FSA.docx - FSA TUTORIAL 1 1 Explain why financial statements are important to the decision-making process in financial analysis Also identify and

FSA.docx - FSA TUTORIAL 1 1 Explain why financial...

This preview shows page 1 - 6 out of 24 pages.

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
Image of page 1
a) Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include in your discussion 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
Image of page 2
3. Express the following income statement information in common-size percents and assess whether this company’s situation is favorable or unfavorable. HARBISON CORPORATION Comparative Income Statement For Years Ended December 31, 2019 and 2018 2019 ($) 2018 ($) Sales 720,000 535,000 Cost of goods sold 475,200 280,340 Gross Profit 244,800 254,660 Operating expenses 151,200 103,790 Net Income 93,600 150,870 4. Mixon Company Balance sheets 2017 to 2019 2019 ($) 2018 ($) 2017 ($) Cash 30,800 35,625 36,800 Accounts receivable, net 88,500 62,500 49,200 Merchandise inventory 111,500 82,500 53,000 Prepaid expenses 9,700 9,375 4,000 Plant assets, net 277,500 255,000 229,500 Total assets 518,000 445,000 372,500 Accounts payable 128,900 75,250 49,250 Long-term notes payable secured by mortgages on plant assets 97,500 102,500 82,500 Common stock, $10 par value 162,500 162,500 162,500 Retained earnings 129,100 104,750 78,250 Total liabilities and equity 518,000 445,000 372,500 Mixon Company’s income statements for the years ended December 31, 2019 and 2018 2019 ($) 2018 ($) Sales 672,500 530,000 Cost of goods sold 410,225 344,500 Other operating expenses 208,550 133,980 Interest expense 11,100 12,300 Income taxes 8,525 7,845 Total costs and expenses (638,400) (498,625) Net Income 34,100 31,375 Earnings per share 2.10 1.93 Required: 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
Image of page 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
Image of page 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.
Image of page 5
Image of page 6

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture