Appendix A Project: Financial Statement Analysis
spring 2019
5% of course grade
Background:
This assignment uses a company case study for financial statement analysis. Students are required to solve financial ratios
and analyze these ratios using a time series trend. The students must identify strengths and weakness of the company and
make recommendations to the manager of the company.
Instructions:
Part A: Use 2017 and 2016 comparative income statements and balance sheets for XYZ Company provided in the following
tab. Calculate the following ratios for 2017:
working capital
current ratio
quick ratio
days sales receivable
inventory turnover
debt to equity
times-interest-earned
return on assets (ROA)
earnings per share (EPS)
price to earnings (PE)
Note: All work must be completed in EXCEL using formulas for grading. You must create a NEW EXCEL FILE indicating you
are the file creatoer and then you can copy/paste the problem from tab 2. Do NOT work directly out of this file!!
(Answers submitted in Word or without formulas in Excel will receive a zero.) All files must be original. DO NOT SHARE
FILES OR USE A COMMON TEMPLATE FOR CALCULATIONS. The question only specifically asks for 2017 ratios. However, in
order to do a thorough analysis in part b you may need to compute 2016 ratios as well for comparisons when
applicable. (There are some ratios that you will not be able to compute from the prior year because of a lack of data.)
Part B: Write a professional memo addressed to the company’s management to discuss your evaluation of solvency and
performance based on calculations from part A. (No bullet lists and/or incomplete sentences.) The memo should explain the
significance of the specific ratios and address strengths and weakness of the company.
Memos should be typed in Word and uploaded to Blackboard through the Assignment menu.
Grading: Calculations in Part A should be well-organized in Excel by the three classifications noted: Short-term solvency,
Long-term solvency and Performance (Profitability). Memos should be a minimum of 500 words. See the FSA Memo
Grading Rubric attached for specific grading requirements.
Due Date: Projects will be due by the end of the day, Monday, 2/25/19
ACCT 2312 - Spring 2019
Financial Statement Analysis Project
Instructions:
Comparative income statements and balance sheets for XYZ Company follow for 2017 and 2016.
XYZ
Comparative Income Statements
December 31, 2017 and 2016
Sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
Other expenses (revenues)
Interest revenue
Interest expense
Total other expenses (revenues)
Income before income taxes
Income taxes
Net Income
$
$
$
$
$
$
$
$
$
$
$
2017
6,394,000
3,812,500
2,581,500
1,788,000
793,500
(52,000)
43,500
(8,500)
802,000
361,000
441,000
$
$
$
$
$
$
$
$
$
$
$
2016
6,126,000
3,702,500
2,423,500
1,788,000
635,500
(44,500)
43,500
(1,000)
636,500
361,000
275,500
XYZ Company
Comparative Balance Sheets
For Years Ended December 31, 2017 and 2016
2017
2016
Assets
Cash
Marketable securities
Accoutns receivable
Inventory
Prepaid expenses
Total current assets
$
176,000
$
173,500
$
488,500
$
805,500
$
67,500
$ 1,711,000
$
184,500
$
156,500
$
528,000
$
815,000
$
63,000
$ 1,747,000
Investments and other assets
Property, plant, and equipment, net
Trademarks and other intangibles
Total assets
$
392,500
$ 1,414,500
$
136,500
$ 3,654,500
$
307,000
$ 1,246,000
$
145,500
$ 3,445,500
Liabilities and stockholders' equity
Current maturities of long-term debt
Accounts payable and accrued expenses
Total current liabilities
$
$
$
Notes payable
Long-term debt
Total liabilities
$
94,500
$
333,000
$ 1,353,500
$
92,500
$
274,500
$ 1,351,000
Common stock, $10 par value
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
67,500
$
119,000
$ 2,114,500
$ 2,301,000
$ 3,654,500
$
67,500
$
118,000
$ 1,909,000
$ 2,094,500
$ 3,445,500
10,000
916,000
926,000
Additional Company Information
Market value of common stock: $40 in 2017 and $30 in 2016
Credit terms: n/30 days
2016 Days Sales Receivable: 32 days
2016 Inventory Turnover: 5 times
Industry Average for Inventory Turnover: 4.5 times
Bank requires a Times-Interest Earned Ratio of 10
Industry Average for ROA: 12%
$
$
$
12,500
971,500
984,000
Financial Statements
And Ratios
Objectives
1. Financial statement analysis.
2. Summarize the uses and limitations of
analytical measures. – Considerations with
Use
3. Types of Analysis
4. Apply financial statement analysis to assess
the solvency of a business.
