Question

1.

Horizontal Analysis of the Income Statement

Income statement data for Winthrop Company for two recent years ended December 31, are as follows:

	Current Year			Previous Year
Sales	$406,100			$310,000
Cost of goods sold	335,400			260,000
Gross profit	$70,700			$50,000
Selling expenses	$21,780			$18,000
Administrative expenses	19,350			15,000
Total operating expenses	$41,130			$33,000
Income before income tax	$29,570			$17,000
Income tax expenses	11,800			6,800
Net income	$17,770			$10,200

a. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. If required, round to one decimal place.

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$406,100	$310,000	$	%
Cost of goods sold	335,400	260,000		%
Gross profit	$70,700	$50,000	$	%
Selling expenses	$21,780	$18,000	$	%
Administrative expenses	19,350	15,000		%
Total operating expenses	$41,130	$33,000	$	%
Income before income tax	$29,570	$17,000	$	%
Income tax expense	11,800	6,800		%
Net income	$17,770	$10,200	$	%

b. The net income for Winthrop Company increased between years. This increase was the combined result of an   in sales and   percentage   in cost of goods sold. The cost of goods sold increased at a   rate than the increase in sales, thus causing the percentage increase in gross profit to be   than the percentage increase in sales.

2.

Current Position Analysis

The following data were taken from the balance sheet of Nilo Company at the end of two recent fiscal years:

				Current Year			Previous Year
Current assets:
Cash				$377,000			$302,400
Marketable securities				436,500			340,200
Accounts and notes receivable (net)				178,500			113,400
Inventories				900,200			592,900
Prepaid expenses				463,800			379,100
	Total current assets			$2,356,000			$1,728,000
Current liabilities:
Accounts and notes payable
	(short-term)			$359,600			$378,000
Accrued liabilities				260,400			162,000
	Total current liabilities			$620,000			$540,000

a. Determine for each year (1) the working capital, (2) the current ratio, and (3) the quick ratio. Round ratios to one decimal place.

			Current Year			Previous Year
1. Working capital	$			$
2. Current ratio
3. Quick ratio

b. The liquidity of Nilo has   from the preceding year to the current year. The working capital, current ratio, and quick ratio have all  . Most of these changes are the result of an   in current assets relative to current liabilities.

3.

1. Six Measures of Solvency or Profitability

   The following data were taken from the financial statements of Gates Inc. for the current fiscal year.

   Property, plant, and equipment (net)						$1,281,600
   Liabilities:
   	Current liabilities			$213,000
   	Note payable, 6%, due in 15 years			1,068,000
   	Total liabilities					$1,281,000
   Stockholders' equity:
   	Preferred $4 stock, $100 par (no change during year)					$960,750
   	Common stock, $10 par (no change during year)					960,750
   Retained earnings:
   	Balance, beginning of year	$1,024,000
   	Net income	472,000		$1,496,000
   	Preferred dividends	$38,430
   	Common dividends	176,570		215,000
   	Balance, end of year					1,281,000
   Total stockholders' equity						$3,202,500
   Sales						$28,850,250
   Interest expense						$64,080

   Assuming that total assets were $4,259,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

   a. Ratio of fixed assets to long-term liabilities
   b. Ratio of liabilities to stockholders' equity
   c. Asset turnover
   d. Return on total assets	%
   e. Return on stockholders’ equity	%
   f. Return on common stockholders' equity	%

Answer 1

Answer-1

(a) A comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year.

Winthrop Company

Comparative Income Statement

For the Years Ended December 31

Particulars	Current year Amount ($)	Previous year Amount ($)	Increase (Decrease) Amount ($)	Increase (Decrease) Percentage
Sales	406,100	310,000	96,100	31%
Cost of goods sold	335,400	260,000	75,400	29%
Gross profit	70,700	50,000	20,700	41.40%
Selling expenses	21,780	18,000	3,780	21%
Administrative expenses	19,350	15,000	4,350	29%
Total operating expenses	41,130	33,000	8,130	24.64%
Income before income tax	29,570	17,000	12,570	73.94%
Income tax expense	11,800	6,800	5,000	73.53%
Net income	17,770	10,200	7,570	74.22%

(b) The net income for Winthrop Company increased between years. This increase was the combined result of an increase in sales and 29 percentage increase in cost of goods sold. The cost of goods sold increased at a lower rate than the increase in sales, thus causing the percentage increase in gross profit to be higher than the percentage increase in sales.

Answer-2

(a) Ratios

Particulars	Current Year	Previous Year
Working capital = Current Assets - Current Liabilities	= $23,56,000-$6,20,000 =$17,36,000	=$17,28,000-$5,40,000 =$11,88,000
Current Ratio = Current assets/Current liabilities	=$23,56,000/$6,20,000 =3.80	=$17,28,000/$5,40,000 =3.20
Quick Ratio = Quick assets/Current liabilities	=($23,56,000-$9,00,200-$4,63,800)/$6,20,000 =1.60	=($17,28,000-5,92,900-$3,79,100)/$5,40,000 =1.40

(b) The liquidity of Nilo has increased from the preceding year to the current year. The working capital, current ratio, and quick ratio have all increased. Most of these changes are the result of an increased in current assets relative to current liabilities.

Answer-3

(a) Ratio of fixed assets to long-term liabilities = Fixed Assets / Long Term Liabilities

= $12,81,600 / $10,68,000

= 1.20

(b) Ratio of liabilities to stockholders' equity = Total Liabilities / Stockholder’s Equity

= $12,81,000 / $32,02,500

= 0.40

(c) Asset turnover = Net Sales / Average Total Assets

= $2,88,50,250 / (($42,59,000+$44,83,500)/2)

= $2,88,50,250 / $43,71,250

= 6.60

(d) Return on total assets = (EBIT / Average Total Assets)*100

= ($4,72,000 / $43,71,250)*100

= 10.80%

(e) Return on stockholders’ equity = (Net Income / Shareholder’s Equity)*100

= ($4,72,000 / $32,02,500)*100

= 14.74%

(f) Return on common stockholders' equity = ((Net Income – Preferred Dividend) / Average common stockholder’s equity)*100

= (($4,72,000-38,430)/$9,60,750)*100

= 45.13%