Question

Comparative financial statements for The Cullumber Company Ltd. are shown below.

THE CULLUMBER COMPANY LTD. Income Statement Year Ended December 31
		2021		2020
Net sales		$1,779,530		$1,819,610
Cost of goods sold		1,091,290		1,028,920
Gross profit		688,240		790,690
Operating expenses		521,960		422,530
Profit from operations		166,280		368,160
Interest expense		25,650		18,630
Profit before income tax		140,630		349,530
Income tax expense		42,189		104,859
Profit		$98,441		$244,671

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Comparative financial statements for The Cullumber Company Ltd. are shown below.

THE CULLUMBER COMPANY LTD. Income Statement Year Ended December 31
		2021		2020
Net sales		$1,779,530		$1,819,610
Cost of goods sold		1,091,290		1,028,920
Gross profit		688,240		790,690
Operating expenses		521,960		422,530
Profit from operations		166,280		368,160
Interest expense		25,650		18,630
Profit before income tax		140,630		349,530
Income tax expense		42,189		104,859
Profit		$98,441		$244,671

THE CULLUMBER COMPANY LTD. Balance Sheet December 31
Assets		2021		2020
Current assets
Cash		$112,631		$67,485
Accounts receivable		102,723		112,506
Inventory		141,460		123,690
Total current assets		356,814		303,681
Property, plant, and equipment		451,990		530,838
Total assets		$808,804		$834,519
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$147,370		$127,596
Income tax payable		43,310		37,860
Current portion of mortgage payable		10,610		19,920
Total current liabilities		201,290		185,376
Mortgage payable		95,460		193,100
Total liabilities		296,750		378,476
Shareholders’ equity
Common shares (50,190 issued in 2021; 54,330 in 2020)		150,570		162,990
Retained earnings		361,484		293,053
Total shareholders’ equity		512,054		456,043
Total liabilities and shareholders’ equity		$808,804		$834,519

Additional information:

1.		All sales were on account.
2.		The allowance for doubtful accounts was $5,412 in 2021 and $5,087 in 2020.
3.		On July 1, 2021, 4,140 shares were reacquired for $9 per share and cancelled.
4.		In 2021, $5,170 of dividends were paid to the common shareholders.
5.		Cash provided by operating activities was $332,125.
6.		Cash used by investing activities was $153,228.

Calculate all possible liquidity, solvency, and profitability ratios for 2021. (Round answers for Collection period, Days sales in inventory, Operating cycle and Free cash flow to 0 decimal places, e.g. 125. Round answer for Earnings per share to 2 decimal places, e.g. 12.56. Round all other answers to 1 decimal place, e.g. 12.5 or 12.5%. )

Answer 1

RATIO ANALYSIS

THE CULLUMBET COMPANY LTD.

FOR THE YEAR ENDED 31 DECEMBER, 2021

S.no.	Ratio	Formula	Year 2021 Amount $
	LIQUIDITY RATIO
(1)	Current ratio	current assets/current liability	356,814/201,290 =1.7:1
(2)	Quick ratio	(current assets - inventory) / current liability	(356,814-141,460)/201,290 =1.1:1
(3)	Receivable turnover	Net credit sales / Average account receivable	1,774,118/107,615 = 16.5 times
(4)	Inventory turnover	Cost of goods sold / Average Inventory	1,091,290/132,575 = 8.2 times
(5)	Collection period	365 days / Receivable turnover ratio	365/16.5 =22 days
(6)	Days sales in Inventory	Ending Inventory / cost of goods sold* 365	141,460/1,091,290*365 =47 days
(7)	operating cycle	Days sales in Inventory + collection period	47 days + 22 days =69days
	SOLVENCY RATIO
(8)	Debt to total assets	Tota debt / Total assets*100	95,460/808,804*100 = 11.8%
(9)	Interest coverage	Earning before interest and tax / Interest expense	166,280/25,650 = 6.5 times
(10)	Free cash flow	cash flow from operating activities - capital expenditure ( cash used by investing activities)	$332,125 - $153,228 =$ 178,897
	PROFITABILITY RATIO
(11)	Gross profit margin	Gross profit / Net sales *100	688,240/1,774,118*100 = 38.8%
(12)	Net profit margin	Net profit / Net sales *100	98,441/1,774,118*100 = 5.5 %
(13)	Return on assets	Net income / Average total assets*100	98,441/821,512"100 =12%
(14)	Return on equity	Net income / shareholders' equity*100	98,441/512,054*100 = 19.2%
(15)	Asset turnover	Net sales/ Average total assets	1,774,118/821,512 =2.2 times
(16)	Earning per share	Net income / Average outstanding shares	98,441/50,190 =$1.96
(17)	Payout ratio	Dividend per share / Earning per share *100	0.1/1.96*100 =5.1 %

Working note:
(1) All sales are on account, hence

Net credit sales = $1,779,530 - $5,412

= $1,774,118

(2) Average account receivable = (Account receivable of 2020 + Account receivable of 2021) / 2

= ($112,506 + $102,723)/2

=$107,614.5

=$107,615 approx

(3) Average Inventory= (Inventory of 2020 + Inventory of 2021)/2

= ($123,690 + $ 141,460)/2

= $132,575

(4) Total debt= Mortgage payable ( non current liability)

= $95,460

(5) Average total assets = (Total assets of 2020 + Total assets of 2021) /2

= ($834,519 + $ 808,504)/2

=$821,511.5

= $821,512 approx

(6) Average outstanding shares

Number of outstanding shares for the year 2021

= 50,190 - 4,140

= 46,050

= (54,330 + 46,050)/2

= 50,190

(7) Dividend per share = Dividend paid in 2021 / Number of outstanding shares of 2021

THANK YOU !

= $5,170/46,050

=$0.1