Chapter 7 Financial Statement Analysis Togo Co. Statement of Retained Earnings for the Year Net income for the year Dividends $ 900,000 300,000 $ 600,000 2.400.000 $ 3.000.000 Add: Retained earnings brought forward Retained earnings carried forward Required Use the information in the financial statements to answer the following questions: (a) Calculate the following ratios: (i) return on sales ratio (as a %) (ii) return on assets ratio (as a %) (iii) return on equity ratio (as a %) (b) Based on these ratios, comment on the profitability of the company (c) Calculate the following ratios: (i) the current ratio (ii) the quick ratio (d) Based on these ratios, comment on the liquidity of the company. (e) Calculate the following ratios: (i) the gross profit to sales ratio (as a %) (ii) the ratio of operating expenses to sales (as a %) (iii) the operating income to sales ratio (as a %) (iv) the net income to sales ratio (as a %) (v) the interest cover ratio (vi) the dividend cover ratio (1) Based on these ratios, comment on the profitability of the company. (8) Calculate the following: (1) the receivables turnover ratio (ii) the receivables collection period (iii) the inventory turnover ratio (iv) the inventory holding period (v) the total asset turnover ratio (h) Based on these ratios, comment on the efficiency of the com- pany (1) Assume Togo Co.'s share price is $100 per share, and there are 100,000 shares in issue. Calculate the following: (i) the dividend payout ratio (ii) the earnings per share (iii) the price to earnings ratio 6) Based on these ratios, comment on the desirability of these shares as an investment 262 Problems 1. Togo Co. has the following financial statements. Togo Co. Income Statement for the Year Sales revenue Less: Cost of goods sold Gross profit Less: Operating expenses $3,700,000 Depreciation 500.000 Operating income Less: Interest expense $ 100,000 Income taxes 800.000 Net income $18,000,000 12,000,000 $ 6,000,000 7 4.200.000 $ 1.800,000 900,000 $ 900,000 28 Togo Co. Balance Sheet at the End of the Year Current assets: Cash $1,000,000 Accounts receivable 3,600,000 Inventory 2,400,000 $ 7,000,000 Long-term assets: At cost $5,000,000 Accumulated depreciation 3.000.000 2,000,000 Total assets S_9,000,000 Liabilities & Shareholders' Equity Current liabilities: Trade accounts payable $2,250,000 Other current liabilities 750,000 $3,000,000 Long-term liabilities: Mortgage 1,500,000 Total liabilities $ 4,500,000 Shareholders' Equity: Common shares $1,500,000 Retained earnings 3.000.000 4,500,000 Total liabilities & Shareholders' Equity $ 9,000,000 261 Chapter 7 Financial Statement Analysis Togo Co. Statement of Retained Earnings for the Year Net income for the year Dividends $ 900,000 300,000 $ 600,000 2.400.000 $ 3.000.000 Add: Retained earnings brought forward Retained earnings carried forward Required Use the information in the financial statements to answer the following questions: (a) Calculate the following ratios: (i) return on sales ratio (as a %) (ii) return on assets ratio (as a %) (iii) return on equity ratio (as a %) (b) Based on these ratios, comment on the profitability of the company (c) Calculate the following ratios: (i) the current ratio (ii) the quick ratio (d) Based on these ratios, comment on the liquidity of the company. (e) Calculate the following ratios: (i) the gross profit to sales ratio (as a %) (ii) the ratio of operating expenses to sales (as a %) (iii) the operating income to sales ratio (as a %) (iv) the net income to sales ratio (as a %) (v) the interest cover ratio (vi) the dividend cover ratio (1) Based on these ratios, comment on the profitability of the company. (8) Calculate the following: (1) the receivables turnover ratio (ii) the receivables collection period (iii) the inventory turnover ratio (iv) the inventory holding period (v) the total asset turnover ratio (h) Based on these ratios, comment on the efficiency of the com- pany (1) Assume Togo Co.'s share price is $100 per share, and there are 100,000 shares in issue. Calculate the following: (i) the dividend payout ratio (ii) the earnings per share (iii) the price to earnings ratio 6) Based on these ratios, comment on the desirability of these shares as an investment 262 Problems 1. Togo Co. has the following financial statements. Togo Co. Income Statement for the Year Sales revenue Less: Cost of goods sold Gross profit Less: Operating expenses $3,700,000 Depreciation 500.000 Operating income Less: Interest expense $ 100,000 Income taxes 800.000 Net income $18,000,000 12,000,000 $ 6,000,000 7 4.200.000 $ 1.800,000 900,000 $ 900,000 28 Togo Co. Balance Sheet at the End of the Year Current assets: Cash $1,000,000 Accounts receivable 3,600,000 Inventory 2,400,000 $ 7,000,000 Long-term assets: At cost $5,000,000 Accumulated depreciation 3.000.000 2,000,000 Total assets S_9,000,000 Liabilities & Shareholders' Equity Current liabilities: Trade accounts payable $2,250,000 Other current liabilities 750,000 $3,000,000 Long-term liabilities: Mortgage 1,500,000 Total liabilities $ 4,500,000 Shareholders' Equity: Common shares $1,500,000 Retained earnings 3.000.000 4,500,000 Total liabilities & Shareholders' Equity $ 9,000,000 261