Exam 9: Analyzing Financial Statements

The debt ratio is calculated by dividing total assets by total liabilities.

David Company had assets of $13,500,000,profit of $3,900,000,and net sales of $167,155,000.Its profit margin was 2.3%.

Micron Company had profit for Year 1 of $47,950 and $53,425 in Year 2.The company had net sales of $363,250 in Year 1 and $392,750 in Year 2.The company's average total assets in Year 1 were $942,550 and $877,560 in Year 2.Calculate Micron's profit margin,total asset turnover,and return on total assets for Year 1 and Year 2.Comment on the results. Profit margin,Year 1: $47,950/$363,250 = 13.2% Profit margin,Year 2: $53,245/$392,750 = 13.6% Total asset turnover,Year 1: $363,250/$942,550 = .385 Total asset turnover,Year 2: $392,750/$877,560 = .448 Return on total assets,Year 1: $47,950/942,550 = 5.1% Return on total assets,Year 2: $53,245/$877,560 = 6.1%

Explain the purpose of financial statement analysis.

Information from the current income statement of Barnes Corp follows: Sales \ 800,000 Gross profit on sales 345,000 Operating income 80,000 Interest expense 32,000 Income before taxes 48,000 Profit 35,600 Calculate the profit margin.

Explain the profit margin ratio and discuss its use in analyzing a company's performance.

Saucony's profit was $800,000; its net assets were $2,050,000; and its net sales were $3,500,000.Calculate the profit margin.

BuyUS Inc.plans to issue 7%,$400,000,10-year bonds in order to finance an expansion.The expansion is expected to increase income before interest expense from $100,000 to $175,000.BuyUS has $1,000,000 in average common equity.Calculate the expected return on common shareholders' equity.(ignore income taxes)

Which of the following statements is incorrect?

Income statement information for calendar 2020 for Eaglefield Corp is presented below: Calculate times interest earned for 2020.

The comparative balance sheet for Equevo Corp is shown below.Express the balance sheet in common-size percentages.(Round all percentages to two decimals)

The higher the debt ratio the higher the level of risk of not being able to meet obligations.

When the times interest earned ratio falls below 1.5,the default rate on liabilities increases sharply.

Harmony Inc.had profit of $225,300 in Year 1 and $320,900 in Year 2.The company had average total assets of $1,230,000 in Year 1 and $1,550,000 in Year 2.Calculate the return on total assets for Year 1 and Year 2.Comment on the results.

A company must have less than 30 days' sales uncollected in order to have enough liquidity.

The current ratio

Vertical analysis is a tool to evaluate individual financial statement items or group of items in terms of a specific base amount.

Maggis has current assets of $19,000 and current liabilities of $9,500.Its current ratio is 1.6 to 1.

Tri-World had income before interest and income tax expense of $129,000.Its interest expense was $67,000.Calculate the times interest earned ratio.

Explain return on total assets and how it is used to measure a company's financial performance.