Michael Masterson has brought you a set of financial statements of a company that he is considering investing in as a long-term investment. He is asking for your help in determining if the company would be a good investment for him.

Using the attached financial statements, you need to create a vertical analysis as percentage of Total Assets for the Balance Sheet and as a percentage of Sales for the Income Statement, as well as a horizontal analysis of the Balance Sheet and Income Statement. Complete this for both years. In addition to the vertical and horizontal analysis, you need to calculate the following ratios:

Liquidity & Efficiency:

Current Ratio

Acid-Test Ratio

Receivables Turnover & Days Sales Uncollected

Inventory Turnover & Days sales in Inventory

Solvency:

Debt Ratio

Equity Ratio

Debt to Equity Ratio

Profitability:

Profit Margin Ratio

Gross Margin Ratio

Return on Total Assets (ROA)

Return on Equity (ROE)

This information then needs to be incorporated into a written memo to Michael Masterson. Be sure to include the following information in your memo.

Introductory Paragraph This paragraph will be an introduction to your analysis. In this paragraph, explain the importance of analyzing financial statements before investing in a company. Be sure to answer the following questions in your introduction:

1. What is the purpose of creating a vertical analysis and why is it useful in analyzing a potential investment?

2. What is the purpose of creating a horizontal analysis and why is it useful in analyzing a potential investment?

3. Overall, what do each of the three sections of ratios (Profitability, Liquidity & Solvency) tell a person about a company? Financial Analysis Section In this section, you will share the results of your calculations and then explain what those results mean in detail. You will need a subsection for the completed vertical analysis and a subsection for the completed horizontal analysis. Within these sections,

you will include specifics regarding your calculations and what those calculations mean for the company. You will also need to include a sub-section for each of the three types of ratios. Within each of the subsections, incorporate the ratios in a Table format and then explain what your calculations mean. While you are allowed to include the definition of the ratios in this section, you must specifically explain what your calculation of the ratio means and analyze the data that you have computed.

The subsections of the Financial Analysis Section must be in this order:

1. Vertical Analysis

2. Horizontal Analysis

3. Liquidity and Efficiency Financial Ratios

4. Solvency Financial Ratios

5. Profitability Financial Ratios

12/31/2018 12/31/2017 $332,800 $ 462,000 331,100 130,900 Sales Cost of Goods Sold Gross Profit 234,000 98,800 Expenses Operating Expenses 36,400 15,600 46,800 58,520 20,020 52,360 Selling & Administrative Expenses Operating Income 3,640 8,320 6,160 10,780 Interest Expense Income Tax Expense 34,840 35,420 Net Income Lewis Enterprises Comparative Balance Sheet For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 Assets: Current Assets Cash Accounts Receivable Inventory Total Current Assets $24,64038,500 55,440 18,480 112,420 42,560 11,200 78,400 Long-Term Assets Equipment Accumulated Depreciation Total Long Term Assets 100,800 (22,400) 78,400 138,600 (38,500) 100,100 $156,800 $ 212,520 Total Assets Liabilities and Shareholders Equit Current Liabilities $20,16033,880 6,160 40,040 Accounts Payable Salaries Payable Total Current Liabilities 6,720 26,880 Long-Term Liabilities Notes Payable Total Long-Term Liabilities 50,400 50,400 53,900 53,900 Total Liabilities 77,280 93,940 Shareholders' Equity 22,400 16,800 40,320 Common Stock, $1 par Paid In Capital Retained Earnings 30,800 23,100 64,680 Total Shareholders' Equity 79,520 118,580 $156,800 $212,520 Total Liabilities and Shareholders' Equity