Statement Of Retained Earnings Baby Cakes International Inc
Statement Of Retained Earningsbaby Cakes International Incstatement Of
Analyze the financial statements of Baby Cakes International Inc., including the statement of retained earnings, income statement, and balance sheet for the years ended December 31, 2008, and 2007. Complete various financial ratio calculations for 2008, interpret the results, perform horizontal and vertical analyses of the income statement, and discuss the implications of these analyses regarding the company's financial health and performance.
Paper For Above instruction
Financial statement analysis is essential for evaluating a company's performance, profitability, liquidity, debt management, and overall financial health. Baby Cakes International Inc., a prominent player in the baking industry, provides an excellent case for such an analysis, considering its financial statements for 2007 and 2008. This paper aims to thoroughly analyze the company’s financial data, calculating key financial ratios, conducting horizontal and vertical analyses, and interpreting the results to offer comprehensive insights into its operational stability, profitability, liquidity, and solvency during this period.
Introduction
Financial statements serve as vital tools for stakeholders to assess a company's economic performance. The statement of retained earnings illustrates the accumulation of net income over time minus dividends, providing insight into the company's reinvestment and dividend policies. Coupled with the income statement and balance sheet, these documents allow for in-depth ratio analysis and performance evaluation. Baby Cakes International Inc.'s financial data from 2007 and 2008 enables us to examine trends, efficiencies, and financial positioning, thereby facilitating informed managerial and investment decisions.
Part A: Financial Ratio Calculations for 2008
Using the provided data, we calculate critical financial ratios for 2008:
1. Working Capital
Working capital = Current assets - Current liabilities
= (Cash + Securities + Accounts Receivable + Inventory + Prepaids) - Accounts Payable
= (165,000 + 398,000 + 199,000 + 84,000 + 25,000) - 290,000
= 871,000 - 290,000 = $581,000
2. Current Ratio
Current ratio = Current assets / Current liabilities
= 871,000 / 290,000 ≈ 3.00
3. Quick Ratio
Quick assets = Cash + Securities + Accounts Receivable
= 165,000 + 398,000 + 199,000 = 762,000
Quick ratio = Quick assets / Current liabilities
= 762,000 / 290,000 ≈ 2.63
4. Accounts Receivable Turnover
Net sales = 1,050,000
Average Accounts Receivable = (199,000 + previous year's balance if available, assuming same as previous) — but since no previous figure is available, use the year-end balance.
Accounts receivable turnover = Net sales / Accounts Receivable
= 1,050,000 / 199,000 ≈ 5.28 times
5. Number of Days’ Sales in Receivables
Days’ sales in receivables = 365 / Accounts receivable turnover
= 365 / 5.28 ≈ 69.08 days
6. Inventory Turnover
Cost of Goods Sold = 400,000
Inventory = 84,000
Inventory turnover = COGS / Inventory
= 400,000 / 84,000 ≈ 4.76 times
7. Number of Days’ Sales in Inventory
Days’ sales in inventory = 365 / Inventory turnover
= 365 / 4.76 ≈ 76.69 days
8. Ratio of Fixed Assets to Long-term Liabilities
Net Plant Property & Equipment = 1,040,000
Long-term liabilities (Mortgage + Bonds) = 250,000 + 200,000 = 450,000
Ratio = Fixed assets / Long-term liabilities = 1,040,000 / 450,000 ≈ 2.31
9. Ratio of Liabilities to Stockholders’ Equity
Total liabilities = 290,000 + 250,000 + 200,000 = 740,000
Stockholders' equity = Preferred + Common + Retained earnings = 250,000 + 350,000 + 421,000 = 1,021,000
Liabilities to equity = 740,000 / 1,021,000 ≈ 0.72
10. Number of Times Interest Charges Earned
Interest expense = (Mortgage, Bonds, etc.; assuming interest on mortgage and bonds)
Interest on mortgage = 8% of mortgage note (unknown amount). Since specific debt figures are not fully provided, approximate using approximate interest expense or assume total interest cost from liabilities data.
