Question 2

The comparative balance sheets of Waterways Corporation's Irrigation Installation Division for the years 2019 and 2020 and the income statements for the year 2019 and 2020 are presented below.

Additional information:

85% of the sales for Waterways were credit sales. There are 5,000 shares outstanding for both years. This is a private corporation whose shares are not available to the public.

WATERWAYS CORPORATIONINSTALLATION DIVISION

Balance Sheets

December 31

Assets 2020 2019

Current assets

Cash $828,400 $749,800

Accounts receivable 681,300 541,200

Work in process 697,700

Inventory 16,900 7,400

Prepaid expenses 76,100 42,600

----------- -------------

Total current assets 2,300,400 1,341,000

-------------- ---------------

Property, plant, and equipment

Land 303,000 303,000

Buildings 452,000 452,000

Equipment 937,300 807,800

Furnishings 40,100 40,100

Accumulated depreciation (486,200) (480,700)

------------- -------------

Total property, plant, and equipment 1,246,200 1,122,200

-------------- --------------

Total assets $3,546,600 $2,463,200

========== ==========

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable $157,500 $128,200

Income taxes payable 101,200 79,500

Wages payable 4,500 1,900

Interest payable 1,200

Other current liabilities 14,600 15,400

Revolving bank loan payable 15,100

------------ --------------

Total current liabilities 294,100 225,000

Long-term liabilities

Note payable 139,000

------------ -------------

Total liabilities 433,100 225,000

Stockholders' equity

Common stock 1,250,000 1,250,000

Retained earnings 1,863,500 988,200

------------- --------------

Total stockholders' equity 3,113,500 2,238,200

-------------- --------------

Total liabilities and stockholders' equity $3,546,600 $2,463,200

========== =========

WATERWAYS CORPORATIONINSTALLATION DIVISION

Income Statements

For the Year Ending December 31

2020 2019

Sales $5,503,729 $4,956,600

Less: Cost of goods sold 3,115,900 2,821,900

--------------- --------------

Gross profit 2,387,829 2,134,700

------------ --------------

Operating expenses

Advertising 50,300 48,300

Insurance 403,100 403,100

Salaries and wages 588,200 558,200

Depreciation 80,300 71,300

Other operating expenses 21,000 18,390

------------- -------------

Total operating expenses 1,142,900 1,099,290

------------- ---------------

Income from operations 1,244,929 1,035,410

Other income

Gain on sale of equipment 17,800

Other expenses

Interest expense (12,300)

--------------- ----------------

Income before income tax 1,250,429 1,035,410

Income tax expense 375,129 310,623

--------------- ---------------

Net income $875,300 $724,787

========= =========

(a)

Make a horizontal analysis of the income statement using 2019 as the base year. (Do not leave any answer field blank. Enter 0 for amounts. Round percentage values to 1 decimal place, e.g. 52.7%. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

WATERWAYS CORPORATIONINSTALLATION DIVISION

Income Statement

----------------------------

2020 2019 Change Percent

Sales $5,503,729 $4,956,600 $---------- -----------%

Less: Cost of goods sold 3,115,900 2,821,900 ------------ -----------%

-------------- ---------------

Gross profit 2,387,829 2,134,700 ------------ -----------%

-------------- ---------------

Operating expenses

Advertising 50,300 48,300 ------------ ------------%

Insurance 403,100 403,100 ------------ ------------%

Salaries and wages 588,200 558,200 ------------- ------------%

Depreciation 80,300 71,300 ------------- ------------%

Other operating expenses 21,000 18,390 ------------- ------------%

----------- ------------

Total operating expenses 1,142,900 1,099,290 ------------- ------------%

------------- --------------

Income from operations 1,244,929 1,035,410 ------------- ------------%

Other income

Gain on sale of equipment 17,800 ------------- ------------%

Other expenses

Interest expense (12,300) ------------- --------------%

------------ --------------

Income before income tax 1,250,429 1,035,410 ------------- --------------%

Income tax expense 375,129 310,623 ------------- --------------%

------------- --------------

Net income $875,300 $724,787$ ------------- --------------%

========= ==========

(b)

Make a vertical analysis of the income statement for 2020. (Round percentage values to 1 decimal place, e.g. 52.7%. Enter negative amounts using either a negative sign preceding the number e.g. -45% or parentheses e.g. (45)%)

WATERWAYS CORPORATIONINSTALLATION DIVISION

Income Statement

----------------------------

Amount Percent

Sales $5,503,729 -------------%

Less: Cost of goods sold 3,115,900 -------------%

---------------

Gross profit 2,387,829 -------------%

---------------

Operating expenses

Advertising 50,300 -------------%

Insurance 403,100 -------------%

Salaries and wages 588,200 -------------%

Depreciation 80,300 -------------%

Other operating expenses 21,000 -------------%

---------------

Total operating expenses 1,142,900 -------------%

----------------

Income from operations 1,244,929 ------------- %

Other income

Gain on sale of equipment 17,800 -------------%

Other expenses

Interest expense (12,300) -------------%

--------------

Income before income tax 1,250,429 ------------- %

Income tax expense 375,129 ------------- %

----------------

Net income $875,300 --------------%

===========

(c)

Calculate the following ratios for 2020 and indicate whether the ratio is a liquidity, solvency, or profitability ratio. (Round Asset turnover ratio, Accounts receivable turnover ratio, Current ratio and Earnings per share to 2 decimal places, e.g. 15.25. Round Average collection period, Debt to assets ratio, Profit margin, Return on assets ratio, Return on common stockholders' equity ratio and Times interest earned ratio to 1 decimal place, e.g. 15.2 or 15.2%. Use 365 days for calculation.)

Type

(1)Asset turnover ratio ------------- times ---------------

(2)Accounts receivable turnover ratio ------------- times ---------------

(3)Average collection period -------------- days ---------------

(4)Current ratio -------------- : 1 ---------------

(5)Debt to assets ratio -------------- % ---------------

(6)Earnings per share $-------------- ---------------

(7)Profit margin --------------- % ---------------

(8)Return on assets ratio -------------- % ----------------

(9)Return on common stockholders' equity ratio -------------- % ---------------

(10)Times interest earned ratio -------------- times ---------------

(d) Comment on your findings.

Liquidity: The company's liquidity is ---------------

Solvency: The company's solvency is very ---------------

Profitability: The company's profitability is --------------

Overall: By all measures the company appears to be both financially ------------------