The Condensed Financial Statements Of Leeward Corporation

The Condensed Financial Statements Of Leeward Corporation For 2006 And

The condensed financial statements of Leeward Corporation for 2006 and 2005 are provided, including balance sheets and income statements. The assignment requires calculating key financial ratios for 2006, performing horizontal and vertical analyses on the financial statements for both years, assessing the company’s financial performance based on these analyses, and recommending references for industry comparison analysis.

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Leeward Corporation’s financial performance between 2005 and 2006 exhibits several notable trends, which can be thoroughly analyzed through the calculation of key financial ratios alongside horizontal and vertical analyses. These evaluations offer insights into the company's liquidity, solvency, profitability, and operational efficiency over the two-year period, providing a comprehensive understanding of its financial health and strategic positioning.

1. Calculation of Financial Ratios for 2006

To assess Leeward Corporation’s financial health in 2006, we start with key ratios:

  • Current ratio: The current assets in 2006 amount to $240,000, and current liabilities are $100,000. Thus, the current ratio is calculated as:

Current ratio = Current assets / Current liabilities = $240,000 / $100,000 = 2.4

  • Debt to total assets ratio: Total liabilities are $400,000 ($100,000 current + $300,000 long-term). Total assets are $1,020,000.

Debt to total assets = Total liabilities / Total assets = $400,000 / $1,020,000 ≈ 0.392 or 39.2%

  • Profit margin ratio: Net income is $626,500, and revenues are $2,500,000.

Profit margin = Net income / Revenues = $626,500 / $2,500,000 ≈ 25.06%

  • Return on common stockholders' equity (ROE): Stockholders' equity is $620,000.

ROE = Net income / Stockholders' equity = $626,500 / $620,000 ≈ 1.011 or 101.1%

  • Return on assets (ROA): ROA = Net income / Total assets = $626,500 / $1,020,000 ≈ 61.4%

These ratios reveal a solid liquidity position, manageable debt levels, and a remarkably high return on equity, suggestive of effective leverage or possibly high profitability strategies.

2. Horizontal Analysis (2005-2006)

Horizontal analysis assesses year-over-year changes in the financial statements, highlighting growth or contraction trends.

Balance Sheet

Assets 2005 2006 Change % Change
Cash and investments $40,000 $50,000 $10,000 25.0%
Accounts receivable $90,000 $70,000 –$20,000 –22.2%
Inventories $150,000 $120,000 –$30,000 –20.0%
Total current assets $280,000 $240,000 –$40,000 –14.3%
Property, plant, and equipment $800,000 $780,000 –$20,000 –2.5%
Total assets $1,080,000 $1,020,000 –$60,000 –5.6%
Liabilities & Equity $1,080,000 $1,020,000 –$60,000 –5.6%
Current liabilities $140,000 $100,000 –$40,000 –28.6%
Long-term liabilities $320,000 $300,000 –$20,000 –6.3%
Stockholders’ equity $620,000 $620,000 $0 0.0%

Key observations indicate a reduction in current assets, especially receivables and inventories, hinting at improved receivables collection and inventory management. Liabilities decreased as well, reflecting better liquidity management.

Income Statement

Item 2005 2006 Change % Change
Revenues $2,500,000 $2,500,000 $0 0%
Cost of goods sold $1,750,000 $1,080,000 –$670,000 –38.3%
Selling & administrative expenses $500,000 $495,000 –$5,000 –1.0%
Interest expenses $30,000 $30,000 $0 0%
Total expenses $2,280,000 $1,605,000 –$675,000 –29.6%
Income before taxes $220,000 $895,000 $675,000 306.8%
Income tax expense $66,000 $268,500 $202,500 306.8%
Net income $154,000 $626,500 $472,500 307.1%

The dramatic increase in net income is primarily attributable to the significant decrease in cost of goods sold, leading to improved profitability margins, even though revenues remained constant.

