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ACT 311 - Financial Statement Analysis Project Financial Analysis of Glenwood Heating, Inc. & Eads Heaters, Inc. Objectives: There are three objectives of this project. First, it will provide you with additional exposure to financial statements. Second, it requires a comprehensive financial analysis of two home heating companies, allowing you to become more comfortable with the calculation and interpretation of financial ratios. Lastly, it will help you understand the financial statement effects of management's estimates and choices in applying GAAP. Requirements: 1. Part A of the case is provided for you (see last page of case). As practice and review for the comprehensive final, you may find it useful to prepare the journal entries for part A to see if you can come up with the numbers in the given trial balance. 2. You must work with one other person on this project. It is recommended that you complete the requirements of Part B individually and then compare your work with your partner. a. Omit number 4 in the case as we do not cover leases in this class. b. You do not need to complete the Statement of Cash Flows. 3. Complete the requirements of Part C. Many of the ratios have been discussed throughout the semester, although not all of them. In addition to the case, you can find definitions and discussions of the ratios in Ch. 3 part C and Ch. 5 part B. 4. Your project involves two components. a. An excel file clearly showing your work for parts B and C. You may find it useful to use the excel file from the accounting cycle project at the start of the semester as a template for this project and then add a tab for the financial statement ratios. b. A word document containing a brief analysis required in part C that compares and contrasts the operations of the two companies. This part must be typed, professional looking, and easy to follow. You should show supporting calculations where appropriate as opposed to just referencing the excel file. Due dates: The project is due on December 9th and is to be uploaded to Canvas by 11:59pm. ISSUES IN ACCOUNTING EDUCATION Vol. 26, No. 4 2011 pp. 797-806 American Accounting Association DOI: 10.2308/iace-50053 Home Heaters: A Holistic View of the Financial Statements M. Cathy Claiborne and Kirkland A. Wilcox ABSTRACT: In this case, two start-up companies in the same industry have identical economic transactions. Although both companies follow generally accepted accounting principles (GAAP), each manager makes different choices and estimates when applying GAAP. By preparing the financial statements, calculating ratios, and comparing and contrasting the two companies, students see how choices and estimates made by management affect the financial statements. They also see the challenge faced by users of financial information when trying to interpret the financial statements and compare companies. Students really experience an ''aha!'' moment while analyzing this case. The case refutes their commonly held assumptions that accounting always has a right answer and that financial statements represent the truth. Keywords: accounting alternatives; accounting choices; accounting estimates; economic transactions; nancial statements; nancial ratios; nancial statement analysis. CASE A t the beginning of the year 20X1, two companies began operations to sell home heating units. Eads Heater, Inc. is located in Eads, Colorado, and Glenwood Heating, Inc. is in Glenwood Springs, Colorado. The companies operate under similar economic conditions and have identical operations during the year. However, each manager makes different accounting choices and estimates when applying generally accepted accounting principles (GAAP) in preparing the company's financial statements. PART A First-Year Transactions Both companies have completed identical transactions during the first year of operations, 20X1. The transactions for each company are listed: 1. On January 2, each company issued 3,200 shares of capital stock for $160,000 and commenced operations. M. Cathy Claiborne is an Associate Professor and Kirkland A. Wilcox is an Associate Professor Emeritus, both at the University of Colorado. Published Online: November 2011 797 Claiborne and Wilcox 798 2. On January 2, each company borrowed $400,000 on a 20-year, 7 percent note payable. Interest plus $20,000 principal is due September 30 each year, beginning 20X1. 3. On January 3, each company purchased land and a building for $420,000. Both managers assigned $70,000 to the land and $350,000 to the building. Each company paid cash for the land and building. 