3. Question: Financial statement analyses (Total: 25 marks) Karimfour LLC Company wishes to compare itself to a key competitor, Mustafa LLC, but that company is much larger in size than Mustafa. Please refer to the following income statement information for identical periods: Mustafa $8 000 3 370 4630 Karimfour $46 000 22 000 24 000 Revenues (Net Sales) Cost of sales Gross Profit Selling and general expenses: Sales and marketing expense General and administrative expense Research and development expense Total selling and general expenses 2 100 960 330 $3 390 3 950 4 980 4 690 $13 620 Profit before tax Income tax expense Profit/(loss) $1 240 260 $980 $10 380 2670 $ 7710 a) Should Karimfour use the horizontal or vertical common size statements for such a comparison? Why? (05 marks) b) Prepare suitable statement to compare the two companies (15 marks) c) Comment on the results. Compare Karimfour's performance with key competitor Mustafa (05 marks) Ratio Formula Purpose or Use Liquidity Ratios 1. Current ratio Current assets Current liabilities Measures short-term debt-paying ability. Cash + Short-term 2. Acid-test (quick) ratio investments + Accounts receivable (net) Measures immediate short-term liquidity. Current liabilities 3. Accounts receivable Net credit sales turnover Average net accounts receivable Measures liquidity of accounts receivable. 4. Inventory turnover Cost of goods sold Average inventory Measures liquidity of inventory. Profitability Ratios 5. Profit margin Net income Measures net income generated by each Net sales dollar of sales. 6. Asset turnover Net sales Measures how efficiently assets are used Average total assets to generate sales. Ratio Formula Purpose or Use 7. Return on assets Net income Average total assets Measures overall profitability of assets. Net income - Preferred 8. Return on common dividends stockholders' equity Average common Measures profitability of owners' stockholders' equity investment. Net income - Preferred dividends 9. Earnings per share Measures net income earned on each (EPS) Weighted-average common shares outstanding share of common stock. Market price 10. Price-earnings (P-E) per share of stock Measures the ratio of the market price ratio Earnings per share per share to earnings per share. 11. Payout ratio Cash dividends Measures percentage of earnings Net income distributed in the form of cash dividends. Solvency Ratios 12. Debt to assets ratio Debt Measures the percentage of total Assets assets provided by creditors. Income before income taxes 13. Times interest earned and interest expense Measures ability to meet interest Interest expense payments as they come due