Chapter 18 Assignment Instructions: The Problems Below

Chapter 18 Assignmentinstructionscomplete The Problems Below This A

Complete the problems below. This assignment can be completed in either: Microsoft Excel, Word, or hand-written and scanned in PDF format. I prefer Microsoft Excel or Word but will not dock points for PDF format.

Part A

Use the following data to calculate the ratios below:

• Current Year
• Preceding Year

Item	Current Year	Preceding Year
Current Assets	745,000	---
Property, Plant, and Equipment	1,510,000	1,400,000
Total Assets	2,800,000	3,400,000
Current Liabilities (non-interest-bearing)	160,000	---
Long-term Liabilities, 12%	400,000	---
Preferred Stock, 10%	250,000	---
Common Stock, $25 par (current market price is $25/share)	1,200,000	1,200,000
Retained Earnings: Beginning of Year	240,000	---
Net Income for Year	95,000	---
Preferred Dividends Declared	(25,000)	---
Common Dividends Declared	(70,000)	---
Net Sales	3,800,	---

Calculate the following ratios:

1. Profit margin
2. Asset turnover
3. Current ratio
4. Return on assets
5. Return on common stockholders' equity
6. Earnings per share
7. Price-earnings ratio
8. Debt to total assets ratio

Part B

Use the following data to complete the problems below:

Item	Assets
Current Assets	$1,115
Plant Assets	$800
Total Assets	---

Liabilities and Stockholders’ Equity	$
Current Liabilities	---
Long-term Debt	---
Common Stock	---
Retained Earnings	---
Total Liabilities and Stockholders’ Equity	$

1. Using horizontal analysis, show the percentage change for each balance sheet item.
2. Using vertical analysis, prepare a comparative balance sheet.

Part C

Use the following data to answer the question:

Current Year	Preceding Year
Cash, marketable securities, and receivables	80,000	84,000
Inventories	120,000	66,000
Total Current Assets	200,000	---
Current Liabilities	100,000	60,000
Working Capital	100,000	90,000

Has the current year's position improved? Explain using ratios.

Part D

Use the following data to answer the question:

Item	Value
Total Assets	2,000,000
Average Total Assets	2,200,000
Net Income	250,000
Net Sales	1,300,000
Average Common Stockholders’ Equity	1,000,000
Net Cash Provided By Operating Activities	275,000
Shares of Common Stock Outstanding	10,000

Calculate all profitability ratios that can be computed from the above information.

Paper For Above instruction

Below is a comprehensive analysis of the financial ratios, balance sheet analyses, and profitability assessments based on the given data. The goal is to interpret the company's financial health, performance, and efficiency through these calculations, applying standard financial analysis principles.

Part A: Ratio Calculations

Using the provided data, the first step involves calculating key financial ratios to assess profitability, efficiency, liquidity, and leverage.

Profit Margin:

Profit margin indicates how much net income the company retains from its sales.

\[\text{Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales}} = \frac{95,000}{3,800,} \approx 2.5\%\]

Asset Turnover:

Asset turnover measures how efficiently the company uses its assets to generate sales.

\[\text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}}\]

Assuming average total assets are the mean of beginning and ending assets:

\[(\frac{2,800,000 + 3,400,000}{2}) = 3,100,000\]

Thus,

\[\text{Asset Turnover} = \frac{3,800,}{3,100,000} \approx 1.23\]

Current Ratio:

Liabilities for the current year need to be estimated if not directly provided. Assuming current liabilities are $160,000, as provided:

\[\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{745,000}{160,000} \approx 4.66\]

Return on Assets (ROA):

ROA shows how efficiently assets generate net income.

\[\text{ROA} = \frac{\text{Net Income}}{\text{Average Total Assets}} \approx \frac{95,000}{3,100,000} \approx 3.06\%\]

Return on Equity (ROE):

Calculates the return generated on shareholders' equity.

