1 Question 1: Analysis of Financial Statements 2 Perfect Smile's financial statements are shown below. Analyze the statements, completing the requirements to the right. Your answers should be in the cells noted in blue. Do not make any changes to the financial statements. 4 6 7 Perfect Smile Company 8 Statement of Income 9 For the year ended December 31 10 11 2020 2019 12 Sales Revenue (Note 1) $3,083,182 $3,993,562 13 Cost of Goods Sold. 1,289,828 1553,496 14 Gross Margin 1,793,354 2,440,066 15 16 Operating expenses 17 Sales and marketing expenses 953,638 989,378 18 Occupancy expenses 190,728 197,876 19 Administration expenses 267,019 336,389 20 Total operating expenses 1,411,384 1,523,642 21 Operating income 381,970 916,424 22 Non-operating or other 23 Gain (loss) on sale of land and building 171,721 19,364 24 Interest (expense) income 17.934 24,401 25 Total non-operating 189,654 43,765 26 Income before tax 571,624 960,189 27 Income tax expense 128,616 225,644 28 Net Income (Loss): 443,009 734,545 29 Note 1. Management has determined that 80% of its sales were on credit in 2020, and 90% in 30 2019 31 Perfect Smile Company 32 33 84 Statement of Changes in equity For the year ended December 31 2020 2019 35 36. Retained earnings, January 1, 2019 37 Add Net income 38 Less: Dividends declared 39 Retained earnings, December 31, 2020 951,985 443,009 -141,800 1,253,194 430,460 734,545 -213,020 951,985 2018 179,378 330,000 16,735 796,887 1,323,000 50,000 518 840 1,891,840 40 41 Perfect Smile Company 42 Statement of Financial Position 43 As at December 31 2020 2019 44 45 Assets 46 Current assets: 47 Cash 70,524 105,450 48 Accounts receivable, net (Note 2) 783,839 634,910 49 Prepaid expenses 16,223 16,455 50 Inventory 973,000 885,430 51 Total current assets 1,843,586 1,642,245 52 Non-Current Assets 53 Marketable securities 500,000 400,000 54 Property plant & equipment, net 568,035 544,014 55 Total assets 2,911,621 2,586,259 56. Liabilities and shareholders' equity 57 Current liabilities: 58 Accounts payable 389,337 398,523 59 Unearned revenue 63,891 30,551 60 Bank loan, current portion 75,000 75,000 61 Total current liabilities 528,228 504,074 62 Non-Current liabilities: 63 Bank loan payable 655 200 730200 64 Total liabilities 1,183,428 1,234,274 65 Shareholders' equity 66. Common shares 475,000 400,000 67 Retained earnings 1253.194 951.985 68 Total liabilities and shareholders' equity 2,911,621 2,586,259 69 70 Note 2: Accounts rece/vable is net of allowance for doubtful accounts (AFDA). 328,243 52,937 75,000 456,180 805,200 1,261,380 200,000 430 460 11,891,840 2019 734,545 91,610 -19,364 -304,910 -88,543 280 70,280 22,386 461,512 72 Perfect Smile Company 73 74 Statement of Cash Flows 75 For the Year Ended December 31 76 2020 77 78 Cash Flows from Operating Activities 79 Net Income 443,009 80 Depreciation Expense 68,342 81 Gain on sale of Equipment -171,721 82 Changes in working capital items: 83 Accounts Receivable -148,929 84 Inventories -87,570 85 Prepaid expenses 232 86 Accounts Payable -9,186 87 Unearned revenue 33,340 Net cash used for operating activities 127,516 88 89 Cash Flows from Investing Activities 90 Add: Purchase of marketable securities -100,000 91 Add: Proceeds from Sale of Equipment 236,000 92 Deduct: Acquisition of equipment -156,642 93 Net cash provided by investing activities -20,642 94 Cash Flows from Financing Activities 95 Issurance (repurchase) of common shares 75,000 96 Less. Dividends Paid -141,800 97 Less: Repayment of Bank Loan -75,000 98 Net cash used for financing activities -141,800 99 100 Overall increase (decrease) in cash -34,926 101 Cash position at beginning of year 105,450 102 Cash position at end of year 70,524 103 104 -350,000 59,000 -156,420 -447,420 200,000 -213,020 -75,000 -88,020 -73,928 179,378 105,450 Requirement 1a - Ratio Analysis Please ensure you read the notes to the financial statements. Please calculate each of the following ratios for 2019 and 2020 Answers must be in the blue cells provided using formulas in Excel (do not use your calculator and input your final answer into Excel) 2020 2019 Current Assets / Current Liabilities (Current Assets - Inventory Prepaid Expenses Current Liquidity Ratio Current Ratio Quick Ratio Activity Ratio Accounts Receivable Turnover Average Collection Period Solvency Ratios Cash Flows to Total Liabilities Profitability Ratios Gross Margin % Credit Sales / Average Accounts Receivable (net) 365 / Accounts Receivable Turnover Cashflows from Operating Activities/Total Liabilities Gross Margin / Sales Revenue Requirement 1b - Financial Statement Analysis 1) Management has a policy of collecting accounts receivable within 60 days. How does the average collection period compare to these terms? 1) Has the accounts receivable turnover ratio improved or worsened from 2019 to 2020? Worsened 1) What has happened to the average collection period from 2019 to 2020? Worsened IV) Has the company shown an improvement in their liquidity ratios from 2019 to 2020? If the bank loan requires that the company has a minimum quick ratio of 1.5. Is the company meeting this obligation? Yes, Liquidity ratio got improved, v) What does the cash flows to total liabilities tell you? Debt is decreasing and equity is enhancing vi) Examine the company's cash flow statement. What is the cash flow pattern for 2020? 2019? 2020 2019 Operating Activities Investing Activities Financing Activities What does the cash flow pattern tell you about Perfect Smile Company? Vii) Has the company's gross margin improved from 2019 to 2020? Worsened Vill) What would be potential reasons for the increase or decrease in gross margin %