eek Five Exercise Assignment
Financial Ratios

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

 Edison Stagg Thornton
Cash $6,000 $5,000 $4,000
Short-term investments 3,000 2,500 2,000
Accounts receivable 2,000 2,500 3,000
Inventory 1,000 2,500 4,000
Prepaid expenses 800 800 800
Accounts payable 200 200 200
Notes payable: short-term 3,100 3,100 3,100
Accrued payables 300 300 300
Long-term liabilities 3,800 3,800 3,800


a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:
 
 20X5 20X4
Net credit sales $832,000 $760,000 
Cost of goods sold 530,000 400,000 
Cash, Dec. 31 125,000 110,000 
Average Accounts receivable 205,000 156,000 
Average Inventory 70,000 50,000 
Accounts payable, Dec. 31 115,000 108,000 


Instructions
a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places. 
 

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com¬pany reported the following information for 20X7:

 
Net sales $1,750,000 
Interest expense 120,000
Income tax expense 80,000
Preferred dividends 25,000
Net income 130,000
Average assets 1,200,000
Average common stockholders' equity 500,000
 
 
a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly ex¬plain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. 
 
20X2 20X1
Current Assets $86,000 $80,000 
Property, Plant, and Equipment (net) 99,000 90,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000
Long-Term Liabilities 153,000 160,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000
 

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work. 


5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. 

20X2 20X1
Current Assets $86,000 $80,000 
Property, Plant, and Equipment (net) 99,000 80,000 
Intangibles 25,000 50,000 
Current Liabilities 40,800 48,000 
Long-Term Liabilities 153,000 150,000 
Stockholders’ Equity 16,200 12,000 
Net Sales 500,000 500,000 
Cost of Goods Sold 322,500 350,000 
Operating Expenses 93,500 85,000 

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work. 























6. Ratio computation. The financial statements of the Lone Pine Company follow.
 
LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2 20X1
Assets 
Current Assets 
Cash and Short-Term Investments $400 $600 
Accounts Receivable (net) 3,000 2,400
Inventories 3,000 2,300
Total Current Assets $6,400 $5,300 
Property, Plant, and Equipment 
Land $1,700 $500 
Buildings and Equipment (net) 1,500 1,000
Total Property, Plant, and Equipment $3,200 $1,500 
Total Assets $9,600 $6,800 
Liabilities and Stockholders’ Equity 
Current Liabilities 
Accounts Payable $2,800 $1,700 
Notes Payable 1,100 1,900
Total Current Liabilities $3,900 $3,600 
Long-Term Liabilities 
Bonds Payable 4,100 2,100
Total Liabilities $8,000 $5,700 
Stockholders’ Equity 
Common Stock $200 $200 
Retained Earnings 1,400 900
Total Stockholders’ Equity $1,600 $1,100 
 Total Liabilities and Stockholders’ Equity $9,600 $6,800 
 
 
LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales* $36,000 
Less: Cost of Goods Sold $20,000 
Selling Expense 6,000 
Administrative Expense 4,000 
Interest Expense 400 
Income Tax Expense 2,000 32,400 
Net Income $3,600 
Retained Earnings, Jan. 1 900 
Ending Retained Earnings $4,500 
Cash Dividends Declared and Paid 3,100 
Retained Earnings, Dec. 31 $1,400 
*All sales are on account. 

Instructions 
Compute the following items for Lone Pine Company for 20X2, rounding all calcu¬lations to two decimal places when necessary: 
a. Quick ratio 
b. Current ratio 
c. Inventory-turnover ratio 
d. Accounts-receivable-turnover ratio 
e. Return-on-assets ratio 
f. Net-profit-margin ratio 
g. Return-on-common-stockholders’ equity 
h. Debt-to-total assets 
i. Number of times that interest is earned

Final paper
Write a five-to seven-page financial statement analysis of a public company, formatted according to APA style as outlined in the Ashford Writing Center. In this analysis you will discuss the financial health of this company with the ultimate goal of making a recommendation to other investors. Your paper should consist of the following sections: introduction, company overview, horizontal analysis, ratio analysis, final recommendation, and conclusions. Your paper needs to include a minimum of two scholarly resources in addition to the textbook as references.

Here is a breakdown of the sections within the body of the assignment:

Company Overview
Provide a brief overview of your company (one to two paragraphs at most). What industry is it in? What are its main products or services? Who are its competitors?

Horizontal Analysis of Income Statement and Balance Sheet
Prepare a three-year horizontal analysis of the income statement and balance sheet of your selected company. Discuss the importance and meaning of horizontal analysis. Discuss both the positive and negative trends presented in your company.

Ratio Analysis
Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period. Discuss and interpret the ratios that you calculated. Discuss potential liquidity issues based on your calculations of the current and quick ratios. Are there any factors that could be erroneously influencing the results of the ratios? Discuss liquidity issues of competitive companies within the same industry.

Recommendation
Based on your analysis would you recommend an individual invest in this company? What strengths do you see? What risks do you see? It is perfectly acceptable to state that you would recommend avoiding this company as long as you provide support for your position.

Writing the Final Paper

1. Must be five to seven double-spaced pages in length, and formatted according to APA style as outlined in the Ashford Writing Center.
2. Must include a title page with the following:

a. Title of paper
b. Student’s name
c. Course name and number
d. Instructor’s name
e. Date submitted

3. Must begin with an introductory paragraph that has a succinct thesis statement.
4. Must address the topic of the paper with critical thought.
5. Must end with a conclusion that reaffirms your thesis.
6. Must document all sources in APA style, as outlined in the Ashford Writing Center.
7. Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.
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