4. On January 5, each company purchased delivery equipment at a cost of $80,000. Both purchases were made with cash. 5. Each company sells one model of home heating unit, and made the following credit purchases during the year. (You may record all the purchases in one transaction.) Date January 10 March 14 June 1 September 15 October 30 Number Of Units Cost Per Unit 40 60 20 62 28 $1,000 1,100 1,150 1,200 1,300 6. Each company sold 160 units for $398,500 during the year. All sales were on credit; 90 days, same as cash. You will just record the sales piece of this transaction for now. Management has not yet determined how inventory and cost of goods sold will be valued. Therefore, this year, management will use the periodic inventory system and record cost of goods sold at the end of the year (in Part B). 7. $299,100 was collected during the year on the sales described in Transaction 6 above. 8. $213,360 was paid on the purchases made in Transaction 5 above. 9. On September 30, the first $20,000 principal payment plus nine months' interest was made on the note payable described in Transaction 2. 10. A total of $34,200 was paid for a variety of expenses, such as advertising, supplies, insurance, and wages. These expenses are recorded in an account called ''other operating expenses.'' 11. Dividends of $7.25 per share were paid to the stockholders on December 1. 12. Management made an adjusting entry to accrue three months' interest on the note payable in Transactions 2 and 9 above. Requirement Record these 12 transactions for Eads's and Glenwood's first year of operations before going to Part B. Exhibit 1 contains a basic chart of accounts. Note: you will not use all accounts in this part of the case. PART B It is now December 31, and each manager must make several decisions. 1. Each manager must estimate the amount of accounts receivable that will probably not be collected. They make the following estimates: Glenwood Heating, Inc.: The manager estimates that 1 percent of ending accounts receivable will be uncollectible. Eads Heaters, Inc.: The manager estimates that 5 percent of ending accounts receivable will be uncollectible. Issues in Accounting Education Volume 26, No. 4, 2011 Home Heaters: A Holistic View of the Financial Statements 799 EXHIBIT 1 Home Heaters Chart of Accounts Asset Accounts Cash Accounts receivable Allowance for bad debts Inventory Land Building Accumulated depreciation, building Equipment Accumulated depreciation, equipment Leased equipment Accumulated depreciation, leased equipment Liability Accounts Accounts payable Interest payable Note payable Lease payable Equity Accounts Common stock Retained earnings Dividends Sales Cost of goods sold Bad debt expense Depreciation expense Interest expense Other operating expenses Rent expense Provision for income taxes 2. Neither manager recorded cost of goods sold at the time of sale. They have taken a physical inventory, and now must determine the values of cost of goods sold and ending inventory. They decide to use the following inventory methods: Glenwood Heating, Inc.: FIFO Eads Heaters, Inc.: LIFO 3. Both managers determine that the expected lives and salvage values of the building and equipment owned by each company are as follows: Building Delivery Equipment Expected Life Salvage Value 30 years 8 years $50,000 8,000 It is now time to record depreciation expense for the year. The managers decide to use the following depreciation methods: Issues in Accounting Education Volume 26, No. 4, 2011 Claiborne and Wilcox 800 Glenwood Heating, Inc. Building Delivery equipment Eads Heaters, Inc. Building Delivery equipment Straight-line Straight-line Straight-line Double-declining balance (DDB) 4. On January 5, 20X1, each company negotiated the use of a large piece of operating equipment. Both managers agreed to a $16,000 payment on December 31, 20X1, at which time they would decide the terms for using the equipment in the future. On December 31, when making the payment, the managers negotiated the following terms: Glenwood Heating, Inc. Although the owner of the equipment agreed to let Glenwood rent the equipment for $16,000 again next year, he would not guarantee that price past next year. Management decided to rent the equipment on a yearly basis and signed an agreement to rent it next year for $16,000. Rental payment December 31, 20X1 Rental payment due December 31, 20X2 $16,000 $16,000 Eads Heaters, Inc. The owner of the equipment and Eads management negotiated a capital lease agreement. The present value of the lease agreement is $92,000. The contract carried the following terms: Period of time Interest rate Total payment (including principal and interest) due December 31 of each year 8 years 8% $16,000 The first two payments of $16,000 are to be allocated to interest and principal as follows (amounts are rounded to the nearest $10): December 31, 20X1 December 31, 20X2 Interest Principal $7,360 6,670 $8,640 9,330 The manager decides to compute depreciation using straight-line depreciation with a life equal to the eight-year contract term and no salvage value. 