Part I: You, the accountant, are analyzing South Texas Corporation. STC has expa
ID: 2564892 • Letter: P
Question
Part I: You, the accountant, are analyzing South Texas Corporation. STC has expanded its production facilities by 200% since 2016. The income statements for the last three year are below:
South Texas Corporation
Statements of Profit and Loss
For the Years Ending December 31
2019
2018
2017
Sales
$250
$150
$120
Cost of goods sold
190
100
60
Gross profit
60
50
60
Other expenses
35
34
35
Net Income
$25
$16
$25
Requirements:
1. Prepare a vertical analysis of South Texas Corporation’s Income Statement for three years.
2. What conclusions can be drawn on gross profit ratio and expenses, for this analysis? Write conclusion in complete sentence format.
Part II: The following balance sheet (statement of financial position) is presented for Cyber Security Corporation.
Cyber Security Corporation
Statement of Financial Position
At December 31, 2020
Assets
Liabilities
Current
Current
Cash
$100
Accounts Payable
$300
Accounts Receivable
200
Wages Payable
50
Merchandise Inventory
500
Dividends Payable
50
Prepared Expenses
50
400
850
Non-current
Non-current
Property, plant & equipment (net)
1,000
Loan Payable
800
1,200
Shareholders’ Equity
Common Shares
500
Retained Earnings
150
Total Shareholder’s Equity
650
Total Assets
$1,850
Total Liability and Equity
$1,850
Requirements: Show all work.
1. Calculate current ratio, acid-test ratio, and debt to shareholder’s equity ratio.
2. Discuss the meaning of each ratio result. (What do these ratios mean for Cyber Security?)
Part III: The following balance sheet (statement of financial position) is presented for Level Up Corporation.
Level Up Corporation
Statement of Financial Position
At December 31, 2020
Assets
Liabilities
Current
Current
Cash
$60
Accounts Payable
$100
Accounts Receivable
140
Loan Payable
20
Merchandise Inventory
250
Notes Payable
60
Prepared Expenses
10
180
460
Non-current
Non-current
Property, plant & equipment (net)
330
Loan Payable
140
320
Shareholders’ Equity
Preferred shares, 10% (8 shares)
120
Common shares (50 shares)
250
Retained earnings
100
470
Total Assets
$790
Total Liability and Equity
$790
LevelUp Corporation
Income Statement
For the Year Ending December 31, 2020
Net Sales (all on credit)
$800
Cost of Goods Sold
600
Gross Profit
200
Selling and Administration Expenses
100
Income from Operations
100
Interest Expense
20
Income before Income Taxes
80
Income Taxes
30
Net Income
$50
Additional information from December 31, 2019 statement of financial position:
Accounts receivable $180
Merchandise inventory 200
Property, Plant and Equipment (net) 250
Retained earnings 80
Preferred shares 120
Common Shares 250
Requirements:
1. Compute the following ratios, showing all work.
Current ratio
Acid-test ratio
Accounts receivable collection period
Number of days of sales in inventory
Debt to shareholders’ equity ratio
Return on shareholder’s equity
2. What do these ratios tell you about the Level Up Corporation?
South Texas Corporation
Statements of Profit and Loss
For the Years Ending December 31
2019
2018
2017
Sales
$250
$150
$120
Cost of goods sold
190
100
60
Gross profit
60
50
60
Other expenses
35
34
35
Net Income
$25
$16
$25
Explanation / Answer
Part 1
South Texas Corporation
Vertical Analysis of Income Statement
2019
2018
2017
Sales
100%
100%
100%
Cost of Goods Sold
76%
66.67%
50%
Gross Profit
24%
33.33%
50%
Other Expenses
14%
22.67%
29.17%
Net Profit
10%
10.66%
20.83%
Conclusion:
Gross Profit Ratio
The sale is increasing every year but due to increase in Cost of Goods Sold as well, Gross profit ratio is decreasing yearly
Expenses Ratio
The Expenses Ratio is decreasing yearly but due to decrease in G.P. Ratio as well, Net profit ratio is also deceasing yearly
Part 2
Cyber Security Corporation
Current Ratio
=
Current Assets
Current Liabilities
=
100+200+500+50
300+50+50
=
850
400
=
2.125:1
Analysis
Current Ration is a measure of liquidity of a company at a certain date. The optimum Current ratio is 2:1. the higher Current Ratio shows the insufficient use of funds and resources
Acid Test ratio
=
Current Assets-Inventory-Prepaid Expenses
Current Liabilities
=
850-500-50
400
=
300
400
=
0.75:1
Analysis
Acid Test ratio shows the extent of cash and other current assets that are readily convertible into cash in comparison to Short Term obligation of an organization. An Acid Test ratio of 0.75 would suggest that a company is able to settle 3/4th of its Current Liabilities instantaneously.
Debt to shareholder Equity
=
Total Liabilities
Total shareholder's equity
=
1200
650
=
1.85:1
Analysis
Debt Equity ratio higher than 1 indicates that the portion of assets provided by creditors is greater than the portion of assets provided by stockholders.
