ACTG 212: Principles of Accounting II

Financial Analysis Project

Michael Masterson has brought you a set of financial statements of a company that he is considering investing in as a long-term investment. He is asking for your help in determining if the company would be a good investment for him.

Using the attached financial statements, you need to create a vertical analysis as percentage of Total Assets for the Balance Sheet and as a percentage of Sales for the Income Statement, as well as a horizontal analysis of the Balance Sheet and Income Statement. Complete this for both years. In addition to the vertical and horizontal analysis, you need to calculate the following ratios:

Liquidity & Efficiency:

• Current Ratio
• Acid-Test Ratio
• Receivables Turnover & Days Sales Uncollected
• Inventory Turnover & Days sales in Inventory

Solvency:

• Debt Ratio
• Equity Ratio
• Debt to Equity Ratio

Profitability:

• Profit Margin Ratio
• Gross Margin Ratio
• Return on Total Assets (ROA)
• Return on Equity (ROE)

This information then needs to be incorporated into a written memo to Michael Masterson. Be sure to include the following information in your memo.

Introductory Paragraph This paragraph will be an introduction to your analysis. In this paragraph, explain the importance of analyzing financial statements before investing in a company. Be sure to answer the following questions in your introduction:

1. What is the purpose of creating a vertical analysis and why is it useful in analyzing a potential investment?
2. What is the purpose of creating a horizontal analysis and why is it useful in analyzing a potential investment?
3. Overall, what do each of the three sections of ratios (Profitability, Liquidity & Solvency) tell a person about a company?

Financial Analysis Section In this section, you will share the results of your calculations and then explain what those results mean in detail. You will need a subsection for the completed vertical analysis and a subsection for the completed horizontal analysis. Within these sections you will include specifics regarding your calculations and what those calculations mean for the company. You will also need to include a sub-section for each of the three types of ratios. Within each of the subsections, incorporate the ratios in a Table format and then explain what your calculations mean. While you are allowed to include the definition of the ratios in this section, you must specifically explain what your calculation of the ratio means and analyze the data that you have computed.

The subsections of the Financial Analysis Section must be in this order:

1. Vertical Analysis
2. Horizontal Analysis
3. Liquidity and Efficiency Financial Ratios
4. Solvency Financial Ratios
5. Profitability Financial Ratios

Conclusion Paragraph You need to state if you think the company would be a good investment and why. Give detailsto support your reasoning.

Formatting Instructions:

1. Use a memo format for your project. You may use a template in Word to format it.
2. Your memo should be single spaced. (Skip a space between paragraphs.)
3. Minimum length of the memo should be 2 pages of content.
4. Use 1 inch margins.
5. Maximum font size is 12 point.
6. You may use tables to report your financial ratios but they must be broken out in the appropriate section.

Bower Enterprises Comparative Income Statement For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 665,600 630,000 451,500 178,500 Sales Cost of Goods Sold Gross Profit 468,000 197,600 Expenses Operating Expenses 72,800 31,200 93,600 79,800 27,300 71,400 Seling & Administrative Expenses Operating Income Interest Expense Income Tax Expense 7,280 16,640 8,400 14,700 69,680 $48,300 Net Income Bower Enterprises Comparative Balance Sheet For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 Assets Current Assets 43,120 52,500 75,600 25,200 153,300 Cash Accounts Receivable Inventory Total Current Assets 74,480 19,600 137,200 Long-Term Assets Equipment Accumulated Depreciation Total Long Term Assets 176,400 189,000 52,500 136,500 39 137,200 Total Assets $274,400 $289,800 Liabilities and Shareholders E Current Liabilities 35,280 46,200 11,760 47,040 Accounts Payable Salaries Payable Total Current Liabilities 8,400 54,600 Long-Term Liabilities Notes Payable Total Long-Term Liabilities 88,200 88,200 73,500 73,500 Total Liabilities 135,240 128,100 Shareholders' Equity 39,200 29,400 70,560 Common Stock, $1 par Paid In Capital Retained Earnings 42,000 31,500 88,200 Total Shareholders' Equity 139,160 161,700 $274,400 $289,800 Total Liabilities and Shareholders' Equity