Page 77 - Financial Statement Analysis

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54 Financial Statement Analysis

YEAR 7 YEAR 6 YEAR 5

Index Change in Index Change in Index
Statement Item No. Percent No. Percent No.
Net sales . . . . . . . . . . . . . . _____ 29% 100 _____% 90
Cost of goods sold . . . . . . . 139 _____ 100 _____ 85
Gross profit . . . . . . . . . . . . . 126 _____ 100 _____ 80
Operating expenses . . . . . . _____ 20 100 _____ 65
CHECK Income before tax . . . . . . . . _____ 14 100 _____ 70
Year 6 net income Net income . . . . . . . . . . . . . 129 _____ 100 _____ 75
percent, 33.3%

PROBLEM 1–5 Assume you are an analyst evaluating Mesco Company. The following data are available in your
Understanding Financial financial analysis (unless otherwise indicated, all data are as of December 31, Year 5):
Statement Relations:
Retained earnings, December 31, Year 4 . . . . . $98,000 Days’ sales in receivables . . . . . . . . . . . . 18 days
Balance Sheet
Gross profit margin ratio . . . . . . . . . . . . . . . . . 25% Shareholders’ equity to total debt . . . . . . 4 to 1
Construction
Acid-test ratio . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 to 1 Sales (all on credit) . . . . . . . . . . . . . . . . . $920,000
Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . $280,000 Common stock: $15 par value; 10,000 shares issued
Days’ sales in inventory . . . . . . . . . . . . . . . . . . 45 days and outstanding; issued at $21 per share
Required:
Using these data, construct the December 31, Year 5, balance sheet for your analysis. Operating
expenses (excluding taxes and cost of goods sold for Year 5) are $180,000. The tax rate is 40%.
CHECK Assume a 360-day year in ratio computations. No cash dividends are paid in either Year 4 or
Total assets, $422,500 Year 5. Current assets consist of cash, accounts receivable, and inventories.

PROBLEM 1–6 You are an analyst reviewing Foxx Company. The following data are available for your financial
Understanding Financial analysis (unless otherwise indicated, all data are as of December 31, Year 2):
Statement Relations: Current ratio . . . . . . . . . . . . . . . . . . . . . . . 2 Days’ sales in inventory . . . . . . . . . . . . . . . . 36 days
Balance Sheet Accounts receivable turnover . . . . . . . . . . 16 Gross profit margin ratio . . . . . . . . . . . . . . . 50%
Construction Beginning accounts receivable . . . . . . . . . $50,000 Expenses (excluding cost of goods sold) . . . $450,000
Return on end-of-year common equity . . . 20% Total debt to equity ratio . . . . . . . . . . . . . . . 1
Sales (all on credit) . . . . . . . . . . . . . . . . . $1,000,000 Noncurrent assets . . . . . . . . . . . . . . . . . . . . $300,000
Required:
Using these data, construct the December 31, Year 2, balance sheet for your analysis. Current as-
sets consist of cash, accounts receivable, and inventory. Balance sheet classifications include cash,
CHECK accounts receivable, inventory, total noncurrent assets, total current assets, total current liabilities,
Total assets, $500,000 total noncurrent liabilities, and equity.

PROBLEM 1–7 You are planning to analyze Voltek Company’s December 31, Year 6, balance sheet. The
Understanding Financial following information is available:
Statement Relations:
1. Beginning and ending balances are identical for both accounts receivable and inventory.
Dividend and Balance
2. Net income is $1,300.
Sheet Construction
3. Times interest earned is 5 (income taxes are zero). Company has 5% bonds outstanding and issued at par.
4. Net profit margin is 10%. Gross profit margin is 30%. Inventory turnover is 5.
5. Days’ sales in receivables is 72 days.
6. Sales to end-of-year working capital is 4. Current ratio is 1.5.
7. Acid-test ratio is 1.0 (excludes prepaid expenses).
8. Plant and equipment (net) is $6,000. It is one-third depreciated.
9. Dividends paid on 8% nonparticipating preferred stock are $40. There is no change in common shares
outstanding during Year 6. Preferred shares were issued two years ago at par.