5. Apply financial statement analysis to assess
the profitability of a business.
Financial Statement Analysis
•Process of interpreting and evaluating financial
statements by using data and disclosures.
Considerations with Use
•Ratios by themselves do not give you much
information about the business
•Useful to compare against own historical
performance, against competitive data and/or
against standards of lending agreements.
•Apples to Apples Comparison
Horizontal Analysis
What is horizontal
analysis?
Horizontal Analysis
It’s an analysis of the percentage
increases and decreases of related
items in comparative financial
statements.
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
Assets
Current assets
Long-term investments
Fixed assets (net)
Intangible assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Preferred 6% stock, $100 par
Common stock, $10 par
Retained earnings
Total stockholders’ equity
Total liab. & SE
2006
$ 550,000
95,000
444,500
50,000
$1,139,500
Balance Sheet
Increase (Decrease)
2005
Amount
Percent
$ 533,000 $ 17,000
3.2%
177,500
(82,500) (46.5%)
470,000
(25,500)
(5.4%)
50,000
—
$1,230,500
$ (91,000)
(7.4%)
$ 210,000
100,000
$ 310,000
$ 243,000
200,000
$ 443,000
$ (33,000)
(100,000)
$(133,000)
(13.6%)
(50.0%)
(30.0%)
$ 150,000
500,000
179,500
$ 829,500
$1,139,500
$ 150,000
500,000
137,500
$ 787,500
$1230,500
—
—
$42,000
$42,000
$(91,000)
30.5%
5.3%
(7.4%)
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
Assets
Current assets
Long-term investments
Fixed assets (net)
Intangible assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Preferred 6% stock, $100 par
Common stock, $10 par
Retained earnings
Total stockholders’ equity
Total liab. & SE
Increase (Decrease)
2006
2005
Amount
Percent
$ 550,000 $ 533,000 $ 17,000
3.2%
95,000
177,500
(82,500) (46.5%)
444,500 Analysis:
470,000
(25,500)
(5.4%)
Horizontal
50,000
50,000
—
$1,139,500
$1,230,500$17,000
$ (91,000)
(7.4%)
Difference
= 3.2%
Base
year (2005)
$533,000
$ 210,000
$ 243,000 $ (33,000) (13.6%)
100,000
$ 310,000
200,000
$ 443,000
(100,000)
$(133,000)
(50.0%)
(30.0%)
$ 150,000
500,000
179,500
$ 829,500
$1,139,500
$ 150,000
500,000
137,500
$ 787,500
$1230,500
—
—
$42,000
$42,000
$(91,000)
30.5%
5.3%
(7.4%)
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
Assets
Current assets
Long-term investments
Fixed assets (net)
Intangible assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Preferred stock, $100 par
Common stock, $10 par
Retained earnings
Total stockholders’ equity
Total liab. & SE
2006
$ 550,000
95,000
444,500
50,000
$1,139,500
Increase (Decrease)
2005
Amount
Percent
$ 533,000 $ 17,000
3.2%
177,500
(82,500) (46.5%)
470,000
(25,500)
(5.4%)
50,000
—
$1,230,500
$ (91,000)
(7.4%)
Horizontal Analysis:
$ 210,000
$ 243,000 $ (33,000) (13.6%)
Difference
$(82,500)
100,000
200,000
(100,000)
(50.0%)
= (46.5%)
$ 310,000
$ 443,000
$(133,000) (30.0%)
Base
year (2005)
$177,500
$ 150,000
500,000
179,500
$ 829,500
$1,139,500
$ 150,000
500,000
137,500
$ 787,500
$1230,500
—
—
$42,000
$42,000
$(91,000)
30.5%
5.3%
(7.4%)
Lincoln Company
Comparative Balance Sheet
December 31,Okay,
2006 andgo
2005
to
the next slideIncrease (Decrease)
2006the
2005
Amount
Percent
and calculate
Assets
Current assets
$ 550,000 $ 533,000 $ 17,000
3.2%
percentage
change
for
fixed
Long-term investments
95,000
177,500
(82,500) (46.5%)
Fixed assets (net) assets.
