Please refer to the income statement and balance sheet for the Great Service Cle

Question

Please refer to the income statement and balance sheet for the Great Service Cleaning and Maintenance Company available here.

Perform a financial ratio analysis of the company using the following ratios: (1) Gross profit margin, (2) Current ratio, and (3) Debt ratio. From research independent from the textbook, find two other ratios to calculate. Define them and explain their purpose and how they add value to your analysis.

Select significant lines from the financial statements and provide an observation of their trends (Is the account increasing or decreasing in value? What does this mean?)

Draw some conclusions based on your observations. For instance, why do you think the assets of the company went up from 2013 to 2014? What implications does this have? What follow-up questions do you have to ask the company’s management?

Support your observations with data and logic. Discuss what limitations exist with the informational material provided. What other material would be important to your trend analysis?

Balance sheet

Income sheet

ASSETS 2014 2013 CURRENT ASSETS Cash 456,500 222,400 Cash increase - due to no dividends paid in 2014 Receivables 3,936,400 3,320,000 Inventory 89,800 100,200 Other assets 119,500 84,300 Total current assets 4,602,200 3,726,900 Current ratio 2013: 1.21 Current ratio 2014: 1.47 LONG TERM ASSETS Note Receivable 380,600 280,700 Some additional debt acquired in 2014 Equipment (net of depreciation) 975,000 1,017,800 Total long term assets 1,355,600 1,298,500 TOTAL ASSETS 5,957,800 5,025,400 LIABILITIES AND STOCKHOLDERS' EQUITY Debt ratio 2013: 0.7 Debt ratio 2014: 0.6 CURRENT LIABILITIES Accounts payable 2,783,100 2,805,700 Note payable (current maturities) 177,550 172,550 Other accrued liabilities 165,300 114,600 Total current liabilities 3,125,950 3,092,850 LONG TERM LIABILITIES Notes payable (long term) 354,800 354,800 Long term accrued liabilities 289,550 220,250 Total long term liabilities 644,350 575,050 TOTAL LIABILITIES 3,770,300 3,667,900 STOCKHOLDERS' EQUITY Common stock 300,000 300,000 Retained Earnings 1,887,500 1,057,500 Total stockholders' equity 2,187,500 1,357,500 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,957,800 5,025,400

Income sheet

2014 2013 Comments Service Contract Revenues 9,700,000 6,295,400 Increase in contracts Service Contract Costs (7,503,100) (4,957,800) Gross Profit 2,196,900 1,337,600 Gross profit margin 2013: 21.2% Gross profit margin 2014: 22.6% General and Administrative Expenses (896,000) (756,000) Operating Income 1,300,900 518,600 Increase in profit - see above comment Gain on sale of equipment 59,900 7,700 Interest expense (69,500) (70,800) Other expense (9,600) (63,100) Income before taxes 1,281,700 455,400 Taxes (451,700) (300,900) Net Income 830,000 154,500 Increase in net income from 2013-2014 Retained Earnings, Beginning Balance 1,057,500 1,053,000 1,887,500 1,207,500 Less: Dividends paid 0 (150,000) No dividend paid in 2014 Retained Earnings, Ending Balance 1,887,500 1,057,500

Explanation / Answer

2014 2013 Cost of revenues(Cost/Revenues) 77.4% 78.8% Gross Profit Margin Gross profit/Service contract revenues 2196900/9700000= 1337600/6295400= 22.6% 21.2% Operating costs 14.1% 18.8% Net Profit margin= Net profit/Service revenues 830000/9700000= 154500/6295400= 8.6% 2.5% Debt ratio= Total Liabilities/Total assets 3770300/5957800= 3667900/5025400= 0.63 0.73 Current Ratio= Current assets/Current liabilities 4602200/3125950= 3726900/3092850 1.47 1.21 Inventory Turnover Sales/Inventory 9700000/89800= 6295400/100200= 108 63 Cost of revenue/Inventory 7503100/89800= 4957800/100200= 84 49 ie. 365/84 & 365/49 days 4 7 Fixed assets turnover= Sales/Fixed assets 9700000/1355600= 6295400/1298500= 7 5 Due to decrease in operating costs,net income has increased as a% to service revenues. Current ratio has increased due to increase in receivables & cash Receivables have increased due to increase in contract revenues. Accounts receivables turnover=Cost of revenues/Accounts receivables 7503100/3936400 4957800/3320000 1.9061 1.4933 Receivables in days= 365/A/cs. Receivable T.O. 365/1.9061= 365/1.4933= 191 244 Cost of revenues have marginally decreased .Hence Gross profit has marginally increased in 2014 Current ratio has increased due to increase in receivables & cash Receivables have increased due to increase in contract revenues. Debt ratio has decreased due to increase in assets (Denominator in the fraction--Total outside Liabilities/Total assets). Ideal ratio will bw 0.5,ie. Liabilities should be less than or equal to 50% or 0.5 Contract revenues have increased , but receivables are being turned over only maximum of twice in a year ,meaning accounts are pending for more than half of an year.This is one main reason for assets increasing , fixed assets not showing much increase. Due to substantial decrease in operating costs,net income has increased substantially as a % to service revenues. Sales have increased by (9700000-6295400)/6295400= almost 54% in 2014 Costs have increased by (7503100-4957800)/4957800= almost 51% in 2014 Conclusion: Inventory is converted to sales/receivables with in a week(inventory turnover ratio) ,but receivables-cash conversion takes more than half a year(Receivables turnover). So, collection of receivables needs to be speedened up.

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