Problem:
Write a memo to your superior analyzing the performance of SAC for 2010 and 2011. This analysis should be based on the information found in the consolidated financial statements.
Your memo should include the following financial ratios and a comparison of the ratios over the two-year period:
• current ratio
• debt-to-equity ratio
• inventory turnover (use ending inventory)
• accounts receivable turnover (use ending accounts receivable balance)
• gross margin percentage
Show your calculations for each ratio and comment on SAC's performance for each ratio. Discuss other tools/methods that could be utilized to analyze the financial performance of a company.
Sparklin Automotive Company
Comparative Income Statements
For Years Ended December 31, 2010 and 2011
(dollars in thousands)
Increase (Decrease)
2010 2011 Amount Percent
Sales (on account) $155,000 $168,000 $13,000 8%
Cost of Goods Sold 78750 99620 $20,870 27%
Gross Margin 76,250 68,380 -$7,870 -10%
Operating Expenses:
Selling Expenses 4,200 1,560 -$2,640 -63%
Administrative Expenses 3,500 3,000 -$500 -14%
Total Operating Expenses 7,700 4,560 -$3,140 -41%
Net Operating Income 68,550 63,820 -$4,730 -7%
Interest Expense 20,565 19,146 -$1,419 -7%
Net Income Before Taxes 47,985 44,674 -$3,311 -7%
Less Income Taxes (34%) 16,315 15,189 -$1,126 -7%
Net Income $31,670 $29,485 -$2,185 -7%