444,500
470,000
(25,500)
(5.4%)
Intangible assets
50,000
50,000
—
Total assets
$1,139,500 $1,230,500 $ (91,000)
(7.4%)
Liabilities
Current liabilities
$ 210,000 Analysis:
$ 243,000 $ (33,000) (13.6%)
Horizontal
Long-term liabilities
100,000
200,000
(100,000) (50.0%)
Total liabilities
$Difference
310,000
$ 443,000 ? $(133,000) (30.0%)
= ?
Stockholders’ Equity
Base
year (2005)
?
Preferred 6% stock, $100 par
$ 150,000
$ 150,000
—
Common stock, $10 par
500,000
500,000
—
Retained earnings
179,500
137,500
$42,000
30.5%
Total stockholders’ equity
$ 829,500
$ 787,500
$42,000
5.3%
Total liab. & SE
$1,139,500 $1230,500
$(91,000)
(7.4%)
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
Assets
Current assets
Long-term investments
Fixed assets (net)
Intangible assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Preferred 6% stock, $100 par
Common stock, $10 par
Retained earnings
Total stockholders’ equity
Total liab. & SE
2006
$ 550,000
95,000
444,500
50,000
$1,139,500
Increase (Decrease)
2005
Amount
Percent
$ 533,000 $ 17,000
3.2%
177,500
(82,500) (46.5%)
470,000
(25,500)
(5.4%)
50,000
—
$1,230,500 $ (91,000)
(7.4%)
$ 210,000
100,000
$ 310,000
$ 243,000
200,000
$ 443,000
$ (33,000)
(100,000)
$(133,000)
$ 150,000
500,000
179,500
$ 829,500
$1,139,500
$ 150,000
500,000
137,500
$ 787,500
$1230,500
—
—
$42,000
$42,000
$(91,000)
(5.4%)
(13.6%)
(50.0%)
(30.0%)
30.5%
5.3%
(7.4%)
Lincoln Company
Comparative Income Statement
December 31, 2006 and 2005
Sales
Sales returns
Net sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Total operating expenses
Operating income
Other income
Other expense
Income before income tax
Income tax
Net income
2006
$1,530,500
32,500
$1,498,000
1,043,000
$ 455,000
$ 191,000
104,000
$ 295,000
$ 160,000
8,500
$ 168,500
6,000
$ 162,500
71,500
$ 91,000
Income Statement
Increase (Decrease)
2005
Amount
Percent
$1,234,000
$296,500
24.0%
34,000
(1,500)
(4.4%)
$1,200,000
$298,000
24.8%
820,000
223,000
27.2%
$ 380,000
$ 75,000
19.7%
$ 147,000
$ 44,000
29.9%
97,400
6,600
6.8%
$ 244,400
$ 50,600
20.7%
$ 135,600
$ 24,400
18.0%
11,000
(2,500) (22.7%)
$ 146,600
$ 21,900
14.9%
12,000
(6,000) (50.0%)
$ 134,600
$ 27,900
20.7%
58,100
13,400
23.1%
$ 76,500
$ 14,500
19.0%
Lincoln Company
Comparative Income Statement
December 31, 2006 and 2005
Sales
Sales returns
Net sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
operating expenses
Operating income
Other income
Other expense
Income before income tax
Income tax
Net income
Increase (Decrease)
2006
2005
Amount
Percent
$1,530,500 $1,234,000
$296,500 24.0%
24.0%
32,500
34,000
(1,500)
(4.4%)
$1,498,000 $1,200,000
$298,000
24.8%
1,043,000
820,000
223,000
27.2%
$ 455,000
$ 380,000
$ 75,000
19.7%
Horizontal
Analysis:
$ 191,000
$ 147,000
$ 44,000
29.9%
104,000
97,400
6,600 6.8% Total
Increase
amount
$296,500
$ 295,000
$ 244,400
$ 50,600
= 24.0%20.7%
$ 160,000
$ 135,600
$ 24,400
18.0%
Base
year (2005)
$1,234,000
8,500
11,000
(2,500) (22.7%)
$ 168,500
$ 146,600
$ 21,900
14.9%
6,000
12,000
(6,000) (50.0%)
$ 162,500
$ 134,600
$ 27,900
20.7%
71,500
58,100
13,400
23.1%
$ 91,000
$ 76,500
$ 14,500
19.0%
Lincoln Company
Comparative Income Statement
December 31, 2006 and 2005
Sales
Sales returns
Net sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
operating expenses
Operating income
Other income
Other expense
Income before income tax
Income tax
Net income
Increase (Decrease)
2006
2005
Amount
Percent
$1,530,500 $1,234,000
$296,500
24.0%
32,500
34,000
(1,500)
(4.4%)
$1,498,000 $1,200,000
$298,000 24.8%
24.8%
1,043,000
820,000
223,000
27.2%
$ 455,000
$ 380,000
$ 75,000
19.7%
$ 191,000
$ 147,000
$ 44,000
29.9%
104,000
97,400
6,600 6.8% Total
$ 295,000
$ 244,400
$ 50,600
20.7%
Horizontal
Analysis:
$ 160,000
$ 135,600
$ 24,400
18.0%
8,500
Increase
amount 11,000
$298,000 (2,500) (22.7%)
$ 168,500
$ 146,600
$ 21,900
= 24.8%14.9%
Base year
(2005) 12,000
$1,200,000 (6,000) (50.0%)
6,000
$ 162,500
$ 134,600
$ 27,900
20.7%
71,500
58,100
13,400
23.1%
$ 91,000
$ 76,500
$ 14,500
19.0%
Vertical Analysis
A percentage analysis can be
used to show the relationship of
each component to a total
within a single statement.
