Question P24-3_b (Ratio Computations and Addition... [FREE SOLUTION]

(Horizontal and Vertical Analysis) Presented below is the comparative balance sheet for Gilmour Company.

GILMOUR COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2018 AND 2017
December 31
	2018	2017
Assets
Cash	\( 180,000	\) 275,000
Accounts receivable (net)	220,000	155,000
Short-term investments	270,000	150,000
Inventories	1,060,000	980,000
Prepaid expenses	25,000	25,000
Plant & equipment	2,585,000	1,950,000
Accumulated depreciation	(1,000,000)	(750,000)
	\(3,340,000	(2,785,000)

Liabilities and Stockholders’ Equity
Accounts payable	\) 50,000	\( 75,000
Accrued expenses	170,000	200,000
Bonds payable	450,000	190,000
Common stock	2,100,000	1,770,000
Retained earnings	570,000	550,000
	\)3,340,000	(2,785,000)

Instructions

(Round to two decimal places.)

Of what value is the additional information provided in part (b)?

Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to $850,000.

The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.

	2015	2016	2017
Current ratio	1.80	1.89	1.96
Acid-test (quick) ratio	1.04	0.99	0.87
Accounts receivable turnover	8.75	7.71	6.42
Inventory turnover	4.91	4.32	3.42
Debt to assets ratio	51.0%	46.0%	41.0%
Long-term debt to assets ratio	31.0%	27.0%	24.0%
Sales to fixed assets (fixed asset turnover)	1.58	1.69	1.79
Sales as a percent of 2015 sales	1.00	1.03	1.07
Gross margin percentage	36.0%	35.1%	34.6%
Net income to sales	6.9%	7.0%	7.2%
Return on assets	7.7%	7.7%	7.8%
Return on common stockholders’ equity	13.6%	13.1%	12.7%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

Instructions

b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2015–2017 period?

Interim reporting under IFRS:

(a) is prepared using the discrete approach.

(b) is prepared using a combination of the discrete and integral approach.

(c) requires a complete set of financial statements for each interim period.

(d) permits companies to omit disclosure of material events subsequent to the interim reporting date.

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION BALANCE SHEET MARCH 31
Assets	2018	2017
Cash	\) 18,200	\( 12,500
Notes receivable	148,000	132,000
Accounts receivable (net)	131,800	125,500
Inventories (at cost)	105,000	50,000
Plant & Equipment (net of depreciation)	1,449,000	1,420,500
Total assets	\)1,852,000	\(1,740,500

Liabilities and Stockholders’ Equity
Accounts payable	\) 79,000	\( 91,000
Notes payable	76,000	61,500
Accrued liabilities	9,000	6,000
Common stock (130,000 shares, \)10 par)	1,300,000	1,300,000
Retained earnings*	388,000	282,000
Total liabilities and stockholders’ equity	\(1,852,000	\)1,740,500

*Cash dividends were paid at the rate of $1 per share in the fiscal year 2017 and $2 per share in the fiscal year 2018.


BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
	2018	2017
Sales revenue	\(3,000,000	\)2,700,000
Cost of goods sold*	1,530,000	1,425,000
Gross margin	1,470,000	1,275,000
Operating expenses	860,000	780,000
Income before income taxes	610,000	495,000
Income taxes (40%)	244,000	198,000
Net income	\( 366,000	\) 297,000

Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

c). Assume that the percentage changes experienced in fiscal year 2018 as compared with fiscal year 2017 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire to finance the plant expansion from internally generated funds realistic? Discuss.

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION BALANCE SHEET MARCH 31
Assets	2018	2017
Cash	\) 18,200	\( 12,500
Notes receivable	148,000	132,000
Accounts receivable (net)	131,800	125,500
Inventories (at cost)	105,000	50,000
Plant & Equipment (net of depreciation)	1,449,000	1,420,500
Total assets	\)1,852,000	\(1,740,500

Liabilities and Stockholders’ Equity
Accounts payable	\) 79,000	\( 91,000
Notes payable	76,000	61,500
Accrued liabilities	9,000	6,000
Common stock (130,000 shares, \)10 par)	1,300,000	1,300,000
Retained earnings*	388,000	282,000
Total liabilities and stockholders’ equity	\(1,852,000	\)1,740,500

*Cash dividends were paid at the rate of $1 per share in the fiscal year 2017 and $2 per share in the fiscal year 2018.


BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
	2018	2017
Sales revenue	\(3,000,000	\)2,700,000
Cost of goods sold*	1,530,000	1,425,000
Gross margin	1,470,000	1,275,000
Operating expenses	860,000	780,000
Income before income taxes	610,000	495,000
Income taxes (40%)	244,000	198,000
Net income	\( 366,000	\) 297,000

Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

A. Compute the following items for Bradburn Corporation.

4) Return on assets for fiscal years 2017 and 2018. (Assume total assets

were $1,688,500 at 3/31/16.)

Short Answer

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Meaning of Liquidity Ratio

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