5. Both managers are concerned about income taxes. They both realize that companies generally keep a second set of books for tax reporting purposes, but are not sure about the differences between income reported according to GAAP and income as defined by the tax authorities. They also realize that they need to make an estimated tax payment in order to avoid late payment penalties. Both managers talk to their CPAs and are told to pay 25 percent of their GAAP income to the IRS to help avoid late penalties. Thus, each manager Issues in Accounting Education Volume 26, No. 4, 2011 Home Heaters: A Holistic View of the Financial Statements 801 estimated a provision for income taxes of 25 percent of their GAAP income and made a payment for that amount to the IRS. Requirement Record the last five transactions at the end of the year, and prepare the following financial statements for each company for the current year: \u0002 \u0002 \u0002 \u0002 Multistep Income Statement (List all expense accounts separately on the income statement.) Statement of Changes in Stockholders' Equity Classified Balance Sheet Statement of Cash Flows PART C The managers plan to meet at the end of the year and compare the results of their companies' operations. Requirements \u0002 \u0002 Analyze the financial statements of the two companies. Your analysis should include the key financial ratios listed in Exhibit 2. Because this was the first year of operations, for ratios that require average account balances (e.g., average total assets), use the year-end balances. The formulas for the ratios can be found in Exhibit 3. Compare and contrast the operations of the two companies. Hint: Your comparison should address the financial position and profitability of each company. EXHIBIT 2 Home Heaters Financial Ratios Liquidity Ratios Current ratio Acid-test ratio Accounts receivable turnover Days to collect receivables Inventory turnover Days to sell inventory Operating cycle Profitability Ratios Gross profit margin Profit margin Return on assets (ROA) Return on owners' equity (ROE) Earnings per share (EPS) Long-Term Solvency Ratios Debt ratio Times interest earned Issues in Accounting Education Volume 26, No. 4, 2011 Claiborne and Wilcox 802 EXHIBIT 3 Home Heaters Formulas for Financial Ratios Panel 1: Liquidity or Short-Term, Debt-Paying-Ability Ratios Ratio Description Current ratio Indicator of ability of current assets to meet current liabilities Acid-test (quick) ratio Indicates immediate short-term liquidity Accounts receivable turnover Indicates liquidity of accounts receivable during the reporting period Indicates the average number of days taken to collect accounts receivable Indicates liquidity of inventory during the reporting period Indicates the average number of days it takes to sell the inventory Indicates the average number of days between the purchase of inventory and the collection of cash from the sale of inventory Days to collect receivables Inventory turnover Days to sell inventory Operating cycle Formula Current assets Current liabilities Cash short \u0003 term investments net receivables Current liabilities Net credit sales Average net accounts receivable 365 days Accounts receivable turnover Cost of goods sold Average inventory 365 days Inventory turnover Days to sell inventory days to collect receivables Panel 2: Profitability Ratios Ratio Profit Margins: Gross profit margin Profit margin Return on assets (ROA) Return on owners' equity (ROE) Earnings per share Description Formula Measures profit generated from sales after considering cost of goods sold Measures overall profitability as a percentage of sales dollars Measures the overall efficiency in managing the assets and generating profits Measures the return on stockholder's investment after interest is paid to creditors Measures the return to common stockholders for each share owned Sales \u0003 cost of goods sold Sales Net income Sales Net income Average total assets Debt ratio Measures the portion of investment that is from debt; indicates leverage and borrowing power Times