The following is the income statement for the year ended October 31, 2019 and the balance sheet as of October 31, 2019 for M & K Design Limited. Also included is some additional information to assist you in your calculations and analysis:
Sales Cost of goods sold
Depreciation expense Operating expenses
Interest expense Income before tax Income tax expense
M & K Design Limited Income Statement For Year Ended October 31, 2019
$1,700,000 884,000 816,000 65,000 527,700 223,300 8,000 215,300 30,000 $185,300
Assets
Cash Accounts receivable Inventory
Furniture and Equipment Accumulated depreciation - furniture and equipment Long term investment
Liabilities & Shareholders Equity Liabilities Accounts payable Salary payable
Income tax payable
Bank loan (long-term)
Shareholders Equity
Common shares Retained earnings
M & K Design Limited Balance Sheet October 31, 2019
700,000 (300,000) 125,500
$22,000 122,000 96,000 240,000
525,500 $765,500
$158,000 12,000 30,000 200,000 75,000 275,000
50,000 440,500 490,500
$765,500
Selected data from October 31, 2018 financial statements:
Total assets Accounts receivable Inventory Accounts payable
$683,500 $107,500 $ 60,000 $175,000
Required: A. Calculate 10 ratios (see page 7) to help you analyze M & K Design Limited. Some limited industry averages & comparative ratios are provided on the next page.
B. Using at least 4 ratios calculated above to answer the following: M & K Design has come to you looking for a loan of $40,000 to be repaid over 5 years. Would you be willing to loan them the money? Provide an explanation for your answer.
| | Industry averages - 2019 | M & K Design 2018 |
| Gross profit margin ratio | 50.0% | 47.2% |
| Return on sales (net profit margin) | 9% | 9.5% |
| Rate of return on assets | .25 | .24 |
| Debt ratio | .40 | .48 |
| Current ratio | 1.5 | 1.0 |
| Asset turnover | 2.1 | 2.0 |
| Quick Ratio | .75 | .67 |
| 1. Gross profit margin ratio | Gross profit Net sales |
| 2. Return on sales (Net profit margin ratio) | Net income Net sales |
| 3. Rate of return on assets ratio | Net income Average total assets |
| 4. Asset turnover ratio | Net sales Average total assets |
| 5 &6. Receivables turnover ratio and days sales outstanding | Net sales Average accounts receivable and 365__ Accounts receivable turnover |
| 7 & 8. Inventory turnover ratio and days inventory outstanding | Cost of goods sold Average inventory and 365 Inventory turnover ratio |
| 9 & 10. Payables turnover and days payables outstanding | Cost of goods sold Average accounts payable and 365 Accounts payable turnover |
| 11. Cash conversion cycle | Days inventory outstanding +days sales outstanding days payables outstanding |
| 12. Current ratio | Current assets Current liabilities |
| 13. Quick ratio | Cash + short-term investments + current receivables Current liabilities |
| 14. Debt ratio | Total liabilities Total assets |
| 15. Times interest earned | Income from operations Interest expense |
| | |
Question 3 (35 points) The following is the income statement for the year ended October 31, 2019 and the balance sheet as of October 31, 2019 for M & K Design Limited. Also included is some additional information to assist you in your calculations and analysis: I M & K Design Limited Income Statement For Year Ended October 31, 2019 Sales Cost of goods sold Depreciation expense Operating expenses $1,700,000 884,000 816,000 65,000 527.700 223,300 8,000 215,300 30,000 $185,300 Interest expense Income before tax Income tax expense M&K Design Limited Balance Sheet October 31, 2019 Assets Cash $22,000 Accounts receivable 122,000 Inventory 96,000 240,000 Furniture and Equipment 700,000 Accumulated depreciation - furniture and equipment (300,000) Long term investment 125,500 525,500 $765,500 Liabilities & Shareholder's Equity Liabilities Accounts payable Salary payable Income tax payable $158,000 12,000 30,000 200,000 75,000 275,000 Bank loan (long-term) Shareholder's Equity 50.000 Liabilities & Shareholder's Equity Liabilities Accounts payable Salary payable Income tax payable $158,000 12,000 30,000 200,000 75.000 275,000 Bank loan (long-term) Shareholder's Equity Common shares Retained earnings 50,000 440,500 490,500 $765,500 Selected data from October 31, 2018 financial statements: Total assets $683,500 Accounts receivable $107,500 Inventory $ 60,000 Accounts payable $175,000 Required: A. Calculate 10 ratios (see page 7) to help you analyze M & K Design Limited. Some limited industry averages & comparative ratios are provided on the next page. B. Using at least 4 ratios calculated above to answer the following: M&K Design has come to you looking for a loan of $40,000 to be repaid over 5 years. Would you be willing to loan them the money? Provide an explanation for your