For simplicity, assume interest expense = (Mortgage note payable * 8%) + Bonds payable interest (12%)
Interest expense = (say, 100,000 8%) + (100,000 12%) = 8,000 + 12,000 = 20,000
Income before tax = 41,000
Interest coverage ratio = Income before tax / interest expense = 41,000 / 20,000 ≈ 2.05 times
11. Number of Times Preferred Dividends Earned
Preferred dividends = 15,000
Income available for preferred dividends = Net income + preferred dividends (assuming net income after taxes)
Using net income of 68,000, earnings available for preferred dividends = 68,000
Preferred dividend coverage = Earnings / Preferred dividends = 68,000 / 15,000 ≈ 4.53 times
12. Ratio of Net Sales to Assets
Total assets = 871,000 (current assets) + 1,040,000 (plant property and equipment) + 300,000 (long-term investments) = 2,211,000
Net sales = 1,050,000
Net sales to assets ratio = 1,050,000 / 2,211,000 ≈ 0.47
13. Rate Earned on Total Assets
Net income = 68,000
Total assets = 2,211,000
Return on assets (ROA) = 68,000 / 2,211,000 ≈ 3.07%
14. Rate Earned on Stockholders’ Equity
Stockholders’ equity = 1,021,000
Earnings = 68,000
Return on equity (ROE) = 68,000 / 1,021,000 ≈ 6.66%
15. Rate Earned on Common Stockholders’ Equity
Common equity = 350,000 + 421,000 (Retained earnings) assuming preferred stock is not part of common equity
= 350,000 + 421,000 = 771,000
ROE (common) = 68,000 / 771,000 ≈ 8.82%
16. Earnings Per Share on Common Stock
Number of common shares = 35,000 ($10 par value)
Earnings per share (EPS) = Net income / Number of common shares = 68,000 / 35,000 ≈ $1.94
17. Price-Earnings Ratio
Market price per share = $20
Earnings per share = $1.94
P/E ratio = Market price / EPS = 20 / 1.94 ≈ 10.31
18. Dividends Per Share of Common Stock
Dividends paid to common stockholders = 7,000
Dividends per share = 7,000 / 35,000 ≈ $0.20
19. Dividend Yield
Dividend yield = Dividends per share / Market price per share = 0.20 / 20 = 1%
Part B: Interpretation of Ratios
The calculated ratios provide a comprehensive view of Baby Cakes International Inc.'s financial health in 2008. A current ratio of 3.00 indicates strong liquidity, suggesting the company can comfortably meet short-term obligations. The quick ratio of 2.63 reinforces this liquidity position, even when inventories are excluded. Accounts receivable turnover of approximately 5.28 times and inventory turnover of 4.76 times suggest efficient management of receivables and inventories, although there is room for improvement to reduce the days’ sales in receivables and inventory, thereby enhancing cash flow.
The fixed assets to long-term liabilities ratio of 2.31 signifies a solid asset base relative to its debt obligations, highlighting financial stability. The liabilities to equity ratio of 0.72 indicates manageable leverage, with more equity financing than debt. The interest coverage ratio of around 2.05 times suggests the company’s earnings can comfortably cover interest expenses, but a higher ratio would be preferable to mitigate risk.
The company’s ability to generate earnings on its assets and equity is modest, with ROA at 3.07% and ROE at 6.66%. The EPS of approximately $1.94, coupled with a P/E ratio of around 10.31, shows moderate profitability relative to market expectations. The dividend yield of 1% indicates modest dividends relative to stock price, which might appeal to income-focused investors but could also limit dividend growth prospects.
Part C: Horizontal Analysis of the Income Statement
Horizontal analysis compares financial data over two periods to identify trends. For Baby Cakes International Inc., net sales increased from $960,000 in 2007 to $1,050,000 in 2008, a growth of approximately 9.38%. Gross profit improved from $570,000 to $650,000, reflecting better sales performance or cost management. Operating expenses remained relatively stable, with slight decreases in selling expenses but increases in administrative expenses. The net income rose from $68,000 in 2007 to the same in 2008, indicating overall stability in profitability. Such growth patterns suggest effective sales strategies and prudent management of expenses, although profit margins should be monitored for sustained growth.
Part D: Vertical Analysis of the Income Statement
Vertical analysis expresses each line item as a percentage of net sales, providing insight into expense structure and profitability margins. In 2008, gross profit accounts for approximately 61.9% of sales, indicating healthy markup. Selling expenses are 25.7%, and administrative expenses are 18.6%. Income from operations as a percentage of sales is roughly 3.9%, revealing operational efficiency. The net income margin, calculated as net income divided by sales, is approximately 6.48%, suggesting moderate profitability that should be improved for better shareholder returns. These percentages help identify cost control effectiveness and profit margin trends over time.
Conclusion
In conclusion, Baby Cakes International Inc. demonstrated solid liquidity, operational efficiency, and manageable leverage in 2008, with positive revenue growth and stable profitability. While certain ratios like ROA and ROE indicate moderate returns, the company's effective asset management and controlled liabilities position it well for future growth. Continuous monitoring of receivables, inventories, and profit margins is essential for maintaining competitive advantage and financial stability. Further strategic initiatives could focus on increasing profitability and maximizing shareholder value, leveraging the company's strong financial foundation.
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