Vertical Analysis
The total, or 100% item,
on the balance sheet is
“total assets.”
Lincoln Company
Comparative Balance Sheet
December 31, 2006
Amount Percent
Assets
Current assets
$ 550,000
Long-term investments
95,000
Property, plant, & equip. (net)
444,500
Intangible assets
50,000
Total assets
$1,139,500
Liabilities
Current liabilities
$ 210,000
Long-term liabilities
100,000
Vertical
Analysis:
Total
liabilities
$ 310,000
Stockholders’ Equity
Current assets
$550,000
Preferred stock, 6%, $100 par $ 150,000 =
Totalstock,
assets
Common
$10 par $1,139,500
500,000
Retained earnings
179,500
Total stockholders’ equity
$ 829,500
Total liab. & SE
$1,139,500
Balance
Sheet
December 31, 2005
Amount
Percent
48.3%
48.3%
8.3
39.0
4.4
100.0%
$ 533,000
177,500
470,000
50,000
$1,230,500
43.3%
14.4
38.2
4.1
100.0%
18.4%
8.8
27.2%
$ 243,000
200,000
$ 443,000
19.7%
16.3
36.0%
13.2%
48.3%
$ 150,000
500,000
137,500
$ 787,500
$1,230,500
12.2%
40.6
11.2
64.0%
100.0%
43.9
15.7
72.8%
100.0%
Lincoln Company
Comparative Balance Sheet
December 31, 2006
Amount Percent
December 31, 2005
Amount Percent
Assets
Current assets
$ 550,000
48.3%
$ 533,000 43.3%
43.3%
Long-term investments
95,000
8.3
177,500
14.4
Property, plant, & equip. (net)
444,500
39.0
470,000
38.2
Intangible assets
50,000
4.4
50,000
4.1
Total assets
$1,139,500 100.0%
$1,230,500 100.0%
Liabilities
Current liabilities
$ 210,000
18.4%
$ 243,000
19.7%
Long-term liabilities
100,000
8.8
200,000
16.3
Vertical
Analysis:27.2%
Total liabilities
$ 310,000
$ 443,000
36.0%
Stockholders’ Equity
Current assets
$533,000
Preferred 6% stock, $100 par $ 150,000
13.2%
$ 150,000
12.2%
= 43.3%
$1,230,500500,000
Common stock, $10 par Total assets
500,000
43.9
40.6
Retained earnings
179,500
15.7
137,500
11.2
Total stockholders’ equity
$ 829,500
72.8%
$ 787,500
64.0%
Total liab. & SE
$1,139,500 100.0%
$1,230,500 100.0%
Lincoln Company
Comparative Balance Sheet
Assets
Current assets
Long-term investments
Property, plant, & equip. (net)
Intangible assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Preferred 6% stock, $100 par
Common stock, $10 par
Retained earnings
Total stockholders’ equity
Total liab. & SE
December 31, 2006
Amount Percent
December 31, 2005
Amount Percent
$ 550,000
95,000
444,500
50,000
$1,139,500
48.3%
8.3
39.0
4.4
100.0%
$ 533,000
177,500
470,000
50,000
$1,230,500
43.3%
14.4
38.2
4.1
100.0%
$ 210,000
100,000
$ 310,000
18.4%
8.8
27.2%
$ 243,000
200,000
$ 443,000
19.7%
16.3
36.0%
$ 150,000
500,000
179,500
$ 829,500
$1,139,500
13.2%
43.9
15.7
72.8%
100.0%
$ 150,000
500,000
137,500
$ 787,500
$1,230,500
12.2%
40.6
11.2
64.0%
100.0%
Lincoln Company
Income
Comparative Income Statement
Statement
For the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent
Amount Percent
Sales
$1,530,500
102.2% $1,234,000 102.8%
Sales returns
32,500
2.2
34,000
2.8
Net sales
$1,498,000
100.0% $1,200,000 100.0%
Cost of goods sold
1,043,000
69.6
820,000 68.3
Gross profit
$ 455,000
30.4% $ 380,000 31.7%
Selling expenses
$ 191,000Net 12.8%
