Question

The comparative financial statements prepared at December 31 for Golden Corporation showed the following summarized data:

	Current			Previous
Income Statement
Sales revenue	$	200,000		$	181,000
Cost of goods sold		118,000			108,000
Gross profit		82,000			73,000
Operating expenses		57,300			53,600
Interest expense		3,100			3,000
Income before income taxes		21,600			16,400
Income tax expense		6,480			3,400
Net income	$	15,120		$	13,000
Balance Sheet
Cash	$	7,520		$	8,400
Accounts receivable (net)		23,000			25,000
Inventory		44,000			39,000
Property and equipment (net)		49,000			42,000
	$	123,520		$	114,400
Current liabilities	$	18,800		$	21,800
Note payable (long-term)		49,000			49,000
Common stock (par $5)		32,400			32,400
Additional paid-in capital		5,800			5,400
Retained earnings*		17,520			5,800
	$	123,520		$	114,400

*During the current year, cash dividends of $3,400 were declared and paid.

Required:

1-a.	Compute the gross profit percentage for the current and previous years. (Round your 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 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.
	TIP: To calculate EPS, use the balance in Common Stock to determine the number of shares outstanding. Common Stock equals the par value per share times the number of shares. (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 $32,400 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. (Round your 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 $37,000 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 Golden released its current year’s financial statements, the company’s stock was trading at $34. After the release of its previous year’s financial statements, the company’s stock price was $25 per share. Compute the P/E ratios for both years. (Round your intermediate calculations and final answers to 2 decimal places.)

8-b.	Does it appear that investors have become more (or less) optimistic about Golden’s future success?
	More Optimistic Less Optimistic

Answer 1

1 a

Gross Profit %`	Gross Profit/Sales
	Current	Previous
Gross Profit	82,000.00	73,000.00
Sales	200,000.00	181,000.00
Gross Profit %`	41.0%	40.3%

1 b. Current year results are Better as Gross profit % has increased

2 a.

Net Profit %`	Net Profit/Sales
	Current	Previous
Net Profit/Income	15,120.00	13,000.00
Sales	200,000.00	181,000.00
Net Profit %`	7.6%	7.2%

2b.Current year results are Better as Net profit % has increased

3 a.

Earnings Per Share=Reatined Earnings/No of Shares outstanding
	Current	Previous
Retained Earnings	17520	5800
No of shares outstanding	6,480.00	6,480.00
Earnings Per share	2.70	0.90
No of shares outstanding =32400/5

3b Current year results are Better as EPS has increased.

4a.

Return On Equity	Net Income/Shareholders Equity
	Current	Previous
Net Profit/Income	15,120.00	13,000.00
Shareholders Equity	32,400.00	32,400.00
Return On Equity	46.7%	40.1%

4b.Current year results are Better as ROE has increased.

5a.

Fixed Asset Turnover Ratio	Sales/Average Fixed Assets
	Current	Previous
Sales	200,000.00	181,000.00
Average Fixed Assets	45,500.00	39,500.00
Fixed Asset Turnover Ratio	4.40	4.58
Avg Fixed Assets= (Opening Bal + Closing Bal)/2

5b  Current year results are Worse as FA Turnover Ratio has decreased.

6a

Debt to assets Ratio	Total Liabilities/Total Assets
	Current	Previous
Total Liabiites	67,800.00	70,800.00
Total Assets	123,520.00	114,400.00
Debt to assets Ratio	0.55	0.62
Total Liabilities=Current Liabilities+Note Payable 6.b Debt is providing financing for smaller proportion for companys assset growth 7a. Interest Earned Ratio Net Income before taxes/Interest expense Current Previous Net Income before taxes      21,600.00      16,400.00 Interest expense        3,100.00        3,000.00 Interest Earned Ratio 6.97 5.47 7b Current Year results are better as Interest Earned Ratio has increased 8a PE Ratio MarketPrice Per share/Earnings per share Current Previous Market Price per share              34.00              25.00 Earnings per share                 2.70                 0.90 PE Ratio 12.59 27.78

8b.Investors have become less optimistic about the companys future success as PE Ratio has decreased