Revision-TQ(1).docx - Revision \u2013 Tutorial Questions Tutorial List R-1 R-2 R-3 R-4 R-5 R-1 Interpretation of Financial Statements(Time 36 minutes You

Revision-TQ(1).docx - Revision – Tutorial Questions...

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Revision – Tutorial Questions Tutorial List: R-1, R-2, R-3, R-4, R-5 R-1. Interpretation of Financial Statements (Time: 36 minutes) You are the financial consultant for A&B Corporation. The CFO of A&B asks you to provide an analysis of the company’s financial condition and operating results. You are provided with the statement of financial position and income statement for 2017. A&B Corporation Statement of Financial Position As of December 31, 2017 Assets Property, plant, and equipment (gross) $2,093,819 Less: Accumulated depreciation 500,000 Property, plant, and equipment (net) 1,593,819 Inventory 700,625 Accounts receivable (net) 805,556 Cash 25,000 Total assets 3,125,000 Equity and Liabilities Share capital - Ordinary, $1 par $100,000 Share premium – Ordinary 243,750 Retained earnings 1,000,000 Total equity 1,343,750 Long term liabilities $1,165,250 Current portion of long-term liabilities 75,000 Notes payable 311,000 Accounts payable 230,000 Total liabilities 1,781,250 Total liabilities and equity 3,125,000 A&B Corporation Income Statement For the year ended December 31, 2017 Sales revenue $5,650,000 Less: Sales returns and allowances (575,000) Net sales 5,075,000 Cost of goods sold (3,704,000) Gross profit 1,371,000 Operating expense (1,218,000) Income from operations 153,000 Interest expense (93,000) Income before income taxes 60,000 Income tax (24,000) Net income 36,000 Revision-TQ Page 1
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R-1. (Continued) You also obtained the following additional information. Total assets, as of December 31, 2016: $2,895,152 Inventory, as of December 31, 2016: $763,445 Accounts receivable (net), as of December 31, 2016: $763,900 Total ordinary shareholders’ equity, as of December 31, 2016: $1,323,750 Retained earnings, as of December 31, 2016: $980,000 No new shares are issued during 2017. Net income for the year 2017 after distribution of cash dividends is included in retained earnings. No other changes in equity occurred during the year. Market price of the shares of A&B corporation, as of December 31, 2017: $5.49 All sales are credit sales with credit term 2/20, n/50. The historical financial ratios of A&B Corporation for 2015 and 2016 and the average ratios for peer firms in the same industry for 2017 are shown in the following table. Financial Ratios Year Industry Average 2015 2016 2017 Current ratio 1.71 1.82 1.50 Acid-test ratio 1.05 0.90 1.20 Inventory turnover 5.20 5.00 10.20 Average collection period [*] 50.60 55.02 46.00 Asset turnover 1.50 1.52 2.00 Debt to total asset ratio 45.80% 54.30% 24.50% Times interest earned 2.20 1.90 3.50 Revision-TQ Page 2
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Profit margin 1.10% 1.00% 1.20% Return on asset 1.70% 1.50% 1.40% Return on ordinary shareholders' equity 3.10% 3.30% 3.20% Earnings per share 0.42 0.38 N/A Price-Earnings 16.50 15.90 18.20 Dividend payout ratio 44.00% 44.25% 45.50% Note: [*] Use 360 days in a year. Required: (1) Calculate the financial ratios of A&B Corporation in the above table for the fiscal year 2017. Round to the nearest two decimal places. Revision-TQ Page 3
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R-1. (Continued) (2) The CFO of A&B Corporation asks you about the effect of the following potential independent transactions on the existing current ratio as of December 31, 2017. Use “increase”, “decrease”, or “no effect” for your answer.
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  • BarbaraM.Arel

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