sales $ 147,000 12.3%
Administrative expenses
104,000
6.9
97,400
8.1
Total operating expenses
$ 295,000is 100.0%
19.7% $ 244,400 20.4%
Income from operations
$ 160,000
10.7
$ 135,600
11.3%
Other income
8,500
0.6
11,000
0.9
$ 168,500
11.3% $ 146,600 12.2%
Other expense
6,000
0.4
12,000
1.0
Income before income tax
$ 162,500
10.9% $ 134,600
11.2%
Income tax expense
71,500
4.8
58,100
4.8
Net income
$ 91,000
6.1% $ 76,500
6.4%
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent
Amount Percent
Sales
$1,530,500
102.2% $1,234,000 102.8%
Sales returns
32,500
2.2
34,000
2.8
Net sales
$1,498,000
100.0% $1,200,000 100.0%
Cost of goods sold
1,043,000
69.6
820,000 68.3
Gross profit
$ 455,000
30.4% $ 380,000 31.7%
Selling expenses
$ 191,000 12.8%
12.8% $ 147,000 12.3%
Administrative expenses
104,000
6.9
97,400
8.1
Total operating expenses
$ 295,000
19.7% $ 244,400 20.4%
Income from operations
$ 160,000
10.7
$ 135,600
11.3%
Other income
8,500
0.6
11,000
0.9
Vertical Analysis:
$ 168,500
11.3% $ 146,600 12.2%
Other expense
0.4
12,000
1.0
Selling expenses $191,0006,000
Income before income tax
$ 162,500= 12.8%
10.9% $ 134,600
11.2%
Nettax
sales
$1,498,000
Income
expense
71,500
4.8
58,100
4.8
Net income
$ 91,000
6.1% $ 76,500
6.4%
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent
Amount Percent
Sales
$1,530,500
102.2% $1,234,000 102.8%
Sales returns
32,500
2.2
34,000
2.8
Net sales
$1,498,000
100.0% $1,200,000 100.0%
Cost of goods sold
1,043,000
69.6
820,000 68.3
Gross profit
$ 455,000
30.4% $ 380,000 31.7%
Selling expenses
$ 191,000
12.8% $ 147,000 12.3%
Administrative expenses
104,000
6.9
97,400
8.1
Total operating expenses
$ 295,000
19.7% $ 244,400 20.4%
Income from operations
$ 160,000
10.7
$ 135,600
11.3%
Other income
8,500
0.6
11,000
0.9
$ 168,500
11.3% $ 146,600 12.2%
Other expense
6,000
0.4
12,000
1.0
Income before income tax
$ 162,500
10.9% $ 134,600
11.2%
Income tax expense
71,500
4.8
58,100
4.8
Net income
$ 91,000
6.1% $ 76,500
6.4%
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent
Amount Percent
Sales
$1,530,500
102.2% $1,234,000 102.8%
Sales returns
32,500
2.2
34,000
2.8
Net sales
$1,498,000
100.0% $1,200,000 100.0%
Cost of goods sold
1,043,000
69.6
820,000 68.3
Gross profit
$ 455,000
30.4% $ 380,000 31.7%
Selling expenses
$ 191,000
12.8% $ 147,000 12.3%
Administrative expenses
104,000
6.9
97,400
8.1
Total operating expenses
$ 295,000
19.7% $ 244,400 20.4%
Income from operations
$ 160,000
10.7
$ 135,600
11.3%
Other income
8,500
0.6
11,000
0.9
$ 168,500
11.3% $ 146,600 12.2%
Other expense
6,000
0.4
12,000
1.0
Income before income tax
$ 162,500
10.9% $ 134,600
11.2%
Income tax expense
71,500
4.8
58,100
4.8
Net income
$ 91,000
6.1% $ 76,500
6.4%
Common Size Statements
Vertical analysis with both dollar and
percentage amounts is also useful in
comparing one company with another or
with industry averages. Such
comparisons are easier to make with the
use of common-size statements in
which all items are expressed in
percentages.
