Connor Ltd. is a large private company owned by the Connor family. It operates a manufacturing business in northern Ontario. It has applied to the ICB bank for a new loan of $100 million to expand its manufacturing facilities. 

 

You are a financial analyst with ICB. You have just been given an assignment to analyze Connor’s Year 7 financial statements and to identify any concerns about Connor’s performance and financial condition. 

 

The following are financial statements for Connor Ltd. for Year 7:

 

BALANCE SHEETS (In 000s)
	Year 7			Year 6
Asset
Cash	$	13,000		$	34,000
Accounts receivable		209,000			198,000
Inventory		326,000			316,000
Property, plant and equipment		308,000			266,000
	$	856,000		$	814,000
Liabilities and Shareholders’ Equity
Accounts payable	$	206,000		$	212,600
Other accrued liabilities		68,000			56,400
Bonds payable		196,000			196,000
Common shares		174,000			186,000
Retained earnings		212,000			171,000
	$	856,000		$	822,000

 

INCOME STATEMENT (In 000s)
	Year 7				Year 6
Sales	$	1,940,000			$	1,890,000
Cost of goods sold		(1,366,000	)			(1,286,000	)
Gross margin		574,000				604,000
Depreciation expense		(46,000	)			(40,000	)
Other expenses		(412,000	)			(431,000	)
Income tax expense		(62,000	)			(69,000	)
Net income	$	54,000			$	64,000

 

Additional Information

• Connor uses the straight-line method when depreciating its property, plant, and equipment.

• Interest expense was $10,000 for Year 6 and Year 7.

 

Required:

(a) Convert Connor’s financial statements for both Year 7 and Year 6 into common-sized financial statements using: (Enter your answers in thousands. For E.g., 1,000,000 should be entered as 1,000. Input all amounts as positive values. Omit $ sign in your response. Round the final answer to the nearest whole dollar.)

(i) Vertical analysis

 

BALANCE SHEETS
	Year 7	Year 6
Asset
Cash	$		$
Accounts receivable
Inventory
Property, plant and equipment
	$		$
Liabilities and Shareholders’ Equity
Accounts payable	$		$
Other accrued liabilities
Bonds payable
Common shares
Retained earnings
	$		$

 

INCOME STATEMENT
	Year 7	Year 6
Sales	$		$
Cost of goods sold
Gross margin
Depreciation expense
Other expenses
Income tax expense
Net income	$		$

 

(ii) Horizontal analysis

 

BALANCE SHEETS
	Year 7	Year 6
Asset
Cash	$		$
Accounts receivable
Inventory
Property, plant and equipment
	$		$
Liabilities and Shareholders’ Equity
Accounts payable	$		$
Other accrued liabilities
Bonds payable
Common shares
Retained earnings
	$		$

 

INCOME STATEMENT
	Year 7	Year 6
Sales	$		$
Cost of goods sold
Gross margin
Depreciation expense
Other expenses
Income tax expense
Net income	$		$

 

(b) Identify any financial statement items that seem to be peculiar relative to expectations. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

 

 

• Income tax expenseunanswered
• Salesunanswered
• Cost of goodsunanswered
• Bonds payableunanswered
• Accounts payableunanswered
• Accrued liabilitiesunanswered
• Retained earningsunanswered
• Gross marginunanswered
• Accounts receivableunanswered
• Equipmentunanswered
• Depreciation expenseunanswered
• Inventoryunanswered
• Income tax expenseunanswered

 

 

(c) Calculate the current ratio, debt-to-equity ratio, return on assets, and return on equity for both Year 7 and Year 6. (Round the final answers for all the ratios to two decimal places. Omit $ sign in your response.)

 

	Year 7			Year 6
	$			$
Current ratio		=			=
	$			$
	$			$
Debt to equity		=			=
	$			$
	$			$
Return on assets		=	%		=	%
	$			$
	$			$
Return on equity		=	%		=	%
	$			$

 

(d) Determine whether Connor’s liquidity, solvency, and profitability have improved or deteriorated from Year 6 to Year 7.

 

Liquidity	(Click to select)  Deteriorated  Improved  Remains the same
Solvency	(Click to select)  Deteriorated  Improved  Remains the same
Profitability	(Click to select)  Deteriorated  Improved  Remains the same