |
$ 115,000 |
$ 160,000 |
|
Stockholders' Equity |
||
|
Common Stock, $10 par |
$ 25,000 |
$ 25,000 |
|
Retained Earnings |
__110,000 |
__65,000 |
|
Total Stockholders' Equity |
$ 135,000 |
$ 90,000 |
|
Total Liabilities and Stockholders' Equity |
$ 250,000 |
$ 250,000 |
|
WATERLOO CORPORATION Comparative Income Statements For the Years Ending December 31, 20X5 and 20X4 |
||
|
|
20X5 |
20X4 |
|
Net Sales |
$ 550,000 |
$500,000 |
|
Cost of Goods Sold |
__330,000 |
__250,000 |
|
Gross Profit |
$ 220,000 |
$250,000 |
|
Operating Expense |
__132,500 |
__100,000 |
|
Income Before Interest and Taxes |
$ 87,500 |
$150,000 |
|
Interest Expense |
__12,500 |
__3,000 |
|
Income Before Taxes |
$ 75,000 |
$147,000 |
|
Income Tax Expense |
__30,000 |
__58,800 |
|
Net Income |
$ 45,000 |
$ 88,200 |
Instructions
a. Prepare a horizontal analysis of the balance sheet, showing dollar and percentage changes. Round all calculations in parts (a) and (b) to two decimal places.
b. Prepare a vertical analysis of the income statement by relating each item to net sales.
c. Briefly comment on the results of your analysis.
2. Ratio computation. The financial statements of the Lone Pine Company follow.
|
LONE PINE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1 ($000 Omitted) |
||
|
|
20X2 |
20X1 |
|
Assets |
||
|
Current Assets |
||
|
Cash and Short-Term Investments |
$ 400 |
$ 600 |
|
Accounts Receivable (net) |
3,000 |
2,400 |
|
Inventories |
__2,000 |
__2,200 |
|
Total Current Assets |
$5,400 |
$5,200 |
|
Property, Plant, and Equipment |
||
|
Land |
$1,700 |
$ 600 |
|
Buildings and Equipment (net) |
__1,500 |
__1,000 |
|
Total Property, Plant, and Equipment |
$3,200 |
$1,600 |
|
Total Assets |
$8,600 |
$6,800 |
|
Liabilities and Stockholders' Equity |
||
|
Current Liabilities |
||
|
Accounts Payable |
$1,800 |
$1,700 |
|
Notes Payable |
__1,100 |
__1,900 |
|
Total Current Liabilities |
$2,900 |
$3,600 |
|
Long-Term Liabilities |
||
|
Bonds Payable |
4,100 |
2,100 |
|
Total Liabilities |
$7,000 |
$5,700 |
|
Stockholders' Equity |
||
|
Common Stock |
$ 200 |
$ 200 |
|
Retained Earnings |
__1,400 |
__900 |
|
Total Stockholders' Equity |
$1,600 |
$1,100 |
|
Total Liabilities and Stockholders' Equity |
$8,600 |
$6,800 |
|
LONE PINE COMPANY Statement of Income and Retained Earnings For the Year Ending December 31,20X2 ($000 Omitted) |
||
|
Net Sales* |
|
$36,000 |
|
Less: Cost of Goods Sold |
$20,000 |
|
|
Selling Expense |
6,000 |
|
|
Administrative Expense |
4,000 |
|
|
Interest Expense |
400 |
|
|
Income Tax Expense |
__2,000 |
_32,400 |
|
Net Income |
$ 3,600 |
|
|
Retained Earnings, Jan. 1 |
___900 |
|
|
|
$ 4,500 |
|
|
Cash Dividends Declared and Paid |
__3,100 |
|
|
Retained Earnings, Dec. 31 |
|
$ 1,400 |
|
*All sales are on account. |
|
|
Instructions Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:
a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d. Accounts-receivable-turnover ratio
e. Return-on-assets ratio
f. Net-profit-margin ratio
g. Return-on-common-stockholders' equity
h. Debt-to-total assets
i. Number of times that interest is earned
j. Dividend payout rate
3. Financial statement construction via ratios. Incomplete financial statements of Lock Box Inc. are presented as follows:
|
LOCK BOX INC. Income Statement For the Year Ending December 31, 20X3 |
||
|
Sales |
$ ? |
|
|
Cost of Goods Sold |
? |
|
|
Gross Profit |
$ 15,000,000 |
|
|
Operating Expenses and Interest |
? |
|
|
Income Before Taxes |
$ ? |
|
|
Income taxes, 40% |
? |
|
|
Net income |
$ ? |
|
|
LOCK BOX INC. Balance Sheet December 31, 20X3 |
||
|
Assets |
||
|
Cash |
$ ? |
|
|
Accounts Receivable |
? |
|
|
Inventory |
? |
|
|
Property, Plant, and Equipment |
___8,000,000 |
|
|
Total assets |
$ 24,000,000 |
|
|
Liabilities and Stockholders' Equity |
|
|
|
Accounts Payable |
$ ? |
|
|
Notes Payable: Short-Term |
600,000 |
|
|
Bonds Payable |
4,600,000 |
|
|
Common Stock |
2,000,000 |
|
|
Retained Earnings |
? |
|
|
Total Liabilities and Stockholders' Equity |
$ 24,000,000 |
|
Further information is the following:
· Cost of goods sold is 60% of sales. All sales are on account.
· The company's beginning inventory is $5 million; inventory-turnover ratio is 4.
· The debt-to-total-assets ratio is 70%.
· The profit margin on sales is 6%.
· The firm's accounts-receivable-turnover ratio is 5. Receivables increased by $400,000 during the year.
Instructions Using the preceding data, complete the income statement and the balance sheet.
