ANSWER THE BELOW QUESTION 1

Issue Analysis Outline

FRAMEWORK:

1. Users and Objectives:

• Identify the Users of the Financial Statements (be sure the users are RELEVANT to the case study)
• Identify the Users objectives

1. Users and Objectives:

User #1:

Objectives:

User #2:

Objectives:

Sterling Systems Page 1 Question 1: Sterling Systems Ltd. Sterling systems is a company that installs water sprinkler systems and security in office buildings throughout Vancouver Island and the Lower Mainland. The owner, Troy Sterling, has been in business for over 12 years and has a good reputation on the island for quality work. Troy is excited that sales for his company have increased in the last two years due to the company's more aggressive selling approach. He has provided three years financial statements for review. The following industry average ratio data is provided to assist with an analysis of the financial condition of Sterling Systems Ltd. a. Current Ratio 1.60 (1.60:1) b. Profit Margin 5.8% c. Quick Ratio 1.10 (1.1:1) d. Return on Assets 8.1% e. Receivables Turnover 6.3x f. Debt/Total assets 0.60 g. Total asset turnover 1.7x h. Return on Equity 20.3% i. Times Interest Earned 4.3x j. Average collection period 58.3 days k. Inventory turnover 4.3x I. Capital asset turnover 8.OX A copy of the Company's Financial Statements are provided on the next page: Sterling Systems Page 2 Sterling Systems Ltd. Balance Sheet As at Dec 31 2020 2018 Cash Martketable Securities Accounts Receivable inventory Prepaid Expenses Total Current Assets Capital Assets (net) Goodwill Total Assets 14,900 7,000 410,800 256,600 5,200 694,500 162,000 25,400 881,900 $ 2019 Assets 24,700 7,000 361,800 330,000 800 724,300 172,900 28,200 925,400 $ 11,500 7,000 297,300 289,900 5,500 611,200 184,300 30,600 826,100 Accounts Payable S/T Loan (bank) Accrued Expenses Total Current Liabilities Long term debt Total Liabilities Common Stock Retained Eamings Total SH Equity Liabilities and Shareholder's Equity 145,900 196,700 209,700 254,000 202,000 169,000 3,700 23,700 14,400 403,600 422,400 393,100 225 800 181,600 141,000 629,400 604,000 534,100 14,000 14,000 14,000 238,500 307 400 278,000 881,900 $ 925,400 $ 826,100 $ Sterling Systems Ltd. Income Statement For the year ended Dec 31 Sales (credit) Cost of Sales Gross Profit Selling, General Admin Amortization Operating Profit Interest Expense Eamings before taxes Taxes Net Income 2020 1,605,100 1,258.900 346,200 265,650 14,000 66,550 65,100 1,450 350 1,100 $ 2019 1,841,300 1,397 400 443,900 256,850 14,400 172,650 50,550 122,100 27,100 95,000 $ 2018 1,542,700 1,174,800 367,900 294,200 16,000 57,700 50,100 7,600 2,200 5,400 $ Sterling Systems Page 1 Question 1: Sterling Systems Ltd. Sterling systems is a company that installs water sprinkler systems and security in office buildings throughout Vancouver Island and the Lower Mainland. The owner, Troy Sterling, has been in business for over 12 years and has a good reputation on the island for quality work. Troy is excited that sales for his company have increased in the last two years due to the company's more aggressive selling approach. He has provided three years financial statements for review. The following industry average ratio data is provided to assist with an analysis of the financial condition of Sterling Systems Ltd. a. Current Ratio 1.60 (1.60:1) b. Profit Margin 5.8% c. Quick Ratio 1.10 (1.1:1) d. Return on Assets 8.1% e. Receivables Turnover 6.3x f. Debt/Total assets 0.60 g. Total asset turnover 1.7x h. Return on Equity 20.3% i. Times Interest Earned 4.3x j. Average collection period 58.3 days k. Inventory turnover 4.3x I. Capital asset turnover 8.OX A copy of the Company's Financial Statements are provided on the next page: Sterling Systems Page 2 Sterling Systems Ltd. Balance Sheet As at Dec 31 2020 2018 Cash Martketable Securities Accounts Receivable inventory Prepaid Expenses Total Current Assets Capital Assets (net) Goodwill Total Assets 14,900 7,000 410,800 256,600 5,200 694,500 162,000 25,400 881,900 $ 2019 Assets 24,700 7,000 361,800 330,000 800 724,300 172,900 28,200 925,400 $ 11,500 7,000 297,300 289,900 5,500 611,200 184,300 30,600 826,100 Accounts Payable S/T Loan (bank) Accrued Expenses Total Current Liabilities Long term debt Total Liabilities Common Stock Retained Eamings Total SH Equity Liabilities and Shareholder's Equity 145,900 196,700 209,700 254,000 202,000 169,000 3,700 23,700 14,400 403,600 422,400 393,100 225 800 181,600 141,000 629,400 604,000 534,100 14,000 14,000 14,000 238,500 307 400 278,000 881,900 $ 925,400 $ 826,100 $ Sterling Systems Ltd. Income Statement For the year ended Dec 31 Sales (credit) Cost of Sales Gross Profit Selling, General Admin Amortization Operating Profit Interest Expense Eamings before taxes Taxes Net Income 2020 1,605,100 1,258.900 346,200 265,650 14,000 66,550 65,100 1,450 350 1,100 $ 2019 1,841,300 1,397 400 443,900 256,850 14,400 172,650 50,550 122,100 27,100 95,000 $ 2018 1,542,700 1,174,800 367,900 294,200 16,000 57,700 50,100 7,600 2,200 5,400 $