Mr. Smith 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 Mr. Smith that include:

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?

For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 5665,600 630,000 451,500 178,500 Sales Cost of Goods Sold Gross Profit 468,000 197,600 72,800 31,200 93,600 79,800 27,300 71,400 Operating Expenzes Selling & Administrative Expenses Operating Income 7,280 16,640 Interest Expense Income Tax Expense 8,400 14,700 $69,68048 Net Income Comparative Balance Sheet For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 Current Assets 543,120 52.500 75,600 25,200 153,300 Cash Accounts Receivable 74,480 19,600 137,200 Total Current Assets Long-Term Assets 176,400 189,000 (52,500) Total Long Term Assets 137,200 $274,400 289,800 Total Assets Liabilities and Shareholders' Equity: Current Liabilities 535,280 46,200 11,760 47,040 Accounts Payable Salaries Payable Total Current Liabilities 8,400 54,600 Long-Term Liabilities Notes Payable Total Long-Term Liabilities 83,200 73,500 Total Liabilities 135,240 Shareholders' Equity Common Stock, $1 par Paid In Capital Retained Earnings 39,200 29,400 70,560 42,000 31,500 88,200 Total Shareholders' Equity 139,160 161,700 $274,400$289,800 Total Liabilities and Shareholders Equity For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 5665,600 630,000 451,500 178,500 Sales Cost of Goods Sold Gross Profit 468,000 197,600 72,800 31,200 93,600 79,800 27,300 71,400 Operating Expenzes Selling & Administrative Expenses Operating Income 7,280 16,640 Interest Expense Income Tax Expense 8,400 14,700 $69,68048 Net Income Comparative Balance Sheet For the Years Ended December 31, 2018 and 2017 12/31/2018 12/31/2017 Current Assets 543,120 52.500 75,600 25,200 153,300 Cash Accounts Receivable 74,480 19,600 137,200 Total Current Assets Long-Term Assets 176,400 189,000 (52,500) Total Long Term Assets 137,200 $274,400 289,800 Total Assets Liabilities and Shareholders' Equity: Current Liabilities 535,280 46,200 11,760 47,040 Accounts Payable Salaries Payable Total Current Liabilities 8,400 54,600 Long-Term Liabilities Notes Payable Total Long-Term Liabilities 83,200 73,500 Total Liabilities 135,240 Shareholders' Equity Common Stock, $1 par Paid In Capital Retained Earnings 39,200 29,400 70,560 42,000 31,500 88,200 Total Shareholders' Equity 139,160 161,700 $274,400$289,800 Total Liabilities and Shareholders Equity