PA13-2 Analyzing Comparative Financial Statements Using Selected Ratios [LO 13-4

Question

PA13-2 Analyzing Comparative Financial Statements Using Selected Ratios [LO 13-4, LO 13-5] The comparative financial statements prepared at December 31 for Pinnacle Plus showed the following summarized data Current Year Previous Year Income Statement Sales Revenue Cost of Goods Sold $115,000 $103,000 50,000 54,000 Gross Profit Operating Expenses Interest Expense 61,000 37,000 4,100 53,000 33,800 4,100 Income before Income Tax Expense Income Tax Expense (30%) 19,900 5,970 15,100 4,530 Net Income $ 13,930 10,570 Balance Sheet Cash Accounts Receivable, Net Inventory Property and Equipment, Net $ 70,805 37,000 13,000 39,000 106,000 18,000 26,000 96,000 Total Assets $210,805 $195,000 Accounts Payable Income Tax Payable Note Payable (long-term) $ 43,000 1,025 41,000 34,900 550 41,000 Total Liabilities Common Stock (par $10) Retained Earningst 85,025 90,600 35,180 76,450 90,600 27,950 Total Liabilities and Stockholders'Eity $210,805 $195,000 During the current year, cash dividends amounting to $6,700 were declared and paid

Explanation / Answer

For Pinnacle Plus: Ans. (4a) Return On Equity = Net Income / Average Shareholder's Equity Current Year = $13,930 / {($118,550+$125,780)/2} ) = $13,930 / $122,165 = 11.4% Previous Year = $10,570 / {($101,000+$118,550)/2} ) = $10,570 / $109,775 = 9.6% Ans. (4b) The current year results are better than the previous year results. Ans. (5a) Fixed Asset Turnover = Net Sales / Average Fixed Assets Current Year = $115,000 / {($96,000+$106,000)/2} ) = $115,000 / $101,000 = 1.14 Previous Year = $103,000 / {($111,000+$106,000)/2} ) = $103,000 / $108,500 = 0.95 Ans. (5b) The current year results are better than the previous year results. For Golden Corporation: Ans. (5a) Fixed Asset Turnover = Net Sales / Average Fixed Assets Current Year = $210,000 / {($51,000+$44,000)/2} ) = $210,000 / $47,500 = 4.42 Previous Year = $189,000 / {($44,00+$38,000)/2} ) = $189,000 / $41,000 = 4.61 Ans. (5b) The current year results are worse than the previous year results. Ans. (6a) Debt to asset = Total Liability / Total Assets Current Year = $65,600 / $126,680 = 51.78% Previous Year = $74,200 / $119,600 = 62.04% Ans. (6b) Debt is providing financing for a smaller portion of the companys asset growth

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