Total equity is sum of common stock plus retained earnings less preferred stock:

\[

\text{Total Equity} = \text{Common Stock} + \text{Retained Earnings} - \text{Preferred Stock} = 1,200,000 + 240,000 - 250,000 = 1,190,000

\]

Consider net income after preferred dividends:

\[

\text{Net Income for Common Shareholders} = 95,000 - 25,000 = 70,000

\]

\[

\text{ROE} = \frac{70,000}{1,190,000} \approx 5.88\%

\]

Earnings Per Share (EPS):

\[

\text{EPS} = \frac{\text{Net Income for Common Shareholders}}{\text{Number of Shares Outstanding}} = \frac{70,000}{48,000 \text{ shares}} \approx 1.46

\]

Price-Earnings (P/E) Ratio:

Based on current stock price:

\[

\text{P/E} = \frac{\text{Market Price per Share}}{\text{Earnings per Share}} = \frac{25}{1.46} \approx 17.12

\]

Debt to Total Assets Ratio:

\[

\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}

\]

Total liabilities sum is:

\[

\text{Long-term Liabilities} + \text{Current Liabilities} + \text{Preferred Stock} = 400,000 + 160,000 + 250,000 = 810,000

\]

\[

\text{Debt to Total Assets} = \frac{810,000}{2,800,000} \approx 28.93\%

\]

Part B: Horizontal and Vertical Analysis

Horizontal Analysis:

To perform the horizontal analysis, we calculate the percentage change for each balance sheet item between the two periods. If current year figures are available, and previous year's figures are known, then:

\[

\% \text{ Change} = \frac{\text{Current Year} - \text{Preceding Year}}{\text{Preceding Year}} \times 100

\]

Assuming example figures for previous periods, for example:

- Current Assets: If previous year was $1,045,000, then:

\[

\frac{1,115,000 - 1,045,000}{1,045,000} \times 100 \approx 6.73\%

\]

- Similar calculations would be executed for each item based on actual prior figures.

Vertical Analysis:

Express each balance sheet item as a percentage of total assets for the current period:

\[

\text{Vertical Percentage} = \frac{\text{Item}}{\text{Total Assets}} \times 100

\]

For example:

- Current Assets:

\[

\frac{1,115}{\text{Total Assets}} \times 100

\]

- Plant Assets:

\[

\frac{800}{\text{Total Assets}} \times 100

\]

This standardizes data making it easier to compare proportions across periods.

Part C: Liquidity and Financial Position

In assessing whether the current year's position has improved, key ratios such as working capital, current ratio, and quick ratio are evaluated.

Current year's working capital is \$100,000, versus \$90,000 the previous year, indicating an improvement in short-term liquidity.

The current ratio increased from 1.4 to approximately 2.0, suggesting better ability to meet short-term obligations.

Additionally, the increase in current assets relative to current liabilities indicates improved liquidity and financial flexibility.

Part D: Profitability Ratios

From the data provided, the following profitability ratios are calculated:

• Return on Assets (ROA):

  \[

  \frac{250,000}{2,200,000} \approx 11.36\%

  \]

• Return on Sales (ROS):

  \[

  \frac{250,000}{1,300,000} \approx 19.23\%

  \]

• Net Profit Margin:

  \[

  \frac{250,000}{1,300,000} \approx 19.23\%

  \]

• Return on Equity (ROE):

  \[

  \frac{250,000}{1,000,000} = 25\%

  \]

• Profit Margin: (Same as above, 19.23%)

These ratios reflect the company's efficiency in generating profits from sales and in utilizing its assets and equity. An ROA of approximately 11.36% indicates effective asset utilization, while an ROE of 25% demonstrates strong return to shareholders.

Conclusion

Overall, these financial analyses reveal the company's strengths and areas for improvement. Profitability ratios point toward efficient profit generation, while liquidity ratios like working capital and current ratio demonstrate a healthy short-term position. The leverage ratios suggest manageable debt levels, and the profitability ratios indicate solid operational efficiency.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• White, G. I., Sondhi, A., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Pyndick, R., & Jenkinson, T. (2013). Financial Statement Analysis. Pearson.
• Ross, S. A., Westerfield, R., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
• Hilton, R. W., & Platt, D. E. (2012). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
• Stickney, C. P., Brown, P., & Wahlen, J. (2010). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.
• Gibson, C. H. (2012). Financial Reporting and Analysis. Cengage Learning.
• Jagannathan, R., & Wang, Z. (2016). Introduction to Financial Statement Analysis. MIT Press.