Question

(1) Prepare the income statements and balance sheets for years 2017 and 2018 for Smith Company using the following information. The balance sheet numbers are at the end of year figures.

Item	2017	2018
Accounts Payable	150.0	180.0
Accounts Receivable	150.0	180.0
Accumulated Depreciation	270.0	300.0
Cash & Cash Equivalents	10.0	12.0
Common Stock	50.0	50.0
Cost of Goods Sold	550.0	650.0
Depreciation	25.0	30.0
Interest Expense	20.2	21.7
Inventory	200.0	180.0
Long-term Debt	150.0	150.0
Gross Plant & Equipment	520.0	600.0
Retained Earnings	208.5	225.0
Sales	1,000.0	1,200.0
SG&A Expenses	300.0	370.0
Notes Payable	51.5	67.0
Tax Rate	40%	40%

(2) Answer the following questions:

(a) How much did Smith Company spend in acquiring fixed assets in 2018?

(b) How much dividend did Smith Company pay out during 2018?

(c) Using the end of year numbers, did the short-term liquidity improve or deteriorate from 2017 to 2018? Answer this question using at least two short-term liquidity financial ratios.

(d) Using the end of year numbers, did the asset management efficiency improve or deteriorate from 2017 to 2018? Answer this question using at least two asset management financial ratios.

Answer 1

2]
a]	Amount spent in acquiring fixed assets = 600-520	80.0
b]	Dividend paid in 2018:
	NI for 2018 = (1200-370-21.7-30-650)*(1-40%) =	77.0
	Dividend paid in 2018 = Beginning retained earnings+NI for the year-Ending retained earnings = 208.50+77-225 =	60.5
c]		2017	2018
i]	Current ratio [Current assets/Current liabilities]	1.79	1.51
		(150+10+200)/(150+51.5)	(180+12+180)/(180+67)
ii]	Acid test ratio [(Cash & cash equivalents+AR)/Current liabilities)]	0.79	0.78
		(150+10)/(150+51.5)	(180+12)/(180+67)
	The short term liquidity position is not satisfactory during the two year period as the current ratio
	and the acid test ratio are lower than the standard ratios of 2 and 1 respectively. However, to have
	a proper comparison, the above ratios should be compared with industry average ratios.
	Further, the ratios have deteriorated in 2018.
d]
i]	Receivable turnover ratio [Sales/AR]	6.67	6.67
		[1000/150]	[1200/180]
ii]	Inventory turnover ratio [COGS/Inventory]	5.00	6.67
		[1000/200]	[1200/180]
	The above two asset management ratios indicate that the efficiency in management of current assets
	is stable over the two years with improvement in the inventory turnover ratio, However, a proper
	comparison can be made only with industry averages.