week_five_exercise_assignment x
Ashford 6: – Week 5
Discussions
To participate in the following discussions, go to this week’s Discussion link in the left navigation.
- Ratios Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company? Guided Response: Let at least two of your peers know how debt service ratios can be used by a lender in determining whether or not to lend money to a company.
- Profit Margin
Year Ending December 2012 |
Year Ending December 2011 |
Year Ending December 2010 |
||||
Revenues |
40,000 |
35,000 |
3 |
3,000 |
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Operating Expenses |
||||||
Salaries |
15,000 |
10,000 |
9,000 |
|||
Maintenance and Repairs |
6,000 |
|||||
Rental Expense |
2,500 |
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Depreciation |
2,000 |
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Fuel |
4,000 |
3,500 |
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Total Operating Expenses |
29,500 |
2 |
7,000 |
26,000 |
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Operating Income |
10,500 |
8,000 |
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Sales and Administrative Expenses |
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Interest Expense |
1,000 |
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Net Income |
Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend. Guided Response: Let at least two of your peers posts know what you changes you would recommend to improve the net margin of the company.
Exercise Assignment To complete the following assignment, go to this week’s Assignment link in the left navigation.
Financial Ratios Please complete each of the exercises below in a word document. Save the document, and submit to in week using the Assignment Submission button. Week Five Exercise Assignment
Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment.
Final Paper
To complete the following final paper, go to this week’s Final Paper link in the left navigation.
Final Paper Focus of the Final Paper Write a five-to seven-page financial statement analysis of a public company, and formatted according to APA style as outlined in the Ashford Writing Center. In this analysis you will discuss the financial health of this company with the ultimate goal of making a recommendation to other investors. Your paper should consist of the following sections: introduction, company overview, horizontal analysis, ratio analysis, final recommendation, and conclusions. Your paper needs to include a minimum of two scholarly resources in addition to the textbook as references. Here is a breakdown of the sections within the body of the assignment:
Company Overview Provide a brief overview of your company (one to two paragraphs at most). What industry is it in? What are its main products or services? Who are its competitors?
Horizontal Analysis of Income Statement and Balance Sheet Prepare a three-year horizontal analysis of the income statement and balance sheet of your selected company. Discuss the importance and meaning of horizontal analysis. Discuss both the positive and negative trends presented in your company.
Ratio Analysis Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period. Discuss and interpret the ratios that you calculated. Discuss potential liquidity issues based on your calculations of the current and quick ratios. Are there any factors that could be erroneously influencing the results of the ratios? Discuss liquidity issues of competitive companies within the same industry.
Recommendation Based on your analysis would you recommend an individual invest in this company? What strengths do you see? What risks do you see? It is perfectly acceptable to state that you would recommend avoiding this company as long as you provide support for your position.
Writing the Final Paper 1. Must be five to seven double-spaced pages in length, and formatted according to APA style as outlined in the Ashford Writing Center. 2. Must include a title page with the following:
a. Title of paper b. Student’s name c. Course name and number d. Instructor’s name e. Date submitted
3. Must begin with an introductory paragraph that has a succinct thesis statement. 4. Must address the topic of the paper with critical thought. 5. Must end with a conclusion that reaffirms your thesis. 6. Must document all sources in APA style, as outlined in the Ashford Writing Center. 7. Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.
A
Week Five Exercise Assignment
Financial Ratios
1. Liquidity ratios.
Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edison
Stagg
Thornton
Cash
$4,000
$2,500
$1,000
Short-term investments
3,000
2,500
2,000
Accounts receivable
2,000
2,500
3,000
Inventory
1,000
2,500
4,000
Prepaid expenses
800
800
800
Accounts payable
200
200
200
Notes payable: short-term
3,100
3,100
3,100
Accrued payables
300
300
300
Long-term liabilities
3,800
3,800
3,800
a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
2. Computation and evaluation of activity ratios.
The following data relate to Alaska Products, Inc:
20X5
20X4
Net credit sales
$832,000
$760,000
Cost of goods sold
440,000
350,000
Cash, Dec. 31
125,000
110,000
Average Accounts receivable
180,000
140,000
Average Inventory
70,000
50,000
Accounts payable, Dec. 31
115,000
108,000
a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.
3. Profitability ratios, trading on the equity.
Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:
Net sales
$1,500,000
Interest expense
$120,000
Income tax expense
$80,000
Preferred dividends
$25,000
Net income
$130,000
Average assets
$1,100,000
Average common stockholders’ equity
$400,000
a. Compute the profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly explain.
4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
20X2
20X1
Current Assets
$76,000
$80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
143,000
160,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
332,500
350,000
Operating Expenses
93,500
85,000
Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.
5. Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
20X2
20X1
Current Assets
$ 76,000
$ 80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
143,000
160,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
332,500
350,000
Operating Expenses
93,500
85,000
Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.
6. Ratio computation. The financial statements of the Lone Pine Company follow.
LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2
20X1
Assets
Current Assets
Cash and Short-Term Investments
$ 400
$ 600
Accounts Receivable (net)
3,000
2,400
Inventories
2,000
2,200
Total Current Assets
$5,400
$5,200
Property, Plant, and Equipment
Land
$1,700
$ 600
Buildings and Equipment (net)
1,500
1,000
Total Property, Plant, and Equipment
$3,200
$1,600
Total Assets
$8,600
$6,800
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
$1,800
$1,700
Notes Payable
1,100
1,900
Total Current Liabilities
$2,900
$3,600
Long-Term Liabilities
Bonds Payable
4,100
2,100
Total Liabilities
$7,000
$5,700
Stockholders’ Equity
Common Stock
$ 200
$ 200
Retained Earnings
1,400
900
Total Stockholders’ Equity
$1,600
$1,100
Total Liabilities and Stockholders’ Equity
$8,600
$6,800
LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales*
$36,000
Less: Cost of Goods Sold
$20,000
Selling Expense
6,000
Administrative Expense
4,000
Interest Expense
400
Income Tax Expense
2,000
32,400
Net Income
$ 3,600
Retained Earnings, Jan. 1
900
$ 4,500
Cash Dividends Declared and Paid
3,100
Retained Earnings, Dec. 31
$ 1,400
*All sales are on account.
Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:
a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d. Accounts-receivable-turnover ratio
e. Return-on-assets ratio
f. Net-profit-margin ratio
g. Return-on-common-stockholders’ equity
h. Debt-to-total assets
i. Number of times that interest is earned