Common-Size Income Statement
Competitor Analysis Benchmarking
• Comparison with industry averages
• Use:
–
–
–
–
EDGAR - Securities and Exchange Commission
Hoovers
Dun and Bradstreet
Standard and Poor’s Industry Survey
Solvency Analysis
▪ Solvency is the ability of a business to meet its
financial obligations (debts) as they are due.
▪ Solvency analysis focuses on the ability of a
business to pay or otherwise satisfy its current
and noncurrent liabilities.
▪ This ability is normally assessed by examining
balance sheet relationships.
▪ Liquidity ratios and debt coverage ratios
Current Position Analysis
Working Capital and Current Ratio
Current assets
Current liabilities
Working capital
Current ratio
2006
$550,000
210,000
$340,000
2.6
2005
$533,000
243,000
$290,000
2.2
Use: To indicate the ability
to meet
Divide
currently maturing obligations.
current
assets by
current
liabilities
Current Position Analysis
Quick Ratio
Quick assets:
Cash
Marketable securities
Accounts receivable (net)
Total
Current liabilities
Quick ratio
2006
2005
$ 90,500
75,000
115,000
$280,500
$210,000
1.3
$ 64,700
60,000
120,000
$244,700
$243,000
1.0
Use: To indicate instant debt-paying ability.
Accounts Receivable Analysis
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average (Total ÷ 2)
2006
$1,498,000
2005
$1,200,000
$ 120,000
115,500
$ 235,000
$ 117,500
$ 140,000
120,000
$ 260,000
$ 130,000
Net sales on account
Average accounts
receivable
Accounts Receivable Analysis
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Accounts receivable turnover
2006
$1,498,000
2005
$1,200,000
$ 120,000
115,500
$ 235,000
$ 117,500
12.7
$ 140,000
120,000
$ 260,000
$ 130,000
9.2
Use: To assess the efficiency in collecting
receivables and in the management of credit.
Accounts Receivable Analysis
Number of Days’ Sales in Receivables
2006
Accounts receivable (net),
end of year
Net sales on account
Average daily sales on
account (sales ÷ 365)
2005
$ 115,000
$1,498,000
$ 120,000
$1,200,000
$
$
4,104
365
Accounts Receivable Turnover
Ratios
3,288
Accounts Receivable Analysis
Number of Days’ Sales in Receivables
2006
2005
Accounts receivable turnover
12.7
9.2
28.74
36.67
Divide by 365
Number of days’ sales in
receivables
Use: To assess the efficiency in collecting
receivables and in the management of credit.
Inventory Analysis
Inventory Turnover
Cost of goods sold
Inventories:
Beginning of year
End of year
Total
Average (Total ÷ 2)
2006
$1,043,000
2005
$ 820,000
$ 283,000
264,000
$ 547,000
$ 273,500
$ 311,000
283,000
$ 594,000
$ 297,000
Cost of goods sold
Inventory turnover =
Average inventory
Inventory Analysis
Inventory Turnover
Cost of goods sold
Inventories:
Beginning of year
End of year
Total
Average (Total ÷ 2)
Inventory turnover
2006
$1,043,000
2005
$ 820,000
$ 283,000
264,000
$ 547,000
$ 273,500
3.8
$ 311,000
283,000
$ 594,000
$ 297,000
2.8
Use: To assess the efficiency in the
management of inventory.
Long-Term Solvency Ratios
Debt Ratio
Total assets
Total liabilities
Debt Ratio
2006
$444,500
$100,000
.22
2005
$470,000
$200,000
.42
Use: Show the proportion of assets
financed with debt
Long-Term Creditors
Ratio of Liabilities to Stockholders’ Equity
Total liabilities
Total stockholders’ equity
Ratio of liabilities to
stockholders’ equity
2006
$310,000
$829,500
2005
$443,000
$787,500
0.37
0.56
Use: To indicate the margin of safety to
creditors.
