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Perform a vertical analysis of the income statement
Course:- Accounting Basics
Reference No.:- EM132337149




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Accounting Assignment -

Problem 1 - Top managers of Bella Tiles Inc., a specialty fabricating company, have asked for your help in comparing the company's profit performance and financial position with the average for the tile-making industry. The accountant has given you the company's income statement and balance sheet, and also the average data for the tile-making industry (amounts in millions):

Bella Tiles Inc. Income Statement For the Year Ended December 31, 2017

 

Bella Tiles Inc.

Industry Average

Net sales

$29.2

100.0%

Cost of goods sold

17.6

65.9

Gross margin

11.6

34.1

Operating expenses

8.4

28.1

Operating income

3.2

6.0

Other expenses

0.2

0.4

Net income

$3.0

5.6%

 

Bella Tiles Inc. Balance Sheet December 31, 2017

 

Bella Tiles Inc.

Industry Average

Current assets

$10.4

66.6%

Property, plant, equip., net

8.0

32.3

Other assets

0.2

1.1

Total assets

$18.6

100.0%

Current liabilities

$6.2

35.6

Long-term liabilities

5.2

19.0

Shareholders' equity

7.2

45.4

Total liabilities and shareholders' equity

$18.6

100.0%

Required -

1. Prepare a two-column common-size income statement and a two-column common-size-balance sheet for Bella Tiles Inc. The first column of each statement should present Bella Tiles Inc.'s common-size statement, and the second column should show the industry averages.

2. For the profitability analysis, compare Bella Tiles Inc.'s (a) ratio of gross margin to net sales, (b) ratio of operating income (loss) to net sales, and (c) ratio of net income (loss) to net sales. Compare these figures with the industry averages. Is Bella Tiles Inc.'s profit performance better or worse than the average for the industry?

3. For the analysis of financial position, compare Bella Tiles Inc.'s (a) ratio of current assets to total assets and (b) ratio of shareholders' equity to total assets. Compare these ratios with the industry averages. Is Bella Tiles Inc.'s financial position better or worse than the average for the industry?

Problem 2 - Financial statement data of Xi Supplies Inc. as at December 31, 2017, include the following items:

Cash

$53,000

Accounts receivable, net

127,000

Inventories

251,000

Prepaid expenses

10,000

Total assets

922,000

Short-term notes payable

80,000

Accounts payable

91,000

Accrued liabilities

64,000

Long-term liabilities

248,000

Net income

147,000

Number of common shares outstanding

44,000 shares

Required -

1. Compute Xi Supplies Inc.'s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places.

2. Compute each of the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately

a. Borrowed $100,000 on a long-term note payable.

b. Issued 12,000 common shares on January 2, 2018, receiving cash of $180,000.

c. Received cash on account, $29,000.

d. Paid short-term notes payable, $50,000.

e. Purchased merchandise costing $62,000 on account, debiting Inventory.

f. Paid long-term liabilities, $15,000.

g. Declared, but did not pay, a $40,000 cash dividend on the common shares.

Set up a table in the following format for your answers:

Transaction

Current Ratio

Debt Ratio

Earnings per Share

 

 

 

 

 

 

 

 

Problem 3 - Jens Hardware Inc.'s financial statements for the year ended December 31, 2017, are shown below:

Jens Hardware Inc. Balance Sheet December 31, 2017 and 2016

 

2017

2016

Assets

 

 

Cash

$21,600

$15,600

Accounts receivable

33,050

21,000

Merchandise inventory

38,000

42,000

Prepaid expenses

1,000

1,500

Property, plant, and equipment

170,000

157,000

Accumulated amortization

(34,000)

(24,000)

Goodwill

15,000

15,000

Total assets

$244,650

$228,100

Liabilities

 

 

Accounts payable

$15,000

$18,500

Notes payable (due in 30 days)

2,000

3,500

Mortgage payable

40,000

45,000

Total liabilities

57,000

67,000

Shareholders' equity

 

 

Preferred shares (8,000 shares; $2.00, callable at $15.00 per share)

48,000

48,000

Common shares (2017-12,000 shares; 2016-8,000 shares)

81,000

65,000

Retained earnings

58,650

48,100

Total shareholders' equity

187,650

161,100

Total liabilities and shareholders' equity

$244,650

$288,100

 

Jens Hardware Inc. Income Statement For the Year Ended December 31, 2017

Net sales

$330,000

Cost of goods sold

190,000

Gross margin

140,000

Operating expenses:

 

Selling expenses

40,000

Administrative expenses

23,000

Interest expense

6,000

Total operating expenses

69,000

Operating income

71,000

Income taxes (30%)

21,300

Net income

$49,700

 

Jens Hardware Inc. Statement of Retained Earnings For the Year Ended December 31, 2017

Retained earnings, January 1, 2017

 

$48,100

Add net income for 2017

 

49,700

 

 

97,800

Less dividends: Preferred

$16,000

 

Common

23,150

39,150

Retained earnings, December 31, 2017

 

$58,650

Required -

1. Perform a horizontal analysis of the comparative balance sheets. Comment on the analysis.

2. Perform a vertical analysis of the income statement. The industry standards are a gross margin of 45 percent and net income of 15 percent. Comment on the analysis.

3. Calculate each of the following ratios for the year ended December 31, 2017. The industry standards are provided in parentheses for some of the ratios.

a. Current ratio (2:1)

b. Acid-test ratio

c. Inventory turnover

d. Days' sales in receivables

e. Debt ratio (0.47)

f. Times-interest-earned ratio

g. Rate of return on net sales

h. Rate of return on total assets

i. Rate of return on common shareholders' equity

j. Price-earnings ratio-the market price per share is $9.00 at year end, when dividends were paid (14.0).

k. Dividend yield (4%)

4. Comment on your calculations for Jens Hardware Inc. Include comments for those ratios for which industry standards were provided.

Attachment:- Template.rar




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