A Financial Statement Analysis

Question 1
The recent financial statements for the Royal Caribbean Company are given below:

Balance Sheet for the period ending June 30

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Assets 2006 2005

Current assets

Cash $21,000 $24,000

Accounts receivables $160,000 $162,000

Inventories $300,000 $315,000

Prepaid expenses $9,000 $10,000

Total current assets $490,000 $511,000

Property and equipment $810,000 $700,000

Total assets $1,300,000 $1,211,000

Liabilities and shareholders equity

Liabilities

Current liabilities $200,000 $290,000

10% bonds payable $300,000 $275,000

Total liabilities $500,000 $565,000

Shareholders equity

Common stock $5 per share $100,000 $150,000

Retained earnings $700,000 $496,000

Total liabilities and shareholders equity $1,300,000 $1,211,000

Income statement for the year ended June 30

Sales $2,100,000 $1,900,000

Less cost of goods sold $1,260,000 $1,190,000

Gross margin $840,000 $710,000

Less operating expenses $660,000 $510,000

Net operating income $180,000 $200,000

Less interest expense $30,000 $60,000

Net income before taxes $150,000 $140,000

Less income taxes $45,000 $55,000

Net income $105,000 $85,000

Notes: Accounts balance at the beginning of 2005 financial year were: Accounts receivable

$140 000. Inventory $260,000. All sales were credit.

a. Calculate the following ratios for 2006 and 2005.

i. Gross margin percentage

ii. Net income percentage

iii. Current ratio

iv. Acid test ratio

v. Inventory turn over

vi. Debt to equity ratio

vii. Interest cover

b. Briefly comment on the company performance in the area of liquidity and profitability:

Question 2

Key Ratios for ABC, Inc. and Its Industry

ABC, Inc. 1994 Ratios Industry Average Ratios in 1994

Current ratio 1.2 1.4

Acid test ratio 0.89 0.94

Average collection period 30 days 25 days

Inventory turnover 18.1 20.3

Fixed assets turnover 4.1 4.8

Total asset turnover 2.78 2.8

Debt ratio 50% 60%

Times-interest-earned 5.5% 4.5%

Net profit margin 1.15% 1.5%

Return on equity 5.21% 7.32%

ABC, Inc. Income Statement (in thousands)

December 31, 1995

Sales (all credit) $200,000

Cost of goods sold 140,000

Gross profit on sales 60,000

Operating expenses 56,000

Operating income 4,000

Interest expense 1,000

Earnings before tax 3,000

Income tax 1,050

Net income available to common stockholders $1,950

ABC, Inc. Balance Sheet (in thousands)

December 31, 1995

Assets

Cash $2,000

Accounts receivable 17,800

Inventories 8,700

Total current assets 28,500

Gross fixed assets 70,000

Accumulated depreciation 26,500

cNet fixed assets 43,500

Total assets $72,000

Liabilities and Equity

Accounts payable $18,000

Accruals 13,350

Total current liabilities 31,350

Long-term debt 8,250

Total liabilities 39,600

Common stock (par value and paid in capital) 2,000

Retained earnings 30,400

Total stockholders’ equity 32,400

Total liabilities and equity $72,000

Required:

a. Calculate the following ratios for ABC Inc. for 1995

– Average collection period

– Inventory turnover

– Fixed asset turnover

– Current ratio

– Acid test ratio

– Debt to total asset ratio

– Net profit margin

– Return on equity

b. Comment on the firms liquidity and profitability, taking into consideration the industry averages.

Question 3

Christmas Ltd

Sales 600,000

Opening stock 50,000

Purchases 430,000

480,000

Less closing stock 60,000 420,000

Gross profit 180,000

Less running expenses 100,000

Net profit before tax 80,000

Less interest 8,000

Profit before taxes 72,000

Less taxes 30,000

Profit after tax 42,000

Less dividends 2000

Retain profits for the year 40,000

Christmas Ltd

Balance sheet

as at December 31 2010

Fixed assets 140,000

Current assets:

Stocks 60,000

Debtors 2,000

Bank and cash 38,000

100,000

Less current assets 40,000 60,000

Net assets employed 200,000

=======

Share capital

Ordinary shares 20,000

Profit and loss account 100,000

120,000

10 % debentures 80,000

Net capital employed 200,000

=======

Calculate the following ratios

1. Current ratio

2. Quick Ratio

3. Gross margin

4. Net Margin

5. Inventory turnover ratio

6. Clearly explain the term ratio analysis, and list any three limitations of financial statement analysis. For more information on A Financial Statement Analysis visit this: https://www.encyclopedia.com/finance/finance-and-accounting-magazines/financial-statement-analysis

A Financial Statement Analysis

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