Question
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
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 | = | % | = | % | ||
$ | $ | |||||
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