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FSA TUTORIAL 1 1.Explain why financial statements are important to the decision-making process in financial analysis. Also, identify and discuss some of their limitations for analysis purposes.2.The preparation and analysis of comparative balance sheets and income statements are commonly applied tools of financial statement analysis and interpretation.Required:1
a)Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include in yourdiscussion the extent that these limitations are overcome by use of comparative financial statements computed over more than one year.b)A year-to-year analysis of comparative balance sheets and income statements is a useful analysis tool. Still, without proper care, such analysis can be misleading. Discuss factors or conditions that contribute to such a possibility. How can additional information and supplementary data (beyond financial statements) help prevent this possibility? 2
3.Express the following income statement information in common-size percents and assess whether this company’s situation is favorable or unfavorable.HARBISON CORPORATIONComparative Income StatementFor Years Ended December 31, 2019 and 20182019 ($)2018 ($)Sales720,000535,000Cost of goods sold475,200280,340Gross Profit244,800254,660Operating expenses151,200103,790Net Income93,600150,8704.Mixon CompanyBalance sheets 2017 to 20192019 ($)2018 ($)2017 ($)Cash30,80035,62536,800Accounts receivable, net88,50062,50049,200Merchandise inventory111,50082,50053,000Prepaid expenses9,7009,3754,000Plant assets, net277,500255,000229,500Total assets518,000445,000372,500Accounts payable128,90075,25049,250Long-term notes payable secured by mortgages on plant assets97,500102,50082,500Common stock, $10 par value162,500162,500162,500Retained earnings129,100104,75078,250Total liabilities and equity518,000445,000372,500Mixon Company’s income statements for the years ended December 31, 2019 and 20182019 ($)2018 ($)Sales672,500530,000Cost of goods sold410,225344,500Other operating expenses208,550133,980Interest expense11,10012,300Income taxes8,5257,845Total costs and expenses(638,400)(498,625)Net Income34,10031,375Earnings per share2.101.93Required:1.Compare the year-end short-term liquidity position of this company at the end of 2019, 2018, and 2017 by computing the: (a) current ratio and (b) acid-test ratio. Comment on the ratio results.3
2.For the years ended December 31, 2019 and 2018, assume all sales are on credit and then compute the following: (a) collection period, (b) accounts receivable turnover, (c) inventory turnover, and (d) days’ sales in inventory. Comment on the changes in the ratios from 2018 to 2019.3.Compare the long-term risk and capital structure positions of the company at the end of 2019 and 2018 by computing the following ratios: (a) total debt to total liabilities plus equity ratio and (b) times interest earned. Comment on these ratio results.4
4.Evaluate the efficiency and profitability of the company by computing the following: (a) net profit margin, (b) total asset turnover, and (c) return on total assets. Comment on these ratio results.