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 $ 155,000 $ 135,000 Cost of Goods Sold 70,000 66,000 Gross Profit 85,000 69,000 Operating Expenses 45,000 40,200 Interest Expense 4,900 4,900 Income before Income Tax Expense 35,100 23,900 Income Tax Expense (30%) 10,530 7,170 Net Income $ 24,570 $ 16,730 Balance Sheet Cash $ 81,245 $ 29,000 Accounts Receivable, Net 26,000 21,000 Inventory 34,000 47,000 Property and Equipment, Net 104,000 114,000 Total Assets $ 245,245 $ 211,000 Accounts Payable $ 51,000 $ 34,100 Income Tax Payable 1,225 950 Note Payable (long-term) 49,000 49,000 Total Liabilities 101,225 84,050 Common Stock (par $10) 95,400 95,400 Retained Earnings† 48,620 31,550 Total Liabilities and Stockholders’ Equity $ 245,245 $ 211,000 † During the current year, cash dividends amounting to $7,500 were declared and paid. Required: 1-a. Compute the gross profit percentage in 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. (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 $109,000 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 $119,000 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 $27. After the release of its previous year's financial statements, the company's stock price was $24 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

			current Year		Previous Year
Gross profit ratio	gross profit /sales	85000/155000	54.84%	69000/135000	51.11%	it is better
net profit margin	net profit/sales	24570/155000	15.85%	16730/135000	12.39%	it is better
EPS	net income/no of shares	24570/9540	2.58	16730/9540	1.75	it is better
return on equity	net income/average equity	24570/(144020+126590)/2	18.13%	16730/117500	14.24%	it is better
shareholder equity		144020	126950		126950	109000
average shareholders equity=(opening +closing )/2	(144020+126950)/2	135485		(126000+109000)/2	117500
Fixed asset turnover ratio	sales/average fixed assets		1.42		1.16	it is better
average assets	(opening +closing)/2	(104000+114000)/2	109000	(114000+119000)/2	116500
debt to asset ratio	total of liabilities/total of assets		41.28%		39.83%	Larger portion
Times interest earned	EBIT/interest		8.16		5.88	it is better
EBIT	gross profit-operating expense		40000		28800
Interest			4900		4900
PE ratio	market price/eps	27/2.58	10.5	24/1.75	13.7	less optimistic
More optimistic as Financial of the company has improved over the years