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Chapter 15: Q15E (page 840)

Theta Designs, Inc. has the following data:

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 (\()

2017 (\))

Total current assets

25,000

73,440

Property, Plant and Equipment, Net

153,600

168,300

Other Assets

21,400

64,260

Total Assets

200,000

306,000

Liabilities

Total current liabilities

27,600

49,266

Long term debt

72,400

208,998

Total Liabilities

100,000

258,264

Stockholders’ Equity

Total stockholders’ Equity

100,000

47,736

Total liabilities and stockholders’ equity

200,000

306,000

Perform a vertical analysis of Theta Designs’s balance sheet for each year.

Short Answer

Expert verified

The vertical analysis of Theta Designs Inc is prepared for the year 2017 and 2018

Step by step solution

01

Definition of Balance Sheet

The balance sheet is defined as a financial statement that reports the value of assets owned and liabilities owes at any specific date.

02

 Step 2 Preparation of Vertical Analysis

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 ($)

Percent (%)

2017 ($)

Percent (%)

Total current assets

25,000

12.50

73,440

24

Property, Plant and Equipment, Net

153,600

76.80

168,300

55

Other Assets

21,400

10.70

64,260

21

Total Assets

200,000

100

306,000

100

Liabilities

Total current liabilities

27,600

13.80

49,266

16.10

Long term debt

72,400

36.20

208,998

68.30

Total Liabilities

100,000

50

258,264

84.40

Stockholders’ Equity

Total stockholders’ Equity

100,000

50

47,736

15.60

Total liabilities and stockholders’ equity

200,000

100

306,000

100

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Most popular questions from this chapter

Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Explaining financial statements

Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?

Question: P15-38 Using ratios to evaluate a stock investment

This problem continues the Canyon Canoe Company situation from Chapter 14. The company wants to invest some of its excess cash in trading securities and is considering two investments, The Paddle Company (PC) and Recreational Life Vests (RLV). The income statement, balance sheet, and other data for both companies follow for 2019 and 2018, as well as selected data for 2017:


THE PADDLE COMPANY

Comparative Financial Statements

Years Ended December 31


RECREATIONAL LIFE VESTS
Comparative Financial Statements
Years Ended December 31

Income statement

2019

2018

2017

2019

2018

2017

Net sales revenue

\(430,489

\)425,410

\(410,570

\)383,870

Cost of goods sold

258,756

256,797

299,110

280,190

Gross profit

171,733

168,613

111,460

103,680

Operating expenses

153,880

151,922

78,290

70,830

Operating income

17,853

16,691

33,170

32,850

Interest expenses

865

788

2,780

2,980

Income before income tax

16,988

15,903

30,390

29,870

Income tax expenses

5,137

4,809

8,780

8,630

Net income

\(11,851

\)11,094

\(21,610

\)21,240

Balance sheet

Assets

Cash & Cash Equivalents

\(69,159

\)70,793

\(65,730

\)55,270

Accounts Receivable

44,798

44,452

\(44,104

39,810

38,650

\)36,460

Merchandise Inventory

79,919

66,341

76,363

68,500

65,230

59,930

Other Current Assets

15,494

16,264

24,450

37,630

Total Current Assets

209,370

197,850

198,490

196,780

Long-term Assets

89,834

90,776

116,760

116,270

Total Assets

\(299,204

\)288,626

\(276,482

\)315,250

$$313,050

\(310,640

Liabilities

Current Liabilities

\)69,554

\(60,232

\)90,810

\(90,010

Long-term Liabilities

31,682

29,936

96,310

105,890

Total Liabilities

101,236

90,168

187,120

195,900

Stockholders’ Equity

Common Stock

72,795

80,885

111,530

102,480

Retained Earnings

125,173

117,573

16,600

14,670

Total Stockholders’ Equity

197,968

198,458

128,130

117,150

103,840

Total Liabilities and Stockholder’s Equity

\)299,204

\(288,626

\)315,250

\(313,050

Other data

Market price per share

\)21.38

\(33.82

\)46.37

$51.64

Annual dividend per share

0.32

0.30

0.53

0.45

Weighted average number of shares outstanding

9,000

8,000

9,000

8,000

Requirements

  1. Using the financial statements given, compute the following ratios for both companies for 2019 and 2018. Assume all sales are credit sales. Round all ratios to two decimal places.

  2. a. Current ratio

    h. Profit margin ratio

    b. Cash ratio

    i. Asset turnover ratio

    c. Inventory turnover

    j. Rate of return on common stockholders’ equity

    d. Accounts receivable turnover

    k. Earnings per share

    e. Gross profit percentage

    l. Price/earnings ratio

    f. Debt ratio

    m. Dividend yield

    g. Debt to equity ratio

    n. Dividend payout

  1. Compare the companies’ performance for 2019 and 2018. Make a recommendation to Canyon Canoe Company about investing in these companies. Which company would be a better investment, The Paddle Company or Recreational Life Vests? Base your answer on the ability to pay current liabilities, ability to sell merchandise and collect receivables, ability to pay the long-term debt, profitability, and attractiveness as an investment.

Consider the data for Klein Department Stores presented in Problem P15-24A.

Requirements

1.Prepare a common-size income statement and balance sheet for Klein. The first column of each statement should present Klein’s common-size statement, and the second column, the industry averages.

2.For the profitability analysis, compute Klein’s

  1. gross profit percentage and
  2. profit margin ratio. Compare these figures with the industry averages. Is Klein’s profit performance better or worse than the industry average?

3.For the analysis of financial position, compute Klein’s

  1. current ratio and
  2. debt to equity ratio. Compare these ratios with the industry averages.

Assume the current ratio industry average is 1.47, and the debt-to-equity industry average is 1.83. Is Klein’s financial position better or worse than the industry averages?

Preparing common-size statements, analysis of profitability and financial position, comparison with the industry, and using ratios to evaluate a company

Consider the data for Randall Department Stores presented in Problem P15-31B.

Requirements

  1. Prepare a common-size income statement and balance sheet for Randall. The first column of each statement should present Randall’s common-size statement, and the second column, the industry averages.
  2. For the profitability analysis, compute Randall’s (a) gross profit percentage and (b) profit margin ratio. Compare these figures with the industry averages. Is Randall’s profit performance better or worse than the industry average?
  3. For the analysis of financial position, compute Randall’s (a) current ratio and (b) debt to equity ratio. Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47, and the debt to equity industry average is 1.83. Is Randall’s financial position better or worse than the industry averages?
See all solutions

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