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 Connors Year 7 financial statements and to identify any concerns about Connors 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	$	18,000		$	44,000
Accounts receivable		224,000			208,000
Inventory		336,000			326,000
Property, plant and equipment		313,000			276,000
	$	891,000		$	854,000
Liabilities and Shareholders Equity
Accounts payable	$	216,000		$	223,600
Other accrued liabilities		73,000			60,400
Bonds payable		206,000			206,000
Common shares		176,500			183,000
Retained earnings		219,500			181,000
	$	891,000		$	854,000

INCOME STATEMENT (In 000s)
	Year 7				Year 6
Sales	$	2,030,000			$	1,980,000
Cost of goods sold		(1,376,000	)			(1,296,000	)
Gross margin		654,000				684,000
Depreciation expense		(51,000	)			(45,000	)
Other expenses		(422,000	)			(441,000	)
Income tax expense		(72,400	)			(83,160	)
Net income	$	108,600			$	114,840

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 Connors financial statements for both Year 7 and Year 6 into common-sized financial statements using: (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 five financial statement items that seem to be peculiar relative to expectations. (Single click the box with the question mark to produce a check mark for a peculiar item and double click the box with the question mark to empty the box for a non-peculiar item.)

check all that apply

• Cashunanswered
• Accounts receivableunanswered
• Equipmentunanswered
• Accounts payableunanswered
• Accrued liabilitiesunanswered
• Retained earningsunanswered
• Salesunanswered
• Cost of goodsunanswered
• Depreciation expenseunanswered
• 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. (Enter your answers in thousands. For E.g., 1,000,000 should be entered as 1,000. 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		=	%		=	%
	$			$