Long-Term Creditors
Number of Times Interest Charges Earned
Income before income tax
Add interest expense
Amount available for interest
2006
2005
$ 900,000 $ 800,000
300,000
250,000
$1,200,000 $1,050,000
Income before
Number of
Times Interest = income tax + interest expense
Charges Earned
Interest expense
Long-Term Creditors
Number of Times Interest Charges Earned
Income before income tax
Add interest expense
Amount available for interest
Number of times earned
2006
2005
$ 900,000 $ 800,000
300,000
250,000
$1,200,000 $1,050,000
4.0
Use: To assess the risk to debt holders
in terms of number of times
interest charges were earned.
4.2
Profitability Analysis
▪ Profitability is the ability of an entity to
earn profits.
▪ This ability to earn profits depends on the
effectiveness and efficiency of operations
as well as resources available.
▪ Profitability analysis focuses primarily on
the relationship between operating results
reported in the income statement and
resources reported in the balance sheet.
The Common Stockholder
Rate Earned on Total Assets
Net income
Plus interest expense
Total
Total assets:
Beginning of year
End of year
Total
Average (Total ÷ 2)
Rate earned on total assets
2006
$ 91,000
6,000
$ 97,000
2005
$ 76,500
12,000
$ 88,500
$1,230,500
1,139,500
$2,370,000
$1,185,000
8.2%
$1,187,500
1,230,500
$2,418,000
$1,209,000
7.3%
Use: To assess the profitability of the assets.
It measures the net income produced by total assets
The Common Stockholder
Rate Earned on Common Stockholders’ Equity
Net income
Less preferred dividends
Remainder—common stock
Common stockholders’ equity:
Beginning of year
End of year
Total
Average (Total ÷ 2)
$
$
2006
91,000
9,000
82,000
$ 637,500
679,500
$1,317,000
$ 658,500
$
$
2005
76,500
9,000
67,500
$ 600,000
637,500
$1,237,500
$ 618,750
The Common Stockholder
Rate Earned on Common Stockholders’ Equity
Net income
Less preferred dividends
Remainder—common stock
Common stockholders’ equity:
Beginning of year
End of year
Total
Average (Total ÷ 2)
Rate earned on common
stockholders’ equity
$
$
2006
91,000
9,000
82,000
$
$
2005
76,500
9,000
67,500
$ 637,500
679,500
$1,317,000
$ 658,500
$ 600,000
637,500
$1,237,500
$ 618,750
12.5%
10.9%
Use: To assess the profitability of the
investment by common stockholders.
The Common Stockholder
Earnings Per Share on Common Stock
Net income
Less preferred dividends
Remainder—common stock
Shares of common stock
Earnings per share on common stock
2006
$ 91,000
9,000
$ 82,000
50,000
$1.64
2005
$ 76,500
9,000
$ 67,500
50,000
$1.35
Use: To assess the profitability of the
investment by common stockholders.
The Common Stockholder
Price-Earnings Ratio
2006
Market price per share of common
$41.00
Earnings per share on common
÷ 1.64
Price-earnings ratio on common stock
25
2005
$27.00
÷ 1.35
20
Use: To indicate future earnings
prospects, based on the relationship
between market value of common
stock and earnings.
Red Flags
•
•
•
•
•
•
Movement of Sales, Inventory and Receivables
Earnings Problems
Decreased Cash Flow
Too Much Debt
Inability to Collect Receivables
Buildup of Inventories
Other Ratios
Users of Ratios
• Creditors – liquidity ratios and debt coverage
ratios
• Owners – Profitability and turnover ratios
• Investors – Profitability, Payout and Market
Share
The End
Rainbow Paint Co
Comparitive Income Statement
For the Years Ended December, 2019 and 2018
2009
Sales
$
5,125,000 $
Sales returns and allowances
$
125,000 $
Net Sales
$
5,000,000 $
Cost of goods sold
$
3,400,000 $
Gross profit
$
1,600,000 $
Selling expenses
$
650,000 $
Administrative expenses
$
325,000 $
Total operating expenses
$
975,000 $
Income from Operations
$
625,000 $
Interest Income
$
25,000 $
Interest Expenses
$
105,000 $
Income before income tax
$
545,000 $
Income tax expense
$
300,000 $
Net Income
$
245,000 $
Rainbow Paint Co
Comparative Retained Earnings Statement
For the Years Ended December, 2019 and 2018
