Question

Financial statement analysis is the process of analyzing a company's financial statements to make better economic decisions. The process for financial statement analysis includes specific techniques for evaluating risks, performance, and future prospects of an organization.

Directions

This Assessment is separated into four parts. In Part 1 of this Assessment, you will begin by researching and summarizing four of the benefits of financial analysis and indicating which is the most significant to you. In Part 2 of this Assessment, you will define the ratios listed. In Part 3 of this Assessment, you will classify, calculate, and explain the significance of Liquidity, Profitability, and Market Value financial ratios, and provide a year to year comparison of assessed financial trends. In Part 4 of this Assessment, you will compose an analytical essay in a minimum of 350 words reporting the one financial measurement trend you find to be most significant and actions necessary to improve results.

Use this Word template provided to complete your Assessment.

Questions

Part 1.

Locate and read the following article located from the Library:

Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting & Financial Studies Journal, 19(3), 75–85.

Refer to pages 75 and 76 of Faello’s (2015) work. In four separate paragraphs (one for each question), summarize four of the benefits of financial analysis mentioned in the journal article. In one paragraph, describe which one of the four benefits you consider to be most significant.

Review the following financial data, and then answer the questions below.

Company X Income Statement
FYE 2014 and 2015
Period Ending	31-Jan-15	31-Jan-14
Total Sales	$ 485,651,000	$ 476,294,000
Cost of Goods	365,086,000	358,069,000
Gross Profit	120,565,000	118,225,000
Selling General and Administrative	93,418,000	91,353,000
Operating Profit	27,147,000	26,872,000
Total Other Income/Expenses Net	113,000	119,000
Earnings Before Interest And Taxes	27,034,000	26,753,000
Interest Expense	2,461,000	2,335,000
Income Before Tax	24,573,000	24,418,000
Income Tax Expense	7,985,000	8,105,000
Net Income From Continuing Ops	16,588,000	16,313,000
Discontinued Operations	285,000	144,000
Net Income (Net Profit)	$   16,303,000	$   16,169,000
14,000,000 shares outstanding
Market Share price per share	$10.00	$9.00

Company X Balance Sheet
FYE 2014 and 2015
Period Ending	31-Jan-15	31-Jan-14
Assets
Current Assets
Cash and Cash Equivalents	$9,135,000	$7,281,000
Net Receivables	6,778,000	6,677,000
Inventory	45,141,000	44,858,000
Other Current Assets	2,224,000	2,369,000
Total Current Assets	63,278,000	61,185,000
Property Plant and Equipment	116,655,000	117,907,000
Goodwill	18,102,000	19,510,000
Other Assets	5,671,000	6,149,000
Total Assets	203,706,000	204,751,000
Liabilities
Current Liabilities
Accounts Payable	58,583,000	57,174,000
Short/Current Long Term Debt	6,689,000	12,082,000
Other Current Liabilities	-	89,000
Total Current Liabilities	65,272,000	69,345,000
Long Term Debt	43,692,000	44,559,000
Deferred Long Term Liability Charges	8,805,000	8,017,000
Minority Interest	4,543,000	5,084,000
Total Liabilities	122,312,000	127,005,000
Miscellaneous Stocks Options Warrants	0	0
Common Stock	323,000	323,000
Retained Earnings	85,777,000	76,566,000
Capital Surplus	2,462,000	2,362,000
Other Stockholders Equity	-7,168,000	-1,505,000
Total Stockholders’ Equity	81,394,000	77,746,000
Total Liabilities + Stockholders’ Equity	$ 203,706,000	$ 204,751,000
Number of Shares Outstanding	14,000,000	14,000,000
Market Share price per share	$10.00	$9.00

Part 2.

Define the ten financial ratios below.

Financial Ratios:

Financial Ratios:

Current Ratio is equal to Current assets / Current Liability

2014: 61,185,000 / 69,345,000 = 96.95%

Quick Ratio) (Cash and cash equivalents + Current receivable) / Current Liability

2014: 7,281,000 + 6,677,000 / 69,345,000 = 20.13%

2015: 9,135,000 = 6,778,000 / 65,272,000 = 24.38%

Accounts Receivable Turns) Net Credit Sales / Average Accounts Receivable

485651000 / 6,727,500 = 72.19

Accounts Payable Turns

Return on Equity) Net Income / Shareholder’s equity

16,303,000/81,394,000 = 20.03%

Return on Assets

Operating Profit Margin

Net Profit (after tax) Margin

Earnings per Share

Price to Earnings

Answer 1

		2015	2014
1	Return on assets = net income / total assets
	Net income	16303000	16169000
	Total assets	203706000	204751000
	Return on assets	8.0%	7.9%
2	Operating Profit margin = Operating profit / net sales
	Operating profit	27147000	26872000
	Net sales	485651000	476294000
	Operating profit margin	5.6%	5.6%
3	Profit margin = net income / net sales
	Net income (after tax)	16588000	16313000
	Net sales	485651000	476294000
	Profit margin	3.4%	3.4%
4	Net income	16303000	16169000
	Loss on discontinued operations	285000	144000
	Net income from continued operations	16588000	16313000
	Number of shares	14000000	14000000
	Earning per share = 2,890,000 / 1,477,158	1.18	1.17
5	Price to earnings ratio = Price per share / Earning per share
	Price per share	10	9
	Earning per share	1.18	1.17
	Price to earning ratio	8.44	7.72