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3615-43 Bonus Chapter 15 \"How Well Am I Doing?\" Financial Statement Analysis Required: [ndicate the effect that each transaction or event would have on the ratio listed opposite to it. State the effect in terms of increase, decrease, or no effect on the ratio involved, and give the reason for your choice. In all cases, assume that the current assets exceed current liabilities both before and after the event or transaction. Use the following format for your answers: Effect on Ratio Reason for Increase, Decrease, or No Effect 1. 2. Etc. PROBLEM 1516 Comprehensive ProblemPart 1: Financial Ratios for Common Shareholders (Problems 15717 and 15718 delve more deeply into the data presented below. Each problem is independent.) Microswift, Inc. was organized several years ago to develop and market computer software programs. The company is small but growing, and you are considering the purchase of some of its common shares as an investment, The following data on the company are available for the past two years: MICROSWIFT, INC. Comparative Income Statement For the Years Ended December 31,This Year and Last Year This Year Last Year Sales ................................. $10,000,000 $7,500,000 Less cost of goods sold .................. 6,500,000 4,500,000 Gross margin .......................... 3,500,000 3,000,000 Less operating expenses ................. 2,630,000 2,280,000 Net operating income .................... 870,000 720,000 Less interest expense .................... 120,000 120,000 Net income before taxes .................. 750,000 600,000 Less income taxes (30%) ................. 225,000 180,000 Netincome ............................ $ 525,000 $ 420,000 MICROSWIFT, INC. Comparative Retained Earnings Statement For the Years Ended December 31,This Year and Last Year This Year Last Year Retained earnings, January 1 .............. $1,200,000 $ 980,000 Add net income (above) .................. 525,000 420,000 Total .................................. 1,725,000 1,400,000 Deduct cash dividends paid: Preferred dividends .................... 60,000 60,000 Common dividends .................... 180,000 140,000 Total dividends paid ...................... 240,000 200,000 Retained earnings, December 31 ........... $1,485,000 $1,200,000 MICROSWIFT, INC. Comparative Balance Sheet December 31 , This Year and Last Year Assets This Year Last Year Current assets: Cash ............................... $ 100,000 $ 200,000 Accounts receivable, net ................ 750,000 400,000 Inventory ............................ 1,500,000 600,000 Prepaid expenses ..................... 50,000 50,000 Total current assets ...................... 2,400,000 1,250,000 Plant and equipment, net ................. 2,585,000 2,700,000 Total assets ............................ $4,985,000 $3,950,000 continued Bonus Chapter 15 \"How Well Aml Doing?\" Financial Statement Analysis Liabilities and Shareholders' Equity This Year Last Year Liabilities: Current liabilities ...................... $1,250,000 $ 500,000 Bonds payable, 12% ................... 1,000,000 1,000,000 Total liabilities .......................... 2,250,000 1,500,000 Shareholders' equity: Preferred shares, $4 no par, 15,000 issued . 750,000 750,000 Common shares, 100,000 no par ......... 500,000 500,000 Retained earnings ..................... 1,485,000 1,200,000 Total share-holders' equity ................. 2,735,000 2,450,000 Total liabilities and shareholders' equity ...... $4,985,000 $3,950,000 After some research, you have determined that the following ratios are typical of companies in the computer software industry: Dividend yield ratio ............... 3% Dividend payout ratio ............. 40% Price-earnings ratio .............. 16 Return on total assets ............ 13.5% Return on common equity ......... 20% There has been no change in the preferred or common shares outstanding over the last three years. The company's common shares are currently selling for $60 per share. Last year, the shares sold for $45 per share, Required: 1. In analyzing the company, you decide rst to compute the earnings per share and related ratios, For both years, compute: a. The earnings per share. 1). The dividend yield ratio. c. The dividend payout ratio. 6!. The price-earnings ratio. e. The book value per common share. f. The gross margin percentage. 2. You decide next to determine the rate of return that the company is generating. For both years, compute: a, The return on total assets, (Total assets were $3,250,000 on January 1 of last year.) I), The return on common shareholders' equity, (Common shareholders' equity was $1,450,000 on January 1 of lastyear.) c. Is financial leverage positive or negative? Explain. 3. Based on your work in (l) and (2) above, do the company's common shares seem to be an attractive investment? Explain, PROBLEM 1517 Comprehensive ProblemPart 2: Creditor Ratios Refer to the data in Problem l5l6, Although Microswift, Inc, has been very profitable since it was organized several years ago, the company is beginning to experience some difficulty in paying its bills as they come due. Management has approached National Bank requesting a two-year $25 0,000 loan to bolster the Cash account. National Bank has assigned you to evaluate the loan request. You have gathered the following data relating to companies in the computer software industry: Current ratio .................... 2.4 to 1 Acid-test (quick) ratio ............. 1.2 to 1 Average age of receivables ........ 16 days Inventory turnover in days ......... 40 days Times interest earned ............ 7 times Debt-to-equity ratio ............... 0.70 to 1 The following additional information is available on Microswift, Inc.: a. All sales are on account. BC1 5-44 BC 1 5-45 Bonus Chapter 15 \"How Well Am I Doing?\" Financial Statement Analysis b, At the beginning of last year, the accounts receivable balance was $300,000 and the inventory balance was $500,000. Required: 1, Compute the following amounts and ratios for both years: a. The working capital. The current ratio, The acid-test ratio, The accounts receivable turnover (average collection period) in days. The inventory turnover (average sale period) in days, The times interest earned. . The debt-to-equity ratio, 2. C mment on the results of your analysis in (1) above. 3, Would you recommend that the loan be approved? Explain. wwseow PROBLEM 1518 Comprehensive ProblemPart 3: Common-Size Statements Refer to the data in Problem 15716. The president of Vlicroswift, Inc, is very concerned. Sales increased by $2.5 million from last year to this year, yet the company's net income increased by only $105,000. Also, the company's operating expenses went up this year, even though a major effort was launched during the year to cut costs. Required: 1, For both years, prepare the income statement and the balance sheet in common-size form, (Round computations to one decimal place.) 2. From your work in (1) above, explain to the president why the increase\" in profits was so small this year. Were any benefits realized from the company's cost-cutting efforts? Explain, PROBLEM 1519 Incomplete Statements; Analysis of Ratios Incomplete financial statements for Tanner Company are given below: TANNEFt COMPANY Income Statement For the Year Ended December 31 Sales ............................. $2,700,000 Less cost of goods sold .............. '? Gross margin ...................... ? Less operating expenses ............. '? Net operating income ................ 7 Less interest expense ................ 45,000 Net income before taxes .............. 7 Less income taxes (40%) ............. ? Net income ........................ $ '? TANNEFt COMPANY Balance Sheet December 31 Current assets: Cash ........................... .$ Accounts receivable, net ............ Inventory ........................ Total current assets .................. Plant and equipment, net ............. "O '0 "d '0 w) "0 Total assets ........................ $ Current liabilities .................... $250,000 Bonds payable, 10% ................. ? Total liabilities ...................... '? continued