Financial statements for Praven Company appear below: Praven Company Statement o
ID: 2387551 • Letter: F
Question
Financial statements for Praven Company appear below:
Praven Company Statement of Financial Position December 31, Year 2 and Year 1
(dollars in thousands)
Currrent assets:
Yr1 Yr2
Cash and marketable securities. . . . . . . . . . . . $150 $130
Accounts receivable, net . . . . . . . . . . . . . . . . . 190 160
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 180
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 50 40
Total current assets . . . . . . . . . . . . . . . . . . . . . . 560 510
Noncurrent assets:
Plant & equipment, net . . . . . . . . . . . . . . . . . . 1,420 1,330
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,980 $1,840
Current liabilities:
Accounts payable . . . . . .$ 110 $100
Accrued liabilities . . . . . . 90 60
Notes payable, short term .. . . 260 260
Total current liabilities . . . .. . 460 420
Noncurrent liabilities:
Bonds payable . . . . .. . . 400 400
Total liabilities . . . . . . . . . 860 820
Stockholder’s equity:
Preferred stock, $5 par, 15% . . 120 120
Common stock, $10 par . . . . . 240 240
Additional paid-in capital—common stock . . . 210 210
Retained earnings . . . . . . . . . . . . . . . 550 450
Total stockholders’ equity . . . . . . . . . . . 1,120 1,020
Total liabilities & stockholders’ equity . . . $1,980 $1,840
3
Praven Company
Income Statement
For the Year Ended December 31, Year 2 (dollars in thousands)
Sales (all on account). . . . . . . . . . . . . . . . . . . . . $1,700
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,190
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . 510
Selling and administrative expense . . . . . . . . . . 200
Net operating income . . . . . . . . . . . . . . . . . . . . . 310
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 40
Net income before taxes . . . . . . . . . . . . . . . . . . . 270
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . 81
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189
Dividends during Year 2 totaled $89 thousand, of which $18 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $130.
Required:
Compute the following for Year 2:
1. Book value per share
2. Working capital
3. Current ratio
4. Acid-test ratio
5. Accounts receivable turnover
6. Average collection period
7. Inventory turnover
8. Average sale period
9. Times interest earned
10. Debt-to-equity ratio
Explanation / Answer
Current assets: Yr1 Yr2 Cash and marketable securities. . . . . . . . . . . . $150 $130 Accounts receivable, net . . . . . . . . . . . . . . . . . 190 160 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 180 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 50 40 Total current assets . . . . . . . . . . . . . . . . . . . . . . 560 510 Noncurrent assets: Plant & equipment, net . . . . . . . . . . . . . . . . . . 1,420 1,330 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,980 $1,840 Current liabilities: Accounts payable . . . . . .$ 110 $100 Accrued liabilities . . . . . . 90 60 Notes payable, short term .. . . 260 260 Total current liabilities . . . .. . 460 420 Noncurrent liabilities: Bonds payable . . . . .. . . 400 400 Total liabilities . . . . . . . . . 860 820 Stockholder’s equity: Preferred stock, $5 par, 15% . . 120 120 Common stock, $10 par . . . . . 240 240 Additional paid-in capital—common stock . . . 210 210 Retained earnings . . . . . . . . . . . . . . . 550 450 Total stockholders’ equity . . . . . . . . . . . 1,120 1,020 Total liabilities & stockholders’ equity . . . $1,980 $1,840 3 Praven Company Income Statement For the Year Ended December 31, Year 2 (dollars in thousands) Sales (all on account). . . . . . . . . . . . . . . . . . . . . $1,700 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,190 Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . 510 Selling and administrative expense . . . . . . . . . . 200 Net operating income . . . . . . . . . . . . . . . . . . . . . 310 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 40 Net income before taxes . . . . . . . . . . . . . . . . . . . 270 Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . 