The comparative financial statements of Marshall Inc. are as follows. The market
ID: 2587611 • Letter: T
Question
The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $82.80 on December 31, 20Y2.
Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
1
20Y2
20Y1
2
Retained earnings, January 1
$3,712,000.00
$3,262,000.00
3
Net income
570,000.00
560,000.00
4
Total
$4,282,000.00
$3,822,000.00
5
Dividends:
6
On preferred stock
$10,000.00
$10,000.00
7
On common stock
100,000.00
100,000.00
8
Total dividends
$110,000.00
$110,000.00
9
Retained earnings, December 31
$4,172,000.00
$3,712,000.00
Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
1
20Y2
20Y1
2
Sales
$10,840,000.00
$10,000,000.00
3
Cost of goods sold
6,000,000.00
5,440,000.00
4
Gross profit
$4,840,000.00
$4,560,000.00
5
Selling expenses
$2,180,000.00
$2,000,000.00
6
Administrative expenses
1,627,500.00
1,500,000.00
7
Total operating expenses
$3,807,500.00
$3,500,000.00
8
Income from operations
$1,032,500.00
$1,060,000.00
9
Other revenue
99,500.00
20,000.00
10
$1,132,000.00
$1,080,000.00
11
Other expense (interest)
132,000.00
120,000.00
12
Income before income tax
$1,000,000.00
$960,000.00
13
Income tax expense
430,000.00
400,000.00
14
Net income
$570,000.00
$560,000.00
Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
1
20Y2
20Y1
2
Assets
3
Current assets:
4
Cash
$1,050,000.00
$950,000.00
5
Marketable securities
301,000.00
420,000.00
6
Accounts receivable (net)
584,000.00
500,000.00
7
Inventories
410,000.00
380,000.00
8
Prepaid expenses
107,000.00
20,000.00
9
Total current assets
$2,452,000.00
$2,270,000.00
10
Long-term investments
800,000.00
800,000.00
11
Property, plant, and equipment (net)
5,770,000.00
5,184,000.00
12
Total assets
$9,022,000.00
$8,254,000.00
13
Liabilities
14
Current liabilities
$900,000.00
$792,000.00
15
Long-term liabilities:
16
Mortgage note payable, 6%,
$200,000.00
$0.00
17
Bonds payable, 4%,
3,000,000.00
3,000,000.00
18
Total long-term liabilities
$3,200,000.00
$3,000,000.00
19
Total liabilities
$4,100,000.00
$3,792,000.00
20
Stockholders’ Equity
21
Preferred 4% stock, $5 par
$250,000.00
$250,000.00
22
Common stock, $5 par
500,000.00
500,000.00
23
Retained earnings
4,172,000.00
3,712,000.00
24
Total stockholders’ equity
$4,922,000.00
$4,462,000.00
25
Total liabilities and stockholders’ equity
$9,022,000.00
$8,254,000.00
Determine the following measures for 20Y2 (round to one decimal place, including percentages, except for per-share amounts): Assume a 365-day year.
Dividend yield
Determine the following measures for 20Y2 (round to one decimal place, including percentages, except for per-share amounts): Assume a 365-day year.
Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
Explanation / Answer
Ratio analysis is a widely used tool to asses the financial position of company in terms of liquidity,solvency and profitability. There are various ratios like current ratio, liquidity ratio which helps to determine how soon a firm can meet its short term obligations by using its current assets. Similarly, various debt ratios assess the firms ability to pay interest regularly and installment of principal amount on due date.
1) Working capital measures the difference between current assets and current liabilities. It is not a ratio but it measures the liquidity position of the company. It represents excess of current assets over current liabilities. The greater the working capital the better is liquidity position of company.
Working capital = Current assets - Current liabilities
Current assets for company is $2,452,000 and current liabilities is $900,000. The working capital for company for 20Y2 will be as follows:
Working capital = $2,452,000 - $900,000
Working capital = $1,552,000
Therefore, working capital for company for 20Y2 is $1,552,000.
2) Current ratio is the ratio of total current assets to total current liabilities. This ratio measures the ability of firm to meet its short term obligations. It indicates per rupee of current assets available for each rupee of current liabilities. Higher the ratio better it is because it shows that firm has sufficient current assets to meet its current liabilities.
Current ratio = Current assets / Current liabilities
The Current ratio for company for 20Y2 will be as follows:
Current ratio = $2,452,000 / $900,000
Current ratio = 2.72
The Current ratio for company for 20Y2 is 2.72.
3) Quick ratio is the ratio of quick current assets and current liabilities. Quick current assets refers to current assets which can be converted into cash easily and at very short notice. It includes assets like cash and bank balance, short-term marketable securities, debtors. So, current assets which are excluded from quick assets are prepaid expenses and inventory. It is calculated as below:
Quick ratio = Quick current assets / Current liabilities
Quick current assets = Current assets - prepaid expenses - inventory
Quick current assets = $2,452,000 - $107,000 - $410,000
Quick current assets = $1,935,000
So, quick ratio = $1,935,000 / $900,000
quick ratio = 2.15
The quick ratio for company for 20Y2 is 2.15.
4) Accounts receivable turnover ratio measures how soon a company collects its receivables. It is calculated by dividing the net credit sales during a given period by the average accounts receivable during the same period. This ratio indicates the number of times a business collects its accounts receivable during a year.
Accounts receivable turnover = Net credit sales / Average accounts receivable
So, first calculate average accounts receivables which is as follows:
Average accounts receivable = (Accounts receivable at beginning of year + Accounts receivable at end of year) / 2
Average accounts receivable = ($584,000 + $500,000) / 2
Average accounts receivable = $542,000
As per income statement, Net sales for year 20Y2 is $10,840,000.
Accounts receivable turnover = $10,840,000 / $542,000
Accounts receivable turnover = 20
The Accounts receivable turnover for company for 20Y2 is 20.
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