answer. The following information is available for: Gross profit margin ratio Return on sales (net profit margin) Rate of return on assets Debt ratio Current ratio Industry averages - 2019 50.0% 9% .25 40 1.5 M&K Design 2018 47.2% 9.5% .24 .48 1.0 1. Gross profit margin ratio Gross profit Net sales Net income Net sales 2. Return on sales (Net profit margin ratio) 3. Rate of return on assets ratio 4. Asset turnover ratio 5 &6. Receivables turnover ratio and days sales outstanding 7 & 8. Inventory turnover ratio and days inventory outstanding Net income Average total assets Net sales Average total assets Net sales Average accounts receivable and 365 Accounts receivable turnover Cost of goods sold Average inventory and 365 Inventory turnover ratio Cost of goods sold Average accounts payable and 365 Accounts payable turnover Days inventory outstanding +days sales outstanding - days payables outstanding 9 & 10. Payables turnover and days payables outstanding 11. Cash conversion cycle 9 & 10. Payables turnover and days payables outstanding 11. Cash conversion cycle 12. Current ratio Cost of goods sold Average accounts payable and 365 Accounts payable turnover Days inventory outstanding +days sales outstanding - days payables outstanding Current assets Current liabilities Cash + short-term investments + current receivables Current liabilities Total liabilities Total assets Income from operations Interest expense 13. Quick ratio 14. Debt ratio 15. Times interest earned Question 3 (35 points) The following is the income statement for the year ended October 31, 2019 and the balance sheet as of October 31, 2019 for M & K Design Limited. Also included is some additional information to assist you in your calculations and analysis: I M & K Design Limited Income Statement For Year Ended October 31, 2019 Sales Cost of goods sold Depreciation expense Operating expenses $1,700,000 884,000 816,000 65,000 527.700 223,300 8,000 215,300 30,000 $185,300 Interest expense Income before tax Income tax expense M&K Design Limited Balance Sheet October 31, 2019 Assets Cash $22,000 Accounts receivable 122,000 Inventory 96,000 240,000 Furniture and Equipment 700,000 Accumulated depreciation - furniture and equipment (300,000) Long term investment 125,500 525,500 $765,500 Liabilities & Shareholder's Equity Liabilities Accounts payable Salary payable Income tax payable $158,000 12,000 30,000 200,000 75,000 275,000 Bank loan (long-term) Shareholder's Equity 50.000 Liabilities & Shareholder's Equity Liabilities Accounts payable Salary payable Income tax payable $158,000 12,000 30,000 200,000 75.000 275,000 Bank loan (long-term) Shareholder's Equity Common shares Retained earnings 50,000 440,500 490,500 $765,500 Selected data from October 31, 2018 financial statements: Total assets $683,500 Accounts receivable $107,500 Inventory $ 60,000 Accounts payable $175,000 Required: A. Calculate 10 ratios (see page 7) to help you analyze M & K Design Limited. Some limited industry averages & comparative ratios are provided on the next page. B. Using at least 4 ratios calculated above to answer the following: M&K Design has come to you looking for a loan of $40,000 to be repaid over 5 years. Would you be willing to loan them the money? Provide an explanation for your answer. The following information is available for: Gross profit margin ratio Return on sales (net profit margin) Rate of return on assets Debt ratio Current ratio Industry averages - 2019 50.0% 9% .25 40 1.5 M&K Design 2018 47.2% 9.5% .24 .48 1.0 1. Gross profit margin ratio Gross profit Net sales Net income Net sales 2. Return on sales (Net profit margin ratio) 3. Rate of return on assets ratio 4. Asset turnover ratio 5 &6. Receivables turnover ratio and days sales outstanding 7 & 8. Inventory turnover ratio and days inventory outstanding Net income Average total assets Net sales Average total assets Net sales Average accounts receivable and 365 Accounts receivable turnover Cost of goods sold Average inventory and 365 Inventory turnover ratio Cost of goods sold Average accounts payable and 365 Accounts payable turnover Days inventory outstanding +days sales outstanding - days payables outstanding 9 & 10. Payables turnover and days payables outstanding 11. Cash conversion cycle 9 & 10. Payables turnover and days payables outstanding 11. Cash conversion cycle 12. Current ratio Cost of goods sold Average accounts payable and 365 Accounts payable turnover Days inventory outstanding +days sales outstanding - days payables outstanding Current assets Current liabilities Cash + short-term investments + current receivables Current liabilities Total liabilities Total assets Income from operations Interest expense 13. Quick ratio 14. Debt ratio 15. Times interest earned