81 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189 Dividends during Year 2 totaled $89 thousand, of which $18 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $130. Required: Compute the following for Year 2: 1. Book value per share (total assets – total liabilities / outstanding shares) $48.57 2. Working capital (510-420) 90 3. Current ratio (510/420) 1.2 4. Acid-test ratio (290/420) (.7) 5. Accounts receivable turnover (1700/175) 9.7 6. Average collection period (175/ (1700/365) 37.6 days 7. Inventory turnover (1190/175) 6.8 8. Average sale period (inventory turnover (6.8/ 365)) 53.7 days 9. Times interest earned (310/40) 7.8 10. Debt-to-equity ratio (total liabilities/ total stockholder’s Equity) .8 CHAPTER 16: Financial Statement Analysis I. FINANCIAL STATEMENT ANALYSIS ? What is Financial Statement Analysis? ? There are three basic tools of analysis: horizontal, vertical, and ratio analysis. A. HORIZONTAL ANALYSIS (aka Trend Analysis) • a technique for evaluating a series of financial statement data over multiple time periods • can be expressed as either a dollar amount or a percentage • to look at trend over time, select a base year; changes are expressed as percentages of the base year amount. • Example: B. VERTICAL ANALYSIS (Common Size Statements) Vertical analysis expresses each item within a financial statement as a percent of a base amount. Generally, the base amount is: • For the BALANCE SHEET: • For the INCOME STATEMENT: C. RATIO ANALYSIS: - Ratios express the mathematical relationship between two or more financial variables II. RATIO ANALYSIS—A closer look. Note: the formulas under “II. Ratio Analysis” will be provided on the exam. A. Ratio Analysis: Profitability 1. Earnings per share: measures the amount of net income earned on each share of common stock. 2. Price-earnings ratio: measures the ratio of market price per share of common stock to earnings per share. Reflects an assessment of a company's earnings from the perspective of the stock market. 3. Dividend payout ratio: measures the percentage of earnings distributed in the form of cash dividends. 4. Dividend Yield Ratio: measures the rate of return (in the form of dividends) earned by an investor who buys a share of stock at the current market price. 5. Return on total assets: measures the ability of the firm to earn a return on its assets. 6. Gross profit rate: indicates a company's ability to maintain an adequate selling price above its costs. Gross profit rate = 7. Return on common stockholders' equity: measures ability of the company to earn a return on the common stockholder’s investment. * Average Common Stockholder’s equity = 8. Book Value per share: measures what would be distributed to stockholder’s if assets were sold at their carrying values and if creditors were paid off. Book Value per Share =Total Stockholder’s equity – Preferred Stock Number of common shares outstanding B. Ratio Analysis: The short-term creditor (Liquidity Ratios)- provide a measure of ability of the enterprise to meet current obligations in a timely manner. 1. Working Capital: measures the company’s ability to repay current liabilities using only current assets. Working Capital = Current Assets – Current Liabilities 2. Current ratio: expresses the relationship of current assets to current liabilities. It is a widely used measure for evaluating a company's short-term debt paying ability. 3. Acid-test ratio: also measures ability to pay short-term debt but excludes less liquid current assets. Marketable Current Acid-test ratio = Cash + Securities + Receivables Current liabilities 4. Accounts receivable turnover: used to assess the liquidity of the receivables; measures the number of times, on average, receivables are collected during the period. 5. Average collection period: A popular variant of the receivables turnover ratio; it converts it into an average collection period in terms of days. 6. Inventory turnover: measures the number of times, on average, the inventory is sold during the period. It indicates the liquidity of the inventory. 7. Average Sale Period: A variant of the inventory turnover ratio--computes the average days taken to sell the average inventory one time. C. Ratio Analysis: The Long-term creditor (Solvency Ratios)- measures of the ability of the enterprise to survive over a long period of time. 1. Times interest earned: measures a company's ability to meet interest payments as they become due. 2. Debt to Equity ratio: measures the relative proportion of financing provided by creditors as opposed to financing provided by stockholders. Debt-to-equity ratio = Total Liabilities Total Stockholder’s Equity
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