interest earned Indicates the ability of the company to meet its interest requirements from earnings Net income \u0003 preferred dividends Average common stockholders' equity Net income \u0003 preferred dividends Average number of common shares outstanding for the year Total liabilities Total assets Income from operations Interest expense Issues in Accounting Education Volume 26, No. 4, 2011 Home Heaters Trial Balance - Part A Debits Cash $ Accounts receivable Credits 47,340 99,400 Inventory 239,800 Land 70,000 Building 350,000 Equipment 80,000 Accounts payable $ Note payable 26,440 380,000 Interest payable 6,650 Common stock 160,000 Dividend 23,200 Sales 398,500 Other operating expenses 34,200 Interest expense 27,650 Total $ 971,590 $ 971,590 5 PART A Transaction 20X1 1 2 3 4 5 6 7 8 9 10 11 12 Account title and explanation Debit Cash 160,000 Common stock (Issued 3,200 common shares for cash) Cash Notes payable (Borrowed a 20 year, 7% notes payable) Land Building Cash (Land and buildings purchased by cash) Equipment Cash (Delivery equipment purchased by cash) Inventory Accounts payable (Units purchased on account) Accounts receivables Sales (Units sold on account) Cash Accounts receivable (Record of cash received from receivables) Accounts payable Cash (Record of cash paid for purchases made on account) Notes payable Interest expense (7% x 400,000 x 9/12) Cash (Being a record of principal repayment and interest due paid) Other operating expenses Cash (General and variety of expenses paid in cash) Dividends (7.25*3,200) Cash (Cash dividends were paid to common shares) Interest expense (7%*400,000*3/12) Interest payable (Being a record of 3-month interest expense accrued on 7%, 20 year notes payable) Credit 160,000 400,000 70,000 350,000 400,000 420,000 80,000 80,000 239,800 239,800 398,500 398,500 299,100 299,100 213,360 213,360 20,000 21,000 34,200 41,000 34,200 23,200 23,200 7,000 7,000 PART B Glenwood Heating Inc. Transaction 20X1 1 2 3 Account title and explanation Debit Bad debts expense (1% x 99,400) Allowance for bad debts Cost of goods sold Inventory Depreciation expense Accumulated depreciation, building Accumulated depreciation, equipment 994 Credit 994 177,000 177,000 19,000 10,000 9,000 5 Eads Heaters Inc. Transaction 20X1 1 2 3 Account title and explanation Debit Bad debts expense (5% x 99,400) Allowance for bad debts Cost of goods sold Inventory Depreciation expense Accumulated depreciation, building Accumulated depreciation, equipment 4,970 4,970 188,800 188,800 30,000 5 Workings: 1. Valuation of cost of Goods sold Units sold = 160 Glenwood Heating Inc. (FIFO) Cost = (40 x 1,000) + (60 x 1,100) + (20 x 1,150) + (40 x 1,200) = $177,000 Eads Heaters Inc. (LIFO) (28 x 1,300) + (62 x 1,200) + (20 x 1,150) + (50 x 1,100) = $188,800 2. Depreciation Glenwood Heating, Inc. Credit 10,000 20,000 Building = (350,000 - 50,000)/30 = $10,000 per year Delivery equipment = (80,000 - 8,000)/8 = $9,000 per year Eads Heaters, Inc. Building = (350,000 - 50,000)/30 = $10,000 per year Delivery equipment = (100/8)*2 x 80,000 = $20,000 Statement of Income For the year ended December 31, 20X1 Glenwood Heating Inc. Eads Heaters Inc. Sales 398,500 398,500 Cost of sales (177,000) (188,800) Gross profit 221,500 209,700 Interest expense (28,000) (28,000) Depreciation expense (19,000) (30,000) Bad debts expense (994) (994) Other operating expense (34,200) (34,200) Net Income 139,306 116,506 Expenses: Statement of Changes in Stockholder's Equity For the year ended December 31, 20X1 Glenwood Heating Inc. Eads Heaters Inc. Common stock 160,000 160,000 Net Income 139,306 116,506 Dividends (23,200) (23,200) Ending balance 276,106 253,306 Balance sheet As at December 31, 20X1 Glenwood Heating Inc. Eads Heaters Inc. Assets Current Assets Cash 47,340 47,340 Accounts receivable 99,400 99,400 Allowance for bad debts (994) (4,970) Inventory 62,800 51,000 208,546 192,770 Land 70,000 70,000 Building 350,000 350,000 Accumulated depreciation, building (10,000) (10,000) Equipment 80,000 80,000 Accumulated depreciation, equipment (9,000) (20,000) 689,546 662,770 276,106 253,306 26,440 26,440 Total current assets Non-current assets Total Assets Shareholder's Equity and Liabilities Shareholder's Equity Owner's equity Liabilities Current liabilities Accounts payable Interest payable Total current liabilities 7,000 7,000 33,440 33,440 380,000 380,000 413,440 413,440 689,546 662,770 Non-current liabilities Notes payable Total liabilities Total shareholder's equity and liabilities PART C Liquidity ratios Glenwood Heaters Eads Heaters Current ratio 208,546/33,440 = 6.24 