Using The 2007 & 2008 Income Statement And Balance Sheet Pro

Using the 2007 & 2008 Income Statement and Balance Sheet provided, calculate the following…

Using the 2007 and 2008 income statement and balance sheet data, calculate the liquidity ratios (current ratio, acid-test ratio, receivables turnover, inventory turnover), profitability ratios (asset turnover, profit margin, return on assets, return on common stockholders’ equity), and solvency ratios (debt to total assets, times interest earned). Show your calculations for each ratio. Create both horizontal and vertical analysis for the balance sheet and income statement. Write a 350- to 700-word memo to the CEO of Berry’s Bug Busters discussing your findings from the ratio calculations and analysis, including insights on the company’s financial position, the interested users for each type of ratio, and what the data reveals about the company’s performance and position.

Paper For Above instruction

Introduction

This analysis aims to evaluate the financial health of Berry’s Bug Busters by calculating key financial ratios and conducting horizontal and vertical analyses of the company's income statement and balance sheet for the years 2007 and 2008. These measures provide valuable insights into liquidity, profitability, and solvency, informing strategic decisions and stakeholder perspectives.

Financial Ratios and Calculations

Liquidity Ratios:

- Current Ratio:

2008: Current Assets / Current Liabilities = $1,836,770.12 / $306,805.71 ≈ 5.99

2007: $1,308,685.20 / $366,786.29 ≈ 3.56

Indicates a strong liquidity position, with more than five times current assets covering current liabilities in 2008.

- Acid-Test Ratio:

(Current Assets - Inventory) / Current Liabilities

2008: ($1,836,770.12 - $205,934.30) / $306,805.71 ≈ 5.21

2007: ($1,308,685.20 - $205,934.30) / $366,786.29 ≈ 3.07

Shows high liquidity, even excluding inventory.

- Receivables Turnover:

Annual Revenue / Average Accounts Receivable

2008: $3,249,580.53 / [($812,395.13 + $811,047.45) / 2] ≈ 4.00 times

2007: $3,893,027.78 / [($812,395.13 + $811,047.45) / 2] ≈ 4.79 times

Reflects efficiency in collecting receivables.

- Inventory Turnover:

Cost of Goods Sold / Average Inventory (assuming direct costs represent COGS)

Since direct expenses include salaries, chemicals, fuel, vehicle maintenance, and others, precise COGS isn’t provided, but approximate usage suggests a high turnover rate consistent across the years.

Profitability Ratios:

- Asset Turnover:

Revenue / Average Total Assets

2008: $3,249,580.53 / [($1,932,041.17 + $1,498,882.00) / 2] ≈ 2.66 times

2007: $3,893,027.78 / [($1,498,882.00 + $1,932,041.17) / 2] ≈ 2.80 times

Indicates how efficiently assets generate revenue.

- Profit Margin:

Net Income / Revenue

2008: $493,139.75 / $3,249,580.53 ≈ 15.17%

2007: $769,000.80 / $3,893,027.78 ≈ 19.75%

Shows a slight decline in profitability.

- Return on Assets (ROA):

Net Income / Total Assets

2008: $493,139.75 / $1,932,041.17 ≈ 25.52%

2007: $769,000.80 / $1,498,882.00 ≈ 51.31%

Substantial reduction indicates decreased efficiency or increased asset base.

- Return on Stockholders’ Equity:

Net Income / Total Equity

2008: $493,139.75 / $1,625,235.46 ≈ 30.3%

2007: $769,000.80 / $1,132,095.71 ≈ 67.9%

Significant decline suggests increased equity or decreased earnings relative to equity.

Solvency Ratios:

- Debt to Total Assets:

Total Liabilities / Total Assets

2008: $306,805.71 / $1,932,041.17 ≈ 15.87%

2007: $366,786.29 / $1,498,882.00 ≈ 24.48%

Indicates low leverage and strong solvency.

- Times Interest Earned:

EBIT / Interest Expenses — Since interest expense isn’t explicitly provided, assume negligible interest; thus, this ratio might be omitted unless specific interest data is obtained.

Horizontal and Vertical Analysis

Horizontal analysis compares current year figures to prior year, highlighting growth or decline:

- Total Assets increased by approximately 29% from 2007 to 2008, indicating expansion.

- Revenues decreased slightly (~16%), suggesting a possible slowdown.

- Net Income declined by about 36%, reflecting potential profit margin pressures.

- Total liabilities decreased, implying a reduction in debt or liabilities.

Vertical analysis expresses each line item as a percentage of total assets or total revenue:

- In 2008, current assets constituted approximately 95% of total assets, reflecting liquidity.

- Expenses related to direct costs accounted for a significant portion (~71%) of revenue, indicating cost structure.

- The net income margin (15%) in 2008 suggests healthy profitability, though below 2007’s nearly 20%.

Discussion and Implications

The ratios reveal that Berry’s Bug Busters maintained strong liquidity in 2008, with high current and acid-test ratios, indicating the ability to meet short-term obligations comfortably. The company’s low debt-to-assets ratio suggests that it relies minimally on external debt, which reduces financial risk and enhances solvency. However, profitability metrics indicate a decline in margins and return on assets from 2007 to 2008, hinting at increased operating costs or lower revenue efficiency.

Stakeholders such as investors and creditors are chiefly interested in liquidity and solvency ratios, as these indicate the company’s ability to meet obligations and sustain operations. Managers and internal stakeholders focus on profitability ratios to assess operational efficiency. The horizontal and vertical analyses help contextualize these ratios, showing where growth has occurred and where costs have increased.

Overall, Berry’s Bug Busters demonstrated a robust financial position in 2008, with solid liquidity and limited leverage. Yet, the decline in profitability signals a need for strategic improvements in revenue generation and cost management. If these trends continue, they could impact future growth and shareholder value. The company should monitor cost structures, explore revenue enhancement strategies, and ensure continued liquidity to maintain stability.

Conclusion

The financial analysis of Berry’s Bug Busters reveals favorable liquidity and low leverage, providing a cushion against financial distress. Nonetheless, a decline in profitability warrants managerial attention. The insights derived from ratios and analysis equip decision-makers with a comprehensive view to formulate informed strategies for sustainable growth.

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