Financial Statement Analysis
I. Large Land Photo Shop has asked you to determine whether the company's ability to pay current liabilities and total liabilities improved or deteriorated during 2012. To answer this question, you gather the following data:
|
|
2012
|
2011
|
|
Cash
|
$58,000
|
$57,000
|
|
Short-term investments
|
31,000
|
|
|
Net receivables
|
110,000
|
132,000
|
|
Inventory
|
247,000
|
297,000
|
|
Total assets
|
585,000
|
535,000
|
|
Total current liabilities
|
255,000
|
222,000
|
|
Long-term note payable
|
46,000
|
48,000
|
|
Income from operations
|
180,000
|
153,000
|
|
Interest expense
|
52,000
|
39,000
|
1. Compute the following ratios for 2012 and 2011:
a. Current ratio
b. Acid-test ratio
c. Debt to equity ratio
II. Using ratios to evaluate a stock investment
Comparative financial statement data of Danfield, Inc., follow:
Danfield, Inc.
|
Danfield, Inc.
Comparative Income Statement
Years Ended December 31, 2012 and 2011
|
|
|
2012
|
2011
|
|
Net sales
|
$467,000
|
$428,000
|
|
Cost of goods sold
|
237,000
|
218,000
|
|
Gross profit
|
$230,000
|
$210,000
|
|
Operating expenses
|
136,000
|
134,000
|
|
Income from operations
|
$94,000
|
$76,000
|
|
Interest expense
|
9,000
|
10,000
|
|
Income before income tax
|
$85,000
|
$66,000
|
|
Income tax expense
|
24,000
|
27,000
|
|
Net income
|
$61,000
|
$39,000
|
|
Danfield, Inc.
Comparative Income Statement
Years Ended December 31, 2012 and 2011
|
|
|
2012
|
2011
|
2010*
|
|
Current assets:
|
|
|
|
|
Cash
|
$97,000
|
$95,000
|
|
|
Current receivables, net
|
112,000
|
118,000
|
$102,000
|
|
Inventories
|
145,000
|
163,000
|
203,000
|
|
Prepaid expenses
|
12,000
|
5,000
|
|
|
Total current assets
|
$366,000
|
$381,000
|
|
|
Property, plant, and equipment, net
|
211,000
|
179,000
|
|
|
Total assets
|
577,000
|
$560,000
|
598,000
|
|
Total current liabilities
|
$225,000
|
$246,000
|
|
|
Long-term liabilities
|
114,000
|
97,000
|
|
|
Total liabilities
|
$339,000
|
$343,000
|
|
|
Preferred stock, 3%
|
108,000
|
108,000
|
|
|
Common stockholders' equity, no par
|
130,000
|
109,000
|
|
|
Total liabilities and stockholders' equity
|
$577,000
|
$560,000
|
|
* Selected 2010 amounts
1. Market price of Danfield's common stock: $86.58 at December 31, 2012 and $46.54 at December 31, 2011.
2. Common shares outstanding: 12,000 during 2012 and 10,000 during 2011 and 2010.
3. All sales on credit.
Requirements
1. Compute the following ratios for 2012 and 2011:
a. Current ratio
b. Times-interest-earned ratio
c. Inventory turnover
d. Gross profit percentage
e. Debt to equity ratio
f. Rate of return on common stockholders' equity
g. Earnings per share of common stock
h. Price/earnings ratio
2. Decide (a) whether Danfield's ability to pay debts and sell inventory improved or deteriorated during 2012 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.