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Question 4 Comparative financial statement data of Lannister Inc. are as follows: Lannister Inc. Comparative Income...

Question 4

Comparative financial statement data of Lannister Inc. are as follows:

Lannister Inc.

Comparative Income Statement

Years Ended December 31, 2016 and 2015

2016

2015

Net sales

$687,000

$595,000

Cost of goods sold

375,000

276,000

Gross profit

312,000

319,000

Operating expenses

129,000

142,000

Income from operations

183,000

177,000

Interest expense

37,000

45,000

Income before income tax

146,000

132,000

Income tax expense

36,000

51,000

Net income

$110,000

$81,000

Lannister Inc.

Comparative Balance Sheet

December 31, 2016 and 2015

2016

2015

2014

Current assets:

   Cash

$45,000

$49,000

   Current receivables, net

212,000

158,000

$200,000

   Inventories

297,000

281,000

181,000

   Prepaid expenses

4,000

29,000

      Total current assets

558,000

517,000

Property, plant and equipment, net

285,000

277,000

Total assets

$843,000

$794,000

$700,000

Accounts payable

150,000

105,000

112,000

Other current liabilities

135,000

188,000

Total current liabilities

$285,000

$293,000

Long-term liabilities

243,000

231,000

Total liabilities

528,000

524,000

Common shareholders’ equity, no par

315,000

270,000

199,000

Total liabilities and shareholders’ equity

$843,000

$794,000

Other information:

Market price of Lannister common stock: $102.17 at December 31, 2016; and $77.01 at December 31, 2015.

Common shares outstanding: 18,000 during 2016 and 17,500 during 2015.

All sales on credit.

  

Compute the following ratios for 2016 and 2015

Current ratio

Quick ratio (acid test)

Receivables turnover and days’ sales outstanding (rounded to the nearest whole day)

Inventory turnover and days inventory outstanding (rounded to the nearest whole day)

Accounts payable turnover and days’ payable outstanding (rounded to the nearest whole day).

Cash conversion cycle (in days)

Times-interest-earned ratio

Return on assets (use DuPont analysis)

Return on common shareholders’ equity (use DuPont analysis)

Earnings per share of common stock

Price/earnings ratio.

Decide whether (a) Lannister’s financial position improved or deteriorated during 2016 and (b) the investment attractiveness of Lannister’s common stock appears to have increased or decreased.

Solutions

Expert Solution

Answer of Part a:

For 2016:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $558,000 / $285,000
Current Ratio = 1.96

For 2015:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $517,000 / $293,000
Current Ratio = 1.76

Answer of Part b:

For 2016:

Acid Test Ratio = (Current Assets – Inventories – Prepaid Expenses) / Current Liabilities
Acid Test Ratio = ($558,000 - $297,000 - $4,000) / $285,000
Acid Test Ratio = $257,000 / $285,000
Acid Test ratio = 0.90

For 2015:

Acid Test Ratio = (Current Assets – Inventories – Prepaid Expenses) / Current Liabilities
Acid Test Ratio = ($517,000 - $281,000 - $29,000) / $293,000
Acid Test Ratio = $207,000 / $293,000
Acid Test ratio = 0.71

Answer of Part c:

For 2016:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($158,000 + $212,000) /2
Average Accounts Receivable = $185,000

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $687,000 / $185,000
Accounts Receivable Turnover = 3.71 times

Days Sales Outstanding = 365 days / Accounts Receivable Turnover
Days Sales Outstanding = 365 / 3.71
Days Sales Outstanding = 98 days

For 2015:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($200,000 + $158,000) /2
Average Accounts Receivable = $179,000

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $595,000 / $179,000
Accounts Receivable Turnover = 3.32 times

Days Sales Outstanding = 365 days / Accounts Receivable Turnover
Days Sales Outstanding = 365 / 3.32
Days Sales Outstanding = 110 days

Answer of Part d:

For 2016:

Average Inventory = (Beginning Inventory + Ending Inventory) /2
Average Inventory = ($281,000 + $297,000) /2
Average Inventory = $289,000

Inventory Turnover= Cost of Goods Sold / Inventory
Inventory Turnover = $375,000 / $289,000
Inventory Turnover = 1.30 times

Days Inventory Outstanding = 365 days / Inventory Turnover
Days Inventory Outstanding = 365 / 1.30
Days Inventory Outstanding = 281 days

For 2015:

Average Inventory = (Beginning Inventory + Ending Inventory) /2
Average Inventory = ($181,000 + $281,000) /2
Average Inventory = $231,000

Inventory Turnover= Cost of Goods Sold / Inventory
Inventory Turnover = $276,000 / $231,000
Inventory Turnover = 1.19 times

Days Inventory Outstanding = 365 days / Inventory Turnover
Days Inventory Outstanding = 365 / 1.19
Days Inventory Outstanding = 307 days


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