Chapter 18 - Assignment Financial Statement Analysis The following are financial
ID: 2408776 • 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 Skull Bones Company Company Cash Notes receivable Accounts receivable, net Merchandise inventory Prepaid expenses Plant and equipment, net Total Assets $11,900 7,700 42,000 58,800 1,680 232,120 354,200 $20,000 3,200 64,000 87,680 3,520 274,400 $452,800 Current liabilities Mortgage payable Common stock Retained earnings Total liabilities and shareholders' equity $56,000 70,000 140,000 88,200 $354,200 80,000 80,000 160,000 $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 $ 23.373 $880,000 699,840 5,600 10,095 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
1.
current assets /
current liabilities
122080/56000
= 2.18
178400/80000
= 2.23
Current asset ratio is higher for bones. It has more current asset per rupee of current liability
F : Bones
61600/56000
= 1.1
87200/80000
1.09
Acid test ratio of Skull is slightly higher than Bones. The ratio of assets that are realised into cash quickly are higher for Skull
F : Skull
ACCOUNTS RECEIVABLE
TURNOVER
672000/42000
16
880000/64000
13.75
Account receivable to turnover is higher for Skull
F : Skull
528080/58800
= 8.98
699840/87680
= 7.98
Inventory turnover is higher for skull. Its is maintaing lower inventory to turnover which helps to reduce carrying costs
F : Skull
672000/354200
1.90
880000/452800
1.94
Turnover to total assets is higher for Bones. It means assets are more effectively utilised by Bones
F : Bones
126000/354200
= 0.356
160000/452800
0.353
Debt ratio is slightly better for Bones as the percentage of total debt to total assets is lower
F : Bones
143920/672000
= 0.214
180160/880000
= 0.205
GP margin is higher for Skull, hence it is producing more profit per $.
F : Skull
23373/354200
= 0.066
28896/452800
= 0.064
Skull gets higher return on the assets invested
F : Skull
23373/140000
= 0.167
28896/160000
0.181
Bones provides more return per $ invested by the shareholders
F : Bones
2. Skull is better short trrm credit risk as the inventory turnover and accounts receivable to turnover are higher fot it
3. Bones is better long term credit risk as debt ratio is lower for Bones and it has better return equity.
RATIO FORMULAE SKULL BONES COMMENTS CURRENT RATIOcurrent assets /
current liabilities
122080/56000
= 2.18
178400/80000
= 2.23
Current asset ratio is higher for bones. It has more current asset per rupee of current liability
F : Bones
ACID TEST RATIO Quick assets / current liabilities61600/56000
= 1.1
87200/80000
1.09
Acid test ratio of Skull is slightly higher than Bones. The ratio of assets that are realised into cash quickly are higher for Skull
F : Skull
ACCOUNTS RECEIVABLE
TURNOVER
Turnover / Accounts receivable672000/42000
16
880000/64000
13.75
Account receivable to turnover is higher for Skull
F : Skull
INVENTORY TURNOVER Cost of goods sold/ Average inventory528080/58800
= 8.98
699840/87680
= 7.98
Inventory turnover is higher for skull. Its is maintaing lower inventory to turnover which helps to reduce carrying costs
F : Skull
TOTAL ASSETS TURNOVER Sales / Total assets672000/354200
1.90
880000/452800
1.94
Turnover to total assets is higher for Bones. It means assets are more effectively utilised by Bones
F : Bones
DEBT RATIO Total debt / Total assets126000/354200
= 0.356
160000/452800
0.353
Debt ratio is slightly better for Bones as the percentage of total debt to total assets is lower
F : Bones
GROSS PROFIT MARGIN (Sales-Cost of goods sold) / Sales143920/672000
= 0.214
180160/880000
= 0.205
GP margin is higher for Skull, hence it is producing more profit per $.
F : Skull
RETURN ON ASSETS Net income / Average assets23373/354200
= 0.066
28896/452800
= 0.064
Skull gets higher return on the assets invested
F : Skull
RETURN ON EQUITY Net income / Share holders equity23373/140000
= 0.167
28896/160000
0.181
Bones provides more return per $ invested by the shareholders
F : Bones
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