Question

The financial statements of Flowers Co. appear below:

Flowers Co.

Comparative Balance Sheets

December 31, 2018 - 2019

——————————————————————————————————

Assets                                                                         2019                 2018                                                                                               

Cash                                                                       $ 75,000          $ 150,000

Short-term investments                                             75,000             225,000

Accounts receivable (net)                                       150,000             112,500

Inventory                                                                225,000             262,500

Property, plant and equipment (net)                       975,000          1,125,000

            Total assets                                               $1,500,000      $1,875,000

Liabilities and stockholders' equity

Accounts payable                                                   $ 75,000          $ 112,500

Short-term notes payable                                        150,000             337,500

Bonds payable                                                                    300,000             600,000

Common stock                                                        562,500             562,500

Retained earnings                                                  412,500             262,500

Total liabilities and stockholders' equity           $1,500,000         $1,875,000

Flowers Co.

Income Statement

For the Year Ended December 31, 2019

Net sales                                                                   $1,500,000

Cost of goods sold                                                       937,500

Gross profit                                                                  562,500

Expenses

            Operating expenses               $157,500

            Interest expense                      67,500

                        Total expenses                                     225,000

Income before income taxes                                       337,500

Income tax expense                                                    101,250

Net income                                                               $ 236,250

Required:

a. Using the financial statements, compute the following ratios for Flowers Co. for 2019. Show all computations.                                                                                             

1. Current ratio.                                                          

2. Acid-test ratio.

3. Accounts receivable turnover.                               

4. Inventory turnover.

5. Profit margin.                                                         

6. Return on assets.

7. Assets turnover.                                                     

8. Times interest earned.

9. Working capital.

10. Debt to assets ratio.

b. Prepare a vertical analysis of the 2019 income statement data for Flowers Co.            

                                                                                                                       

c. Based on the ratios calculated in (a), and the vertical analysis in (b), discuss briefly the improvement or lack thereof in financial position and operating results from 2018 to 2019 of Flowers Co.                                                                                                        

Answer 1

Company name: flowers co.

A- COMPUTATION OF DIFFERENT RATIOS:

working note;

calculation of current asset , liquid asset & current liability

2018 2019

cash 75000 150000

short term investment    75000 225000

accounts receivable 150000 112500

LIQUID ASSET   300000 487500

+Inventory 225000 262500

CURRENT ASSET 525000 750000

property , plant & equipment 975000 1125000

TOTAL ASSET 1500000 1875000

accounts payable 75000 112500

short term notes payable 150000 337500

CURRENT LIABILITY 225000 450000

1- CURRENT RATIO: Current asset / current liability

2018 525000/ 225000= 2.33

2019 750000/ 450000=1.67

2- ACID TEST RATIO: Liquid asset/ current liability

Liquid asset= current asset+loans &advances- inventories

2018 300000/ 225000=1.33

2019 487500/ 450000=1.08

3-ACCOUNTS RECEIVABLE TURNOVER: Sales / average accounts receivable

average accounts receivable= opening+closing / 2

150000+112500    /2

2019 1500000 / 131250=11.42

4-inventory turnover ratio= cost of goods sold / average inventory

average turnover= 225000+262500 / 2 =243750

2019 937500/ 243750 =3.85

5-profit ,margin = net sales- cost of goods sold / net sales

2019 1500000-937500 /1500000 =.375

6- Return on total assets= net income / average total assets

Average total asset= 1500000+1875000 /2 =1687500

2019 236250 /1687500= .14

7-ASSET TURNOVER RATIO; REVENUE / NET ASSETS

2019 1500000/ 1875000= 0.8

8-TIMES INTREST EARNED; EBIT / Total interest exp.

2019 337500+67500 /67500= 6

9- working capital ; current asset - current liability

2018 525000-225000=300000

2019 750000-450000=300000

10-Debt to asset ratio ; short term + long term debt / total asset

2018 75000+150000+300000 / 1500000= .35

  2019    112500+337500+600000 / 1875000=.56

B- Vertical analysis of income statement

2019($)

Revenue 100%

cost of goods sold 62.5%

gross profit 37.5%

operating expenses 10.5%

intrest expenses 4.5%

income tax expenses 6.75%

Net income 15.75%

c-interpretation;

1- Current ratio of 2: 1 indicates the highely solvent position where as 1.33:1 is considered by bank as the minimum acceptable level for providing working capital finance .

a very high current ratio will have the adverse effect on the profitability ie- it leads to ineffeiciency in collection of debtors or high balance in cash or bank without proper investment.

2-acid test ratio of 1:1 indicates highly solvent position

3- Higher the stock turnover rate or lower the the stock turnover period are better.

coclusion

overally the fowers company is in good position in 2019 as compared to 2018

because the current ratio , acid test raio & inventory turnover ratios are within the limit.

in 2019 the net income is 15.75% of revenue .