Chapter 18- Assignment Financial Statement Analysis The following are financial
ID: 2408111 • Letter: C
Question
Chapter 18- Assignment Financial Statement Analysis The following are financial statements for two companies selling similar products: Data from the Current Year End Balance Sheets Bones Company Skull Notes receivable Accounts recelvable, net Merchandise inventory Prepaid expenses Plant and equipment, net Total Assets $11,900 7,700 42,000 58,800 1,680 3,200 64,000 87,680 3,520 274400 $452,800 7 $ 354,200 Current liabilities Mortgage payable Common stock Retained earnings Total liabilities and shareholders' equity $56,000 70,000 140,000 80,000 80,000 160,000 5354,200 452,800 Data from the Current Year's Income Statement Sales Cost of Goods sold Interest expense Income tax expense Net Income $672,000 528,080 4,200 9.875 880,000 699,840 5,600 Required: 1. Calculate and complete the following table. For the comment identify with an "F" the company that has the most favorable ratio and explain why. Note: Just saying it is larger is not enough!Explanation / Answer
Solution.
1. Current ratio.
Current assets / Current Liabilities
Skull = $122,080 / $56,000 = 2.18
Bones = $178,400 / $80,000 = 2.23
2. Acid test ratio.
Total current asset - Inventory - Prepaid expense / Current liabilities
Skull = $61,600 / $56,000 = 1.10
Bones = $87,200 / $80,000 = 1.09
3. Account receivable Turnover.
Net Annual Credit Sales ÷ ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)
Skull = $672,000 / $42,000 = 16
Bones = $880,000 / $64,000 = 13.75
4. Inventory turnover.
Cost of goods sold / Average inventory
Skull = $528,080 / $58,800 = 8.98
Bones = $699,840 / $87,680 = 7.98
5. Total asset turnover.
Net sales / Average total asset
Skull = $672,000 / $354,200 = 1.897
Bones = $880,000 / $452,800 = 1.943
6. Debt Ratio.
Total libilities / Total Aseets
Skull = $126,000 / $354,200 = 0.356
Bones = $160,000 / $452,800 = 0.353
7. Gross profit margin.
Gross profit / Net sales
Skull = $143,920 / $672,000 = 21.42%
Bones = $180,160 / $880,000 = 20.47%
8. Return on total asset.
Net income / Total asset
Skull = $23,373 / $354,200 = 6.60%
Bones = $28,895 / $452,800 = 6.38%
9. Return on equity.
Net income / Total Equity
Skull = $23,373 /140,000 = 16.695
Bones = $28,895 / 160,000 = 18.059
Q2.
Company Bonesl has better short term credit risk. because it"s current ratio is 2.23 Times. it shows Bones has grater current asset to remmit the current liabilities.
Q3.
Company Skull has better long term credit risk. because it has lower Debt ratio is 0.0356 Times. it shows Skull has lower Debt that"s why Skulls has less interest payment liability. so Skull are less long time investment risk.
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