Part 3
Level Up Corporation
Current Ratio
=
Current Assets
Current Liabilities
=
460
180
=
2.56:1
Analysis
Current Ration is a measure of liquidity of a company at a certain date. The optimum Current ratio is 2:1. the higher Current Ratio shows the insufficient use of funds and resources
Acid Test ratio
=
Current Assets-Inventory-Prepaid Expenses
Current Liabilities
=
460-250-10
180
=
200
180
=
1.11:1
Analysis
Acid Test ratios shows the extent of cash and other current assets that are readily convertible into cash in comparison to Short Term obligation of an organization. An Acid Test ratio higher than 1 may suggest that the company is investing too many resources in the working capital of the business
Account Receivables Collection Period
=
No. of Working Days
Accounts Receivables Turnover ratio
Accounts Receivables Turnover Ratio
=
Net Credit Sales
Accounts Receivables
=
800
180
=
4 Days (approx.)
Hence, Accounts Receivables Collection Period
=
365
4
=
91 days (approx.)
Analysis
This Accounts Receivables Collection period of 91 days indicates that thos business takes average 91 days to collect payment from sales
No. of days of sales in inventory
=
Average Inventory
*365
Cost of Goods Sold
Average Inventory
=
Opening Inventory + Closing Inventory
2
=
200+250
2
=
225
Hence, No. of days of sales in inventory
=
225
*365
600
=
137 days (approx.)
Analysis
This ratio indicates that the company is required average 137 days to convert its inventory into sales
Debt to shareholder Equity
=
Total Liabilities
Total shareholder's equity
=
320
470
=
0.68:1
Analysis
Debt Equity ratio lower than 1 indicates that the portion of assets provided by stockholders is greater than the portion of assets provided by creditors.
Return on Shareholder's Equity
=
Net Income
Common shareholder's equity
=
50
250
=
20%
Analysis
A higher return on Shareholder's equity indicates the high profitability and strong financial position of a company.
Part 1
South Texas Corporation
Vertical Analysis of Income Statement
2019
2018
2017
Sales
100%
100%
100%
Cost of Goods Sold
76%
66.67%
50%
Gross Profit
24%
33.33%
50%
Other Expenses
14%
22.67%
29.17%
Net Profit
10%
10.66%
20.83%
Conclusion:
Gross Profit Ratio
The sale is increasing every year but due to increase in Cost of Goods Sold as well, Gross profit ratio is decreasing yearly
Expenses Ratio
The Expenses Ratio is decreasing yearly but due to decrease in G.P. Ratio as well, Net profit ratio is also deceasing yearly
Part 2
Cyber Security Corporation
Current Ratio
=
Current Assets
Current Liabilities
=
100+200+500+50
300+50+50
=
850
400
=
2.125:1
Analysis
Current Ration is a measure of liquidity of a company at a certain date. The optimum Current ratio is 2:1. the higher Current Ratio shows the insufficient use of funds and resources
Acid Test ratio
=
Current Assets-Inventory-Prepaid Expenses
Current Liabilities
=
850-500-50
400
=
300
400
=
0.75:1
Analysis
Acid Test ratio shows the extent of cash and other current assets that are readily convertible into cash in comparison to Short Term obligation of an organization. An Acid Test ratio of 0.75 would suggest that a company is able to settle 3/4th of its Current Liabilities instantaneously.
Debt to shareholder Equity
=
Total Liabilities
Total shareholder's equity
=
1200
650
=
1.85:1
Analysis
Debt Equity ratio higher than 1 indicates that the portion of assets provided by creditors is greater than the portion of assets provided by stockholders.
Part 3
Level Up Corporation
Current Ratio
=
Current Assets
Current Liabilities
=
460
180
=
2.56:1
Analysis
Current Ration is a measure of liquidity of a company at a certain date. The optimum Current ratio is 2:1. the higher Current Ratio shows the insufficient use of funds and resources
Acid Test ratio
=
Current Assets-Inventory-Prepaid Expenses
Current Liabilities
=
460-250-10
180
=
200
180
=
1.11:1
Analysis
Acid Test ratios shows the extent of cash and other current assets that are readily convertible into cash in comparison to Short Term obligation of an organization. An Acid Test ratio higher than 1 may suggest that the company is investing too many resources in the working capital of the business
Account Receivables Collection Period
=
No. of Working Days
Accounts Receivables Turnover ratio
Accounts Receivables Turnover Ratio
=
Net Credit Sales
Accounts Receivables
=
800
180
=
4 Days (approx.)
Hence, Accounts Receivables Collection Period
=
365
4
=
91 days (approx.)
Analysis
This Accounts Receivables Collection period of 91 days indicates that thos business takes average 91 days to collect payment from sales
No. of days of sales in inventory
=
Average Inventory
*365
Cost of Goods Sold
Average Inventory
=
Opening Inventory + Closing Inventory
2
=
200+250
2
=
225
Hence, No. of days of sales in inventory
=
225
*365
600
=
137 days (approx.)
Analysis
This ratio indicates that the company is required average 137 days to convert its inventory into sales
Debt to shareholder Equity
=
Total Liabilities
Total shareholder's equity
=
320
470
=
0.68:1
Analysis
Debt Equity ratio lower than 1 indicates that the portion of assets provided by stockholders is greater than the portion of assets provided by creditors.
Return on Shareholder's Equity
=
Net Income
Common shareholder's equity
=
50
250
=
20%
Analysis
A higher return on Shareholder's equity indicates the high profitability and strong financial position of a company.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.