192,770/33440 = 5.77 Acid test ratio (208,546 - 62800)/33400 = 4.36 (192770 - 51000)/33400 = 4.24 Accounts receivable turnover 398500/ (99400 - 994) = 4.05 398500/ (99400 - 4970) = 4.22 Days to collect receivables 365/ 4.05 = 90 days 365/4.22 = 86 days Inventory turnover 177000/62800 = 2.82 188800/51000 = 3.7 Days to sell inventory 365/2.82 = 129 days 365/3.7 = 99 days Operating cycle 90 + 129 = 219 days 86 + 99 = 185 days Profitability ratios Gross profit margin 221500/398500 = 0.56 209700/398500 = 0.53 Profit margin 139306/398500 = 0.35 116506/398500 =0.29 Return on Assets 139306/689546 = 0.20 116506/662770 = 0.18 Return on Owner's equity 139306/276106 = 0.50 116506/253306 = 0.46 Earnings per share 139306/3200 = $43.53 116506/3200 = $36.41 Debt ratio 413440/689546= 0.60 Times interest earned 139306/28000 = 4.98 413440/662770 = 0.62 116506/28000 = 4.16 Financial analysis of the company Glenwood Heaters Inc. is more liquid than Eads Heaters Inc. This is because the current ratio of Glenwood is far higher than the current ratio of Eads Heaters Inc. This can also be demonstrated by the high acid test ratio of Glenwood Heaters Inc. This shows that Glenwood Heaters are able to meet the maturing short term obligations more ease with no financial difficulties compared to Eads Heaters Inc. The operational efficiency of Eads Heaters Inc. is higher than that of Glenwood Inc. This can be shown by the lower days to sell inventory and the less days of collecting receivables and less days in the operating cycle that Eads Heaters is enjoying over the Glenwood Inc. This means that Eads Heaters is able to reduce costs of operations more efficiently and thus boosting the profitability of the company. The profitability of Glenwood Heaters Inc. is however higher compared to that of Eads Inc. This can be shown by the high gross profit margin, high profit margin, high return on assets and the high return on owner's equity that Glenwood Inc. enjoys over Eads Inc. This ensures that the investors of the company are well rewarded for their investment in the company. This high shareholder's value maximization can be shown by the high earnings per share as demonstrated from the financial ratios. Finally, the financial risk of Eads Heaters is higher than that of Glenwood Incorporation. This is because of the lower debt ratio. This means that Glenwood can be able to repay its loan and the accruing interests on the loans more easily than Eads Inc. The lower financial risk can also be demonstrated by Glenwood Incorporation by considering the times interest earned. A higher interest earned means that the company can be able to repay the accruing interest expenses more easily. PART A Transaction 20X1 1 2 3 4 5 6 7 8 9 10 11 12 Account title and explanation Debit Cash 160,000 Common stock (Issued 3,200 common shares for cash) Cash Notes payable (Borrowed a 20 year, 7% notes payable) Land Building Cash (Land and buildings purchased by cash) Equipment Cash (Delivery equipment purchased by cash) Inventory Accounts payable (Units purchased on account) Accounts receivables Sales (Units sold on account) Cash Accounts receivable (Record of cash received from receivables) Accounts payable Cash (Record of cash paid for purchases made on account) Notes payable Interest expense (7% x 400,000 x 9/12) Cash (Being a record of principal repayment and interest due paid) Other operating expenses Cash (General and variety of expenses paid in cash) Dividends (7.25*3,200) Cash (Cash dividends were paid to common shares) Interest expense (7%*400,000*3/12) Interest payable (Being a record of 3-month interest expense accrued on 7%, 20 year notes payable) Credit 160,000 400,000 70,000 350,000 400,000 420,000 80,000 80,000 239,800 239,800 398,500 398,500 299,100 299,100 213,360 213,360 20,000 21,000 34,200 41,000 34,200 23,200 23,200 7,000 7,000 PART B Glenwood Heating Inc. Transaction 20X1 1 2 3 Account title and explanation Debit Bad debts expense (1% x 99,400) Allowance for bad debts Cost of goods sold Inventory Depreciation expense Accumulated depreciation, building Accumulated depreciation, equipment 994 Credit 994 177,000 177,000 19,000 10,000 9,000 5 Eads Heaters Inc. Transaction 20X1 1 2 3 Account title and explanation Debit Bad debts expense (5% x 99,400) Allowance for bad debts Cost of goods sold Inventory Depreciation expense Accumulated depreciation, building Accumulated depreciation, equipment 4,970 4,970 188,800 188,800 30,000 5 Workings: 1. Valuation of cost of Goods sold Units sold = 160 Glenwood Heating Inc. (FIFO) Cost = (40 x 1,000) + (60 x 1,100) + (20 x 1,150) + (40 x 