Question

(This is a continuation of the Waterways Problem from Chapters 1 through 13.)

WCP14 The comparative balance sheets of Waterways Corporation’s Irrigation Installation

Division for the years 2016 and 2017 and the income statements for the year 2016 and

2017 are presented below.

Additional information:

85% of the sales for Waterways were credit sales. There are 5,000 shares outstanding for

both years. This is a private corporation, whose shares are not available to the public.

WATERWAYS CORPORATION—INSTALLATION DIVISION

Balance Sheets

December 31

Assets 2017 2016

Current assets

Cash $ 836,797 $ 746,681

Accounts receivable 680,750 542,685

Work in process 702,159 —

Inventory 16,766 7,500

Prepaid expenses 76,550 42,590

Total current assets 2,313,022 1,339,456

Property, plant, and equipment

Land 300,000 300,000

Buildings 450,000 450,000

Equipment 929,400 800,200

Furnishings 40,416 40,416

Accumulated depreciation (482,523) (485,204)

Total property, plant, and equipment 1,237,293 1,105,412

Total assets $3,550,315 $2,444,868

Liabilities and Stockholders’ Equity

2017 2016

Current liabilities

Accounts payable $ 157,095 $ 128,360

Income taxes payable 101,344 79,989

Wages payable 4,517 1,984

Interest payable 1,187 —

Other current liabilities 14,515 15,246

Revolving bank loan payable 15,000 —

Total current liabilities 293,658 225,579

Long-term liabilities

Note payable 140,000 —

Total liabilities 433,658 225,579

Stockholders’ equity

Common stock 1,250,000 1,250,000

Retained earnings 1,866,657 969,289

Total stockholders’ equity 3,116,657 2,219,289

Total liabilities and stockholders’ equity $3,550,315 $2,444,868

WATERWAYS CORPORATION—INSTALLATION DIVISION

Income Statements

For the Year Ending December 31

2017 2016

Sales $5,536,077 $4,957,266

Less: Cost of goods sold 3,132,777 2,807,316

Gross profit 2,403,300 2,149,950

Operating expenses

Advertising 50,000 48,000

Insurance 400,000 400,000

Salaries and wages 584,640 554,640

Depreciation 71,319 62,319

Other operating expenses 21,200 18,476

Total operating expenses 1,127,159 1,083,435

Income from operations 1,276,141 1,066,515

Other income

Gain on sale of equipment 18,000 —

Other expenses

Interest expense (12,187) —

Income before income tax 1,281,954 1,066,515

Income tax expense 384,586 319,955

Net income $ 897,368 $ 746,56

Instructions

(a) Prepare a horizontal analysis of the income statement using 2016 as the base year.

(b) Prepare a vertical analysis of the income statement for 2017.

(c) Calculate the following ratios for 2017 and indicate whether the ratio is a liquidity,

solvency, or profitability ratio.

(1) Asset turnover ratio.

(2) Receivables turnover ratio.

(3) Average collection period.

(4) Current ratio.

(5) Debt to total assets ratio.

(6) Earnings per share.

(7) Profit margin rate.

(9) Return on assets ratio.

(10) Return on common stockholders’ equity ratio.

(11) Times interest earned ratio.

(d) Comment on your findings.

Answer 1

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			Horizontal
			A=2017-2016	B=A/2016*100
	2017	2016	Amount Increase	% Increase
Sales	5536077	4957266	578811	11.68%
Less Cost of Goods Sold	3132777	2807316	325461	11.59%
Gross Profit	2403300	2149950	253350	11.78%
Operating Expense:
Advertising	50000	48000	2000	4.17%
Insurance	400000	400000	0	0.00%
Salaries and wages	584640	554640	30000	5.41%
Depreciation	71319	62319	9000	14.44%
Other Operating Expense	21200	18476	2724	14.74%
Total Operating Expense	1127159	1083435	43724	4.04%
Income from operations	1276141	1066515	209626	19.66%
Other Income
Gain on Sale of Equipment	18000	0	18000	100.00%
Other Expense
Interest Expense	12187	0	12187	100.00%
Income before tax	1281954	1066515	215439	20.20%
Income Tax	384586	319955	64631	20.20%
Net Income	897368	746560	150808	20.20%
Verticle Analysis
	2017	2017 Analysis	2016	2016 Analysis	Formula Used
Sales	5536077	100%	4957266	100%	2017 or 2016/Sale*100
Less Cost of Goods Sold	3132777	57%	2807316	57%
Gross Profit	2403300	43%	2149950	43%
Operating Expense:
Advertising	50000	1%	48000	1%
Insurance	400000	7%	400000	8%
Salaries and wages	584640	11%	554640	11%
Depreciation	71319	1%	62319	1%
Other Operating Expense	21200	0%	18476	0%
Total Operating Expense	1127159	20%	1083435	22%
Income from operations	1276141	23%	1066515	22%
Other Income
Gain on Sale of Equipment	18000	0%	0	0%
Other Expense
Interest Expense	12187	0%	0	0%
Income before tax	1281954	23%	1066515	22%
Income Tax	384586	7%	319955	6%
Net Income	897368	16%	746560	15%
Ratio
1. Asset Turnover	Net Sales/Average total assets	5536077/2997592	1.85
Average total assets	(3550315+2444868)/2	2997592
2. Accounts Receivable Turnover	Net Credit Sale/Average Accounts Receivable	(5536077*85%)/611718	7.69
Average Accounts Receivable	(680750+542685)/2	611718
3. No of Days in sales receivable/Average Collection Period	365/Accounts Receivable Turonver Ratio	365/9.05	40
4. Current Ratio	Total Current Assets/Total Curretn Liabilities	2313022/293658	7.88
5. Debt to Asset Ratio	Total Liabilities/Total Asset	433658/3550315	0.12
6. Earning Per share	Net Income for Equity shareholder/No of Shares	897368/5000	179.47
7. Profit Margin Rate	Net Income/Net Sale	897368/5536077	16.21%
9. Return on Asset Ratio	Net Income/Total Asset	897368/3550315	25.28%
10 Return on common stockholder equity	(Net Income-Preferred Dividend)/(Average Common Stock equity)	897368/3116657	28.79%
11. Times Interest Earned	Earning before income tax and interest/Interest Expense	1276141/12187	104.71