2009
Retained earnings, January 1
$
683,000 $
Add net income for year
$
245,000 $
Total
$
928,000 $
Deduct dividends:
On common stock
Total
Retained earnings, December 31
$
$
$
45,000 $
45,000 $
883,000 $
2008
3,257,600
57,600
3,200,000
2,080,000
1,120,000
464,000
224,000
688,000
432,000
19,200
64,000
387,200
176,000
211,200
2008
541,800
211,200
753,000
30,000
30,000
723,000
Rainbow Paint Co
Comparative Balance Sheet
December 31, 2019, 2018 and 217
2019
Assets
Current assets:
Cash
Marketable securities
Accounts receivable (net)
Inventories
Prepaid expenses
Total current assets
Long-term investments
Property, Plant and Equipment (net)
Total assets
Liabilities
Current liabilities
Long-term liabilities:
Mortgage not payable, 10%, due 2012
Bonds payable, 8%, due 2015
Total long-term liabilities
Total liabilities
2018
$ 175,000 $ 125,000
$ 150,000 $
50,000
$ 425,000 $ 325,000
$ 720,000 $ 480,000
$
30,000 $
20,000
$ 1,500,000 $ 1,000,000
$ 250,000 $ 225,000
$ 2,093,000 $ 1,948,000
$ 3,843,000 $ 3,173,000
$
750,000 $
650,000
$ 410,000 $
$ 800,000 $ 800,000
$ 1,210,000 $ 800,000
$ 1,960,000 $ 1,450,000
Sotckholders' Equity
Common Stock, $10 par
Retained earnings
Total Stockholders' Equity
Total liabilities and stockholders' equity
# of shares CS outstanding
market value per share (given)
$ 1,000,000 $ 1,000,000
$ 883,000 $ 723,000
$ 1,883,000 $ 1,723,000
$ 3,843,000 $ 3,173,000
100,000
$25
Credt Terms: n/30 days
Bank requires a times interest earned ratio of 10.
Working Capital
Current Ratio
Quick Ratio
Days sales in receivable
inventory turnover
debt to equity
times-interest earned
ROA
EPS
P/E ratio
current assets - current liabilities
current assets/current liabilites
(cash + marketable securities + receivables)/current liabilities
Average AR/average daily sales
average daily sales = net sales/365
COGS/average inventory
total liabilities/total stockhoders' equity
EBIT/Interest Expense
(net income + interest expense)/average total assets
net income /# of shares common stock outstanding
market value per share/ EPS
$
$
2019
750,000
2.00
1.00
27.38 days
5.67 times
1.04
6.19 times
10%
2.45
10.20
2017
$ 125,000
$
50,000
$ 320,000
$ 500,000
$
20,000
$ 1,015,000
$ 225,000
$ 1,948,000
$ 3,188,000
$
650,000
$
$ 800,000
$ 800,000
$ 1,450,000
$ 1,000,000
$ 738,000
$ 1,738,000
$ 3,188,000
$
$
2018
350,000
1.54
0.77
36.79
4.24
0.84
7.05
8.65%
2.11
11.84
Ratio
Working Capital
Current Ratio
Quick Ratio
Days sales in receivable
inventory turnover
debt to equity
times-interest earned
ROA
EPS
P/E ratio
$
2019
2018
750,000 $
350,000
2 1.538461538
1 0.769230769
27.375 36.78515625
5.666666667 4.244897959
1.040892193 0.841555427
6.19047619
7.05
0.09977195 0.086527276
2.45
2.112
10.20408163 11.83712121
Industry
Competitor
Standard
Standard
740000
755000
2
1.6
1.1
0.81
30
5.4
6
4.23
0.4
0.56
7.5
8
0.14
0.14
4.5
4
6
6.85
Ratio
Horizontal
Analysis
Comments
FSA Memo for Principles II
Not acceptable
-Misses one or more
ratios
-Made 3 or more
calculation errors
--Did not use the ratios to
make a decision or
-Did not suggest a
decision or
-Suggested a decision
that’s not supported by
the ratios
Acceptable
-Calculated all necessary
ratios
-Made 1 or 2 minor
calculation errors
-Suggested a decision and
supported it by referring
only in a general way to
the ratios or
-Makes little or no
comparison to the ratios
of previous years or of
industry competitors
Length of discussion10%
-Makes a one-sentence
recommendation with no
discussion
-Word count 500
-Thoroughly discusses the
company’s short-term and longterm ability to pay bills
(liquidity)
-Thoroughly discusses the
company’s profitability and
-Thoroughly discusses
management of the company and
--Thoroughly discusses market
perceptions of the company
-Typed
-Well edited (no major errors in
spelling, punctuation or
grammar)
-Ratios are labelled by type
Purchase answer to see full
attachment