1,200) = $177,000 Eads Heaters Inc. (LIFO) (28 x 1,300) + (62 x 1,200) + (20 x 1,150) + (50 x 1,100) = $188,800 2. Depreciation Glenwood Heating, Inc. Credit 10,000 20,000 Building = (350,000 - 50,000)/30 = $10,000 per year Delivery equipment = (80,000 - 8,000)/8 = $9,000 per year Eads Heaters, Inc. Building = (350,000 - 50,000)/30 = $10,000 per year Delivery equipment = (100/8)*2 x 80,000 = $20,000 Statement of Income For the year ended December 31, 20X1 Glenwood Heating Inc. Eads Heaters Inc. Sales 398,500 398,500 Cost of sales (177,000) (188,800) Gross profit 221,500 209,700 Interest expense (28,000) (28,000) Depreciation expense (19,000) (30,000) Bad debts expense (994) (994) Other operating expense (34,200) (34,200) Net Income 139,306 116,506 Expenses: Statement of Changes in Stockholder's Equity For the year ended December 31, 20X1 Glenwood Heating Inc. Eads Heaters Inc. Common stock 160,000 160,000 Net Income 139,306 116,506 Dividends (23,200) (23,200) Ending balance 276,106 253,306 Balance sheet As at December 31, 20X1 Glenwood Heating Inc. Eads Heaters Inc. Assets Current Assets Cash 47,340 47,340 Accounts receivable 99,400 99,400 Allowance for bad debts (994) (4,970) Inventory 62,800 51,000 208,546 192,770 Land 70,000 70,000 Building 350,000 350,000 Accumulated depreciation, building (10,000) (10,000) Equipment 80,000 80,000 Accumulated depreciation, equipment (9,000) (20,000) 689,546 662,770 276,106 253,306 26,440 26,440 Total current assets Non-current assets Total Assets Shareholder's Equity and Liabilities Shareholder's Equity Owner's equity Liabilities Current liabilities Accounts payable Interest payable Total current liabilities 7,000 7,000 33,440 33,440 380,000 380,000 413,440 413,440 689,546 662,770 Non-current liabilities Notes payable Total liabilities Total shareholder's equity and liabilities PART C Liquidity ratios Glenwood Heaters Eads Heaters Current ratio 208,546/33,440 = 6.24 192,770/33440 = 5.77 Acid test ratio (208,546 - 62800)/33400 = 4.36 (192770 - 51000)/33400 = 4.24 Accounts receivable turnover 398500/ (99400 - 994) = 4.05 398500/ (99400 - 4970) = 4.22 Days to collect receivables 365/ 4.05 = 90 days 365/4.22 = 86 days Inventory turnover 177000/62800 = 2.82 188800/51000 = 3.7 Days to sell inventory 365/2.82 = 129 days 365/3.7 = 99 days Operating cycle 90 + 129 = 219 days 86 + 99 = 185 days Profitability ratios Gross profit margin 221500/398500 = 0.56 209700/398500 = 0.53 Profit margin 139306/398500 = 0.35 116506/398500 =0.29 Return on Assets 139306/689546 = 0.20 116506/662770 = 0.18 Return on Owner's equity 139306/276106 = 0.50 116506/253306 = 0.46 Earnings per share 139306/3200 = $43.53 116506/3200 = $36.41 Debt ratio 413440/689546= 0.60 Times interest earned 139306/28000 = 4.98 413440/662770 = 0.62 116506/28000 = 4.16 Financial analysis of the company Glenwood Heaters Inc. is more liquid than Eads Heaters Inc. This is because the current ratio of Glenwood is far higher than the current ratio of Eads Heaters Inc. This can also be demonstrated by the high acid test ratio of Glenwood Heaters Inc. This shows that Glenwood Heaters are able to meet the maturing short term obligations more ease with no financial difficulties compared to Eads Heaters Inc. The operational efficiency of Eads Heaters Inc. is higher than that of Glenwood Inc. This can be shown by the lower days to sell inventory and the less days of collecting receivables and less days in the operating cycle that Eads Heaters is enjoying over the Glenwood Inc. This means that Eads Heaters is able to reduce costs of operations more efficiently and thus boosting the profitability of the company. The profitability of Glenwood Heaters Inc. is however higher compared to that of Eads Inc. This can be shown by the high gross profit margin, high profit margin, high return on assets and the high return on owner's equity that Glenwood Inc. enjoys over Eads Inc. This ensures that the investors of the company are well rewarded for their investment in the company. This high shareholder's value maximization can be shown by the high earnings per share as demonstrated from the financial ratios. Finally, the financial risk of Eads Heaters is higher than that of Glenwood Incorporation. This is because of the lower debt ratio. This means that Glenwood can be able to repay its loan and the accruing interests on the loans more easily than Eads Inc. The lower financial risk can also be demonstrated by Glenwood Incorporation by considering the times interest earned. A higher interest earned means that the company can be able to repay the accruing interest expenses more easily