Question 2 (Total marks= 20)

Adams Corporation manufactures fasteners. The companys income statements for three years are indicated in Exhibit 1. The balance Sheets for the same period are shown in Exhibit 2.

(a) Using the Du Pont System, describe the changes in the return on assets from year to year and analyze the factors affecting the ROA. (8 marks)

(b) Construct the common size Balance Sheet for Adams Corporation for 2017 through 2019. Is there any observable trend in the firms use of debt? (6 marks)

(c) Prepare Indexed Balance Sheet for Adams Corporation with 2017 as the base year. Is there any observable trend in the firms efficiency? (6 marks)

Exhibit 1 ADAMS CORPORATION Income Statement 2017 Sales (all on credit). $1,500,000 Cost of goods sold. 950,000 Gross profit....... 550,000 Selling and administrative expense. 380,000 Operating profit.. 170,000 Interest expense. 30.000 Net income before taxes. 140,000 Taxes.. 46,120 Net Income. $93,880 Shares.. 40,000 2018 $1,800,000 1.120.000 680,000 490,000 190,000 40,000 150,000 48,720 $101,280 40,000 2019 $2,160,000 1,300,000 860,000 590,000 270,000 85,000 185,000 64,850 $120, 150 46,000 Exhibit 2 2018 2019 $30,000 $20,000 35,000 50,000 230,000 330,000 285,000 325.000 580,000 725,000 720,000 1,169,000 $1,300,000 $1,894,000 ADAMS CORPORATION Balance Sheet Assets 2017 Cash..... $20,000 Marketable securities. 30,000 Accounts receivable.. 150,000 Inventory.. 250.000 Total Current Assets... 450,000 Net Plant and equipment. 550,000 Total Assets... $1,000,000 Liabilities & Equity Accounts payable..... $100,000 Notes payable (bank). 100,000 Total Current liabilities.. 200,000 Long-term liabilities. 250,000 Total liabilities........ 450,000 Common stock ($10 par). 400,000 Capital paid in excess of par.. 50,000 Retained earnings.... 100,000 Total stockholders' equity. 550,000 Total liabilities and stockholders' equity... $1,000,000 $225,000 $200,000 100,000 300.000 325,000 500,000 331,120 550,740 656,120 1,050,740 400,000 460,000 50,000 80,000 193,880 303,260 643,880 843,260 $1,300,000 $1,894,000