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	$	21,000		$	50,000
Accounts receivable		233,000			214,000
Inventory		342,000			332,000
Property, plant and equipment		316,000			282,000
	$	912,000		$	878,000
Liabilities and Shareholders Equity
Accounts payable	$	222,000		$	230,200
Other accrued liabilities		76,000			62,800
Bonds payable		212,000			212,000
Common shares		178,000			186,000
Retained earnings		224,000			187,000
	$	912,000		$	878,000

INCOME STATEMENT (In 000s)
	Year 7				Year 6
Sales	$	2,060,000			$	2,010,000
Cost of goods sold		(1,382,000	)			(1,302,000	)
Gross margin		678,000				708,000
Depreciation expense		(54,000	)			(48,000	)
Other expenses		(428,000	)			(447,000	)
Income tax expense		(78,400	)			(89,460	)
Net income	$	117,600			$	123,540

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

• Cash
• Accounts receivable
• Equipment
• Accounts payable
• Accrued liabilities
• Retained earnings
• Sales
• Cost of goods
• Depreciation expense
• Income tax expense

(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		=	%		=	%
	$			$

(d) Determine whether Connors 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