04 Jun COMPUTE THE GROSS PROFIT MARGIN RATIO, THE RETURN ON EQUITY AND THE RETURN ON ASSETS, ROUNDING CALCULATIONS TO TWO DECIMAL PLACES
1-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.
2-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.
3-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.
4-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
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?
5-Computation and evaluation of activity ratios.The
following data relate to Alaska Products, Inc:
19X5 19X4
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
Compute the accounts receivable
and inventory turnover ratios for 19X5. Alaska rounds all calculations to
two decimal places.
6-Profitability ratios,
trading on the equity.Digital Relay has
both preferred and common stock outstanding. The company reported the
following information for 19X7:
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
Compute the gross profit
margin ratio, the return on equity and the return on assets, rounding
calculations to two decimal places.
Does the firm have positive
or negative financial leverage? Briefly explain.
7-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
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