Natural Microwave Products Ltd.'s financial statements for the year ended December 31, 2017, are shown below:

NATURAL MICROWAVE PRODUCTS LTD.

Income Statement

For the Year Ended December 31, 2017

Net sales ..................................$945,000

Cost of goods sold ....................... 610,000

Gross margin ............................. 335,000

Operating expenses:

Selling expenses ....................... 128,200

Administrative expenses ................ 78,000

Interest expense ......................... 22,000

Total operating expenses ............... 228,200

Operating income ........................ 106,800

Income taxes (25%) .................... 26,700

Net income ............................... $ 80,100

NATURAL MICROWAVE PRODUCTS LTD.

Statement of Retained Earnings

For the Year Ended December 31, 2017

NATURAL MICROWAVE PRODUCTS LTD.
Balance Sheet
December 31, 2017 and 2016

Required
1. Perform a horizontal analysis of the comparative balance sheets. Comment on the analysis.
2. Perform a vertical analysis of the income statement. The industry standards are gross margin of 35 percent and net income of 12 percent. Comment on the results
3. Calculate each of the following ratios for the year ended December 31, 2017. The industry standards are provided in parentheses for some of the ratios.
a. Current ratio (3:1)
b. Acid-test ratio
c. Inventory turnover
d. Days' sales in receivables
e. Debt ratio (0.50)
f. Times-interest-earned ratio
g. Rate of return on net sales
h. Rate of return on total assets
i. Rate of return on common shareholders' equity
j. Price-earnings ratio-the market price per share is $30.00 at year end, when dividends were paid (5.0)
k. Dividend yield (5%)
4. Comment on your calculations for Natural Microwave Products Ltd. in Requirement 3. Include comments for those ratios for which industry standards were provided.

Transcribed Image Text:

Retained earnings, January 1, 2017 Add net income for 2017 $162,000 80,100 242,100 Less dividends: Preferred $25,000 9,000 Common 34,000 $208,100 2017 2016 Assets Cash Accounts receivable Merchandise inventory Prepaid expenses Property, plant, and equipment Accumulated Goodwil Total assets Liabilities Accounts payable Notes payable (due in 30 days) Mortgage payable $92,000 84,000 102,000 8,000 498,000 (106,000) 40,000 $718,000 $45,000 92,000 118,000 6,000 474,000 (70,000) 40,000 $705,000 amortization $30,100 3,000 68,800 101,900 $43,000 10,000 130,000 183,000 Total liabilities Shareholders' equity Preferred shares (1,250 shares, $20.00 callable at $210.00 per share) (2017-12,000 shares; 2016-6,000 shares) Total shareholders' equity $240,000 $240,000 Common shares 168,000 208,100 616,100 $718,000 120,000 162,000 Retained earnings Total liabilities and shareholders' equity $705,000