Financial Statement Analysis Selected financial information for two moving and s
ID: 2415897 • Letter: F
Question
Financial Statement Analysis
Selected financial information for two moving and storage supply stores is provided below:
Balance Sheet:
Storage Central
Boxes Galore
Average Total Assets
$ 250,000
$ 150,000
Average Shareholders’ Equity
$ 172,000
$ 36,000
Income Statement:
Sales
$ 78,000
$ 124,000
Cost of Goods Sold
51,650
76, 325
Gross Profit
26,350
47,675
Operating Expenses
Advertising Expense
404
1,985
Repairs and Maintenance Expense
697
3,279
Salaries and Wages Expense
8,449
24,320
Depreciation Expense
3,200
4,280
Interest Expense
9,750
6,136
Total Expenses
22,500
40,000
Net Income
$ 3,850
$ 7,675
Required:
a) If you have $10,000 to invest, would you invest in Storage Central or Boxes Galore? Use three relevant ratios to support your answer. More workspace is available on the following page. (See the formula sheet attached to the end of this exam to assist you in answering. Be sure to show all calculations and round to two decimal places.)
b) Calculate the debt to equity ratio for both stores. Which company would you choose to invest in now? Does this change your answer to (a) above? Explain.
Balance Sheet:
Storage Central
Boxes Galore
Average Total Assets
$ 250,000
$ 150,000
Average Shareholders’ Equity
$ 172,000
$ 36,000
Income Statement:
Sales
$ 78,000
$ 124,000
Cost of Goods Sold
51,650
76, 325
Gross Profit
26,350
47,675
Operating Expenses
Advertising Expense
404
1,985
Repairs and Maintenance Expense
697
3,279
Salaries and Wages Expense
8,449
24,320
Depreciation Expense
3,200
4,280
Interest Expense
9,750
6,136
Total Expenses
22,500
40,000
Net Income
$ 3,850
$ 7,675
Explanation / Answer
Solution.
1. Asset turnover ratio.
Formula = Net sales / Average total asset
Storage Central = $78,000 / $250,000 = 31.2
Boxes Galore = $124,000 / $150,000 = 82.66
2. Time interest earn ratio.
Formula = EBIT / Interest expense
Storage Central = $13,600 / $9,750 = 1.39
Boxes Galore = $13,811 / $6,136 = 2.25
3. Return on asset ratio.
Formula = Net income / Average total asset
Storage Central = 3,850 / $250,000 = 0.0154
Boxes Galore = 7,675 / $150,000 = 0.05116
Overall analysis of above three ratio result Boxes Galore is batter for investment point of view.
B. Calculation of the debt to equity ratio for both stores
Formula = Total libilities / Total Equity
Total libilities =
Storage Central = 250,000 x 2 = 500,000
Boxes Galore = 150,000 x 2 = 300,000
Debt to equity ratio =
Storage Central = 500,000 / 344,000 = 1.45
Boxes Galore = 300,000 / 72,000 = 4.16
According to this ratio Storage Central is batter for investment purpose.
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