?(Analyzing common-size financial? statements) Use the? common-size financial st
ID: 1170070 • Letter: #
Question
?(Analyzing common-size financial? statements) Use the? common-size financial statements found? here: LOADING... to respond to your? boss' request that you write up your assessment of the? firm's financial condition.? Specifically, write up a brief narrative that responds to the following? questions:
a. How much cash does Patterson have on hand relative to its total? assets?
b. What proportion of? Patterson's assets has the firm financed using? short-term debt?? Long-term debt?
c. What percent of? Patterson's revenues does the firm have left over after paying all of its expenses? (including taxes)?
d. Describe the relative importance of? Patterson's major expense? categories, including cost of goods? sold, operating? expenses, and interest expenses. a. How much cash does Patterson have on hand relative to its total? assets? The cash Patterson has on hand relative to its total assets is nothing?%. ?(Round to one decimal? place.)
Common-Size Balance Sheet
2016
Cash and marketable securities
$
550
1.7
%
Accounts receivable
6,030
18.2
Inventory
9,550
28.8
Total current assets
$
16,130
48.7
%
Net property, plant, and equipment
16,990
51.3
Total assets
$
33,120
100.0
%
Accounts payable
$
7,180
21.7
%
Short-term notes
6,810
20.6
Total current liabilities
$
13,990
42.2
%
Long-term liabilities
6,980
21.1
Total liabilities
$
20,970
63.3
%
Total common shareholders’ equity
12,150
36.7
Total liabilities and shareholders’ equity
$
33,120
100.0
%
Common-Size Income Statement
2016
Revenues
$
29,950
100.0
%
Cost of goods sold
(20,030)
66.9
Gross profit
$
9,920
33.1
%
Operating expenses
(8,010)
26.7
Net operating income
$
1,910
6.4
%
Interest expense
(930)
3.1
Earnings before taxes
$
980
3.3
%
Income taxes
(356)
1.2
Net income
$
624
2.1
%
Common-Size Balance Sheet
2016
Cash and marketable securities
$
550
1.7
%
Accounts receivable
6,030
18.2
Inventory
9,550
28.8
Total current assets
$
16,130
48.7
%
Net property, plant, and equipment
16,990
51.3
Total assets
$
33,120
100.0
%
Accounts payable
$
7,180
21.7
%
Short-term notes
6,810
20.6
Total current liabilities
$
13,990
42.2
%
Long-term liabilities
6,980
21.1
Total liabilities
$
20,970
63.3
%
Total common shareholders’ equity
12,150
36.7
Total liabilities and shareholders’ equity
$
33,120
100.0
%
Common-Size Income Statement
2016
Revenues
$
29,950
100.0
%
Cost of goods sold
(20,030)
66.9
Gross profit
$
9,920
33.1
%
Operating expenses
(8,010)
26.7
Net operating income
$
1,910
6.4
%
Interest expense
(930)
3.1
Earnings before taxes
$
980
3.3
%
Income taxes
(356)
1.2
Net income
$
624
2.1
%
Explanation / Answer
(a) Patterson has 1.7% of the total assets in form of Cash and Cash equivalents which are as liquid as cash. I think this is a bit lesser relative to total assets but is significant is we consider only current assets. Still if we look at the current ratio the firm has liquidity with current ratio being > 1.
(b) It is basically the short term debt ratio and long term debt ratio, which is just an indicative of how much of the company's total assets are financed by short term borrowings and long term borrowings. generally this ratio is defined as a whole as debt ratio being the single entity.
Short term debt ratio = short term notes payable/ total assets = 0.2056 or 20.56%.
Long term notes payable = long term liabilities / total assets = 0.2107 or 21.07%. Hence its observed that both long term and short term borrowings have been equally used by Patterson to generate its assets.
(c). Net income available is the revenue left after all expenses = 2.1% of the total revenues generated. This percentage should be as high as possible and the percentage observed is quite less, for a profit making firm.
(D). Cost of Goods Sold (COGS) given is approx 67% of the total revenues. This is basically the cost incurred in production of a product and it includes majorly the raw materials, various taxes imposed on them, then few fixed costs related to production. This should be approx 60% at maximum, so here there is about 7% excess of it.
Operating expenses are about 27% of the total revenue which is also a bit high. This should not exceed 23-24 % of the total revenue. Operating expenses are basically the variable costs incurred inclusive of salaries of employees, electricity charges and other internal transport expenses, admin expenses etc.
Interest expenses are basically due to the debt present in the accounts of firm and is majorly due to short term borrowings that have to be repaid at short intervals of time and interest paid on such short term debt every year is included in income statements. Although high interest is not a good liquidity and management indicator for firm but it provides the tax shiled.Also here only 3% of revenue is going to taxes, which is not high and is optimum.
So with the above optimum percentage of all the expenses, the net income should be = $ 2660 approx which is approx 9% of the revenues generated and is quite healthy percentage as it should between 8-10% hence the firm should work on its COGS and operations.
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