ACC-1A Lecture Notes - Lecture 3: Accounting Equation, A Question Of Balance, Financial Statement
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| Hillside,Inc. | ||||||||
| BALANCE SHEET | INCOME STATEMENT | |||||||
| ($ in millions) | ($ in millions) | |||||||
| ASSETS | LIABILITIES | Revenue | 28,681.10 | |||||
| Cash & Marketable Securities | 449.90 | Accounts Payable | 1,611.20 | Cost Of Goods Sold | 20,768.80 | |||
| Accounts Receivable | 954.80 | Salaries Payable | 225.20 | Gross Profit | 7,912.30 | |||
| Inventories | 3,645.20 | Other Current Liabilities | 1,118.80 | |||||
| Other Current Assets | 116.60 | Total Current Liabilities | 2,955.20 | Operating Expenses: | ||||
| Total Current Assets | 5,166.50 | Selling, General & Admin. | 5,980.80 | |||||
| Other Liabilities | 693.40 | Depreciation | 307.30 | |||||
| Machinery & Equipment | 1,688.90 | Operating income | 1,624.20 | |||||
| Land | 1,129.70 | Total Liabilities | 3,648.60 | |||||
| Buildings | 2,348.40 | Interest | - | |||||
| Depreciation | (575.60) | SHAREHOLDER'S EQUITY | Other Expense (Income) | (13.10) | ||||
| Property, Plant & Equip. - Net | 4,591.40 | Common Stock | 828.50 | Income Before Taxes | 1,637.30 | |||
| Other Long Term Assets | 120.90 | Retained Earnings | 5,401.70 | Income Taxes | 618.10 | |||
| Total Long-Term Assets | 4,712.30 | Total Shareholder's Equity | 6,230.20 | Net Income | 1,019.20 | |||
| Total Assets | 9,878.80 | Total Liabilities & Equity | 9,878.80 | |||||
| Number of Common Stock | ||||||||
| Shares Outstanding | 1,032,271 | |||||||
| Input Answers Below | Financial Performance Summary | |||||||
| LIQUIDITY RATIOS | ||||||||
| Current Ratio (times) | ||||||||
| Quick Ratio (times) | ||||||||
| Average Payment Period (days) | ||||||||
| ASSET MANAGEMENT RATIOS | ||||||||
| Total Asset Turnover (times) | ||||||||
| Average Collection Period (days) | ||||||||
| Inventory Turnover (times) | ||||||||
| FINANCIAL LEVERAGE RATIOS | ||||||||
| Total Debt to Total Assets | ||||||||
| Equity Multiplier (times) | ||||||||
| PROFITABILITY RATIOS | ||||||||
| Operating Profit Margin | ||||||||
| Net Profit Margin | ||||||||
| Return on Total Assets | ||||||||
| Return on Equity | ||||||||
| Earnings per Share | ||||||||
Based on the financial information provided, calculate thefollowing ratios and explain their purpose:
Current Ratio
Inventory Turnover Ratio
Accounts Receivable Turnover Ratio Debt to Equity Ratio
Return on Assets Ratio
Asset Turnover Ratio
Return on Equity Ratio
Profit Margin Ratio
Price-Earnings Ratio
Dividend Yield Ratio
Note: When a balance sheet amount is related toan income statement amount in computing a ratio, the balance sheetamount should be an average of that period. The average iscalculated by adding the ending balances of this year and last yearand dividing the result by 2. Describe how a bank lending officermight use ratio analysis. Select five ratios that would be mostuseful for the purpose and explain the rationale for yourselection.
12/31/10 | 12/31/09 | |
Amount in Dollars | Amount in Dollars | |
Cash | 200.00 | 150.00 |
Receivables | 500.00 | 350.00 |
Inventories | 750.00 | 755.00 |
Other Current Assets | 100.00 | 75.00 |
Total Current Assets | 1,550.00 | 1,330.00 |
Plant and Equipment | 1,100.00 | 1,170.00 |
Other Long - Term Assets | 150.00 | 100.00 |
Total Assets | 2,800.00 | 2,600.00 |
Accounts Payable | 510.00 | 400.00 |
Other Current Liabilities | 25.00 | 25.00 |
Total Current Liabilities | 535.00 | 425.00 |
Long Term Debt | 375.00 | 400.00 |
Other Long Term Liabilities | 225.00 | 175.00 |
Preferred Stock | 250.00 | 250.00 |
Shareholders' Equity | 1,415.00 | 1,350.00 |
Total Liabilities and Shareholders' Equity | 2,800.00 | 2,600.00 |
Year-2010 | Year-2009 | |
Amount in Dollars | ||
Net Sales | 3500.00 | 3200.00 |
Cost of Goods Sold | 2200.00 | 2100.00 |
Other Expenses | 300.00 | 250.00 |
Depreciation | 77.00 | 62.00 |
Interest Expenses | 40.00 | 46.00 |
Tax | 200.00 | 150.00 |
Net Income | 683.00 | 592.00 |
Preferred Stock Dividend | 25.00 | |
Common Stock Dividends | 260.00 | |
Market Value of Equity | 4000.00 | |
Average Number of Shares | 100.00 | |
Share Price | 40.00 | |
Dividends per Share | 2.60 | |
Earnings per Share | 6.58 | |
This term you have learned to understand a companyâs financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the companyâs financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.
Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.
The bank will base its decision on the following averages for the DME industry:
| Ratio | Industry Average |
| Current ratio | 1.50 |
| Quick ratio | 0.80 |
| Receivables turnover ratio | 18.0 |
| Inventory turnover ratio | 20.0 |
| Debt to assets ratio | 0.56 |
| Profit margin | 10.25% |
The balance sheet data for Dependable DME Company follows:
| December 31, 2017 | December 31, 2016 | |
| Cash | $75,000 | $60,000 |
| Accounts receivable | 40,000 | 20,000 |
| Inventory | 30,000 | 20,000 |
| Prepaid insurance | 5,000 | 5,000 |
| Total current assets | 140,000 | 105,000 |
| Property and equipment | 600,000 | 550,000 |
| Accumulated depreciation | 140,000 | 110,000 |
| Total property and equipment | 460,000 | 440,000 |
| Total assets | $600,000 | $545,000 |
| Accounts payable | $60,000 | $60,000 |
| Other current liabilities | 40,000 | 45,000 |
| Total current liabilities | 100,000 | 105,000 |
| Bonds payable | 150,000 | 150,000 |
| Total liabilities | 250,000 | 255,000 |
| Common stock | 250,000 | 250,000 |
| Retained earnings | 100,000 | 40,000 |
| Total stockholdersâ equity | 350,000 | 290,000 |
| Total liabilities and stockholdersâ equity | $600,000 | $545,000 |
The income statement data for Dependable DME Company follows:
| Sales | $600,000 |
| Cost of goods sold | 350,000 |
| Gross profit | $250,000 |
| Operating expenses | 100,000 |
| Operating income | $150,000 |
| Interest expense | 25,000 |
| Income before taxes | $125,000 |
| Income tax expense | 65,000 |
| Net income | $60,000 |
Required:
Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.
You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)
Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)
Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)
In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)