3. Vertical Analysis (2005 and 2006)

Balance Sheet

Item 2005 - Amount 2005 - Percent 2006 - Amount 2006 - Percent
Cash and investments $40,000 3.7% $50,000 4.9%
Accounts receivable $90,000 8.3% $70,000 6.5%
Inventories $150,000 13.9% $120,000 11.1%
Total current assets $280,000 25.9% $240,000 23.4%
Property, plant and equipment $800,000 74.1% $780,000 76.6%
Total assets $1,080,000 100% $1,020,000 100%
Liabilities & Equity $1,080,000 100% $1,020,000 100%

Income Statement

Item 2005 - Amount 2005 - Percent 2006 - Amount 2006 - Percent
Revenues $2,500,000 100% $2,500,000 100%
Cost of goods sold $1,750,000 70.0% $1,080,000 43.2%
Selling & administrative expenses $500,000 20.0% $495,000 19.8%
Interest expense $30,000 1.2% $30,000 1.2%
Total expenses $2,280,000 91.2% $1,605,000 64.2%
Income before taxes $220,000 8.8% $895,000 35.8%
Income tax expense $66,000 2.6% $268,500 10.7%
Net income $154,000 6.2% $626,500 25.1%

The these analyses highlight notable improvements in profitability and efficiency, with decreasing costs relative to sales and assets, as well as better management of receivables and inventories. The stability in revenues coupled with increased net income suggests enhanced operational effectiveness.

4. Financial Performance Assessment

From 2005 to 2006, Leeward Corporation demonstrated significant improvements in profitability, evidenced by the jump in net income and profit margin. The high ROE (>100%) in 2006 also signals highly effective utilization of equity. Liquidity ratios, such as the current ratio (2.4), indicate a comfortable ability to meet short-term obligations, while the reduction in inventories and receivables reflects improved operational efficiencies.

The drop in total assets (-5.6%) suggests a strategic contraction or asset divestment, which likely contributed to the increased profitability margins and return ratios. The decrease in liabilities aligns with a more conservative debt management approach, improving solvency as revealed by the debt-to-asset ratio (39.2%).

In summary, the company's operational efficiency, profitability, and financial stability have improved markedly from 2005 to 2006, positioning it well for sustainable growth. Strategic inventory and receivables management, coupled with reduced costs, have played pivotal roles in this positive turnaround.

5. Industry Comparison Analysis References

To perform industry comparison analysis, Leeward Corporation should utilize credible and comprehensive sources such as:

  1. Bloomberg Industry Data and Financials
  2. Standard & Poor’s (S&P) Industry Reports
  3. Morningstar’s Industry Analysis
  4. IBISWorld Industry Reports
  5. Yahoo Finance Industry Data
  6. Dun & Bradstreet Business Information Reports
  7. FactSet Industry Standards
  8. Reuters Industry Sector Reports
  9. Census Bureau Data for Industry Averages
  10. SEC’s EDGAR database for peer company filings

These sources provide aggregated industry financial ratios, benchmarks, and sector-specific trends, enabling Leeward Corporation to benchmark its performance against peers, identify areas of competitive strength or weakness, and inform strategic decision-making effectively.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2021). Corporate Finance. McGraw-Hill Education.
  • White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. John Wiley & Sons.
  • Gibson, C. H. (2012). Financial Reporting & Analysis. Cengage Learning.
  • Khan, M. Y., & Jain, P. K. (2014). Financial Management. McGraw-Hill Education.
  • Investopedia. (2023). Financial Ratios. https://www.investopedia.com/terms/f/financialratio.asp
  • Morningstar. (2023). Industry Analysis Toolkit. https://www.morningstar.com/
  • IBISWorld. (2023). Industry Reports and Data. https://www.ibisworld.com/
  • S&P Global. (2023). Industry Reports and Benchmark Data. https://www.spglobal.com/
  • U.S. Census Bureau. (2023). Industry Economic Accounts. https://www.census.gov/econ/

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