Question

The comparative financial statements prepared at December 31 for Pinnacle Plus showed the following summarized data:

	Current Year			Previous Year
Income Statement
Sales Revenue	$	150,000		$	131,000
Cost of Goods Sold		68,000			64,000
Gross Profit		82,000			67,000
Operating Expenses		44,000			39,400
Interest Expense		4,800			4,800
Income before Income Tax Expense		33,200			22,800
Income Tax Expense (30%)		9,960			6,840
Net Income	$	23,240		$	15,960
Balance Sheet
Cash	$	79,940		$	30,000
Accounts Receivable, Net		25,000			20,000
Inventory		33,000			46,000
Property and Equipment, Net		103,000			113,000
Total Assets	$	240,940		$	209,000
Accounts Payable	$	50,000		$	34,200
Income Tax Payable		1,200			900
Note Payable (long-term)		48,000			48,000
Total Liabilities		99,200			83,100
Common Stock (par $10)		94,800			94,800
Retained Earnings†		46,940			31,100
Total Liabilities and Stockholders’ Equity	$	240,940		$	209,000

^† During the current year, cash dividends amounting to $7,400 were declared and paid.

Required:

1-a. Compute the gross profit percentage in the current and previous years. (Round your percentage answers to 1 decimal place.)



1-b. Are the current year results better, or worse, than those for the previous year?

	Better
	Worse

2-a. Compute the net profit margin for the current and previous years. (Round your percentage answers to 1 decimal place.)



2-b. Are the current year results better, or worse, than those for the previous year?

	Better
	Worse

3-a. Compute the earnings per share for the current and previous years. (Round your answers to 2 decimal places.)



3-b. Are the current year results better, or worse, than those for the previous year?

	Better
	Worse

4-a. Stockholders' equity totaled $108,000 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. (Round your percentage answers to 1 decimal place.)



4-b. Are the current year results better, or worse, than those for the previous year?

	Better
	Worse

5-a. Net property and equipment totaled $118,000 at the beginning of the previous year. Compute the fixed asset turnover ratios for the current and previous years. (Round your answers to 2 decimal places.)



5-b. Are the current year results better, or worse, than those for the previous year?

	Better
	Worse

6-a. Compute the debt-to-assets ratios for the current and previous years. (Round your answers to 2 decimal places.)



6-b. Is debt providing financing for a larger or smaller proportion of the company's asset growth?

	Larger Proportion
	Smaller Proportion

7-a. Compute the times interest earned ratios for the current and previous years. (Round your answers to 1 decimal place.)



7-b. Are the current year results better, or worse, than those for the previous year?

	Better
	Worse

8-a. After Pinnacle Plus released its current year's financial statements, the company's stock was trading at $26. After the release of its previous year's financial statements, the company's stock price was $23 per share. Compute the P/E ratios for both years. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)



8-b. Does it appear that investors have become more (or less) optimistic about Pinnacle's future success?

	More Optimistic
	Less Optimistic

Answer 1

Ans. Calculation of Gross profit percentage

                                                         Current Yr              Previous yr

Gross Profit                                         82000                      67000

Sales                                                 150000                    131000

Gross %                                             54.67%                    51.15%

1 b. Current year result is better than previous yr

Better

2. Calculation of Net profit margin

                                                           Current yr                  Previous yr

Net profit                                               23240                       15960

Sales                                                  150000                       131000

Net profit margin                                   15.49%                      12.18%

2 b . Curretn year result is better than previous yr

Better

3. Calculate of Earning per share (EPS)

                                               Current Year               Previous yr

Net income                             23240                       15960

No of share o/s (94800/10)           9480                          9480

EPS                                          2.45                           1.68

3b. Current year result is better than previous

Better

4. Calculation of ROE = Net income/Average shareholder equity

Average shareholder equity =    (Shareholder equity at the begning +shareholder equity at the end)/2

Opening shareholder equity at the previous yr = 108000

Closing shareholder equity at the previous yr = 209000

Average shareholder equity previous yr = (108000+209000)/2 = 158500

ROE for the previous yr   = 15960/158500X100 = 10.07%

Calculating ROE for the current yr

Step: 1 Calculation of average Shareholder equity = (209000+240940)/2 =224970

ROE for the current Year = 23240/224970X100 = 10.33%

4b. Current year result is better than previous year

Better

5. Calculation of Assets turnover ratio = net sales/Average Total assets

Average total assets for previous yr = (118000+209000)/2 = 163500

Assets turnover ratio for the previous year = 131000/163500 = .80

Calculating of Assets turnover ratio for the curret year

Step 1:: calculating of Average assets for current year = (209000+240940)/2 = 224970

Assets turnover ratio = 150000/224970 = .67

5b. Current year result worse than previous year

Worse

6a . Calculation of Debt to Assets ratio = Total libilities /Total assets

                                                          Current year                     Previous year

Total debt                                              99200                             83100

Total assets                                          240940                           209000

Debt to assets ratio                               .41                                  .40

6b. Debt to assets ratio is less than .50 that means debt providing smaller percentage of company assets growth.

Smaller proportion

7a. Calculation of times of interest earned ratio = EBIT/Interest exp.

                                                         Current year               Previous year

EBIT/operating profit                                    44000                         39400

Interest exp.                                               4800                          4800

Times of interest earned ratio                        9.17                            8.21

7b. Current year result is better than previous year

Better

8a. Calculation of P/E ratio of the company = market share/EPS

                                         Current year               Previous year

Martket value                                     26                               23

EPS                                                 2.45 1.68

P/E Ratio                                         10.61                          13.70

8-b. Investors have become more optimistic about pinnacle's future success

More optimistic