Question

-What kind of financial information is a publically traded company required to provide to its stockholders? Which financial statement do you think provides the best information for investors?

-Differentiate (compare) among the information that is provided in each of the following financial statements: (1) balance sheet, (2) income statement, and (3) statement of cash flows.

-Discuss some of the limitations associated with performing ratio (financial statement) analysis. What is the most important ingredient (input) in completing ratio analysis? Explain why.

-Robust Robots (RR) recently issued 100,000 shares of common stock at $7 per share. The stock has a par value equal to $3 per share. What amount of the $700,000 that RR raised should be reported in the “common stock at par” account, and what amount should be reported in the “Paid-in capital” account?

-Crooked Golf's 2014 income statement shows that net income was $90,000, depreciation was $25,000, and taxes were $60,000. What was Crooked Golf's net cash flow in 2014?

-HighTech Wireless just published its 2014 income statement, which shows net income equal to $240,000. The statement also shows that operating expenses were $500,000 before including depreciation, depreciation was $100,000, and the tax rate was 40 percent. If HighTech has no debt, what were its sales revenues in 2014? What was its 2014 net cash flow?

-Credit Card of America (CCA) has a current ratio of 3.5 and a quick ratio of 3.0. If its total current assets equal $73,500, what are CCA's (a) current liabilities and (b) inventory?

-At the end of the year, Wrinkle Free Laundry (WFL) had $150,000 in total assets. (a) If WFL's total assets turnover was 2.0, what were its sales revenues? (b) If WFL's return on assets was 6 percent, what were its net income and net profit margin?

-The balance sheet for Panoramic Open Pictures (POP) shows $300,000 in total assets and $200,000 in total liabilities. POP's return on assets (ROA) is 5 percent. Compute POP's (a) net income for the year and (b) its return on equity (ROE). POP has no preferred stock.

-Legacy Cleaning has a debt ratio equal to 40 percent, total assets equal to $750,000, return on assets (ROA) at 6 percent, and total assets turnover of 3.0. (a) If it has no preferred stock, what amount of common equity does Legacy have? (b) What is Legacy's net profit margin?

Answer 1

1) A publically traded company is required to provide information about the performance of the company. It also tells about its profitability and the factors/ risk that affect its profitability. This information is required to be submitted to the Securities Exchange on an annual and quarterly basis.

The financial statement that provides the best information to investors is "Cash Flow Statement" as it helps the investor in understanding the difference between the accounting income and cash flow.

2) The Balance Sheet shows the Net Position of the Entity. It shows what a company owns in the form of assets and what it owes in the form of liabilities.

The Income Statement provides the investor with information whether the entity is generating Profit or loss for the period as it provides information about revenue and expenses of the company.

The Cash Flow Statement measures how well a company manages to generate its cash to pay its debt obligations and operating expenses.

3) Ratio analysis is a popular technique of financial analysis. However, it suffers from the following limitations :

a) Ratio analysis is based on past results, therefore, doesn't represent future company performance.

b) Firms can use window dressing techniques to make their financial statements look better than they actually are.

c) A firm might have some ratios that look good and other ratios that look bad, making it difficult to tell whether the company is good or bad.

The most important ingredient in completing ratio analysis is judgment used when interpreting the results to reach an overall conclusion about the firm's financial position.

4) i) Common stocks at par = Number of shares * Par Value per share

Therefore, Common stocks at par = 1,00,000*$3

= $3,00,000

ii) When shares for sold in excess of their par value, the excess amount is recorded separately in Paid-in capital account.

Therefore, the amount that should be recorded in Paid-in capital account = $4,00,000 ($7,00,000-$3,00,000).

5) Net cash flow in 2014 = Net Income + Depreciation (as depreciation is a non-cash expense and it was deducted while calculating net income)

Net cash flow = $1,15,000 ($90,000 + $25,000)

6) i) Calculation of Sales Revenue :

Income Before Tax = Net Income / (1-Tax rate)

Income Before Tax = $4,00,000 ($2,40,000/60%)

Sales = Income Before tax + Operating Expenses including Depreciation

Sales = $10,00,000 ($4,00,000+$5,00,000+$1,00,000)

ii) Net Cash Flow = Net Income + Depreciation

Therefore, Net Income = $3,40,000 ($2,40,000+$1,00,000)

7) Current Ratio = Current Assets / Current Liabilities

Therefore, Current Liabilities = Current Assets / Current Ratio

Current Liabilities = $21,000 ($73,500/3.5)

Quick Ratio = (Current Assets - Inventory)/ Current Liabilities

Therefore, Inventory = Current Assets - (Current Liabilities * Quick Ratio)

Inventory = $10,500

8) Assets Turnover = Sales Revenue / Total Assets

Therefore, Sales Revenue = $3,00,000 ($1,50,000 * 2)

Return on Assets = Net Income / Total Assets

Therefore, Net Income = $9,000 ($1,50,000 * 6%)

Profit Margin = Net Income / Sales

Therefore, Profit Margin = 3% ($9,000 / $3,00,000)

9) Return on Assets = Net Income / Total Assets

Therefore, Net Income = $15,000 ($3,00,000 * 5%)

Return on Equity = Net Income / Equity shareholders fund

Equity Fund = Total Assets - Total Liabilities

Therefore, Return on Equity = 15% ($15,000 / $1,00,000)

10) Debt Ratio = Toal Liabilities / Total Assets

Total liabilities = $3,00,000 ($7,50,000 * 40%)

Therefore, Common Equity = $4,50,000 ($7,50,000 - $3,00,000)

Profit Margin = Net Income / Sales

Net Income = Return on Assets* Total Assets

Net Income = $45,000 ($7,50,000 * 6%)

Sales = Assets Turnover Ratio * Total Assets

Sales = $22,5,0000 (3 * $7,50,000)

Profit Margin = 2% ($45,000 / $22,50,000)