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	$	17,000		$	42,000
Accounts receivable		221,000			206,000
Inventory		334,000			324,000
Property, plant and equipment		312,000			274,000
	$	884,000		$	846,000
Liabilities and Shareholders Equity
Accounts payable	$	214,000		$	221,400
Other accrued liabilities		72,000			59,600
Bonds payable		204,000			204,000
Common shares		176,000			182,000
Retained earnings		218,000			179,000
	$	884,000		$	846,000

INCOME STATEMENT (In 000s)
	Year 7				Year 6
Sales	$	2,020,000			$	1,970,000
Cost of goods sold		(1,374,000	)			(1,294,000	)
Gross margin		646,000				676,000
Depreciation expense		(50,000	)			(44,000	)
Other expenses		(420,000	)			(439,000	)
Income tax expense		(70,400	)			(81,060	)
Net income	$	105,600			$	111,940

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		=	%		=	%
	$			$