Assignment 1

Analysis of Financial Statements

Due date 03 November 2023

Student Name:
Student ID:
Program: BBA-7

Q.1 Classify each of the following as a (CA) current asset, (NA) noncurrent asset, (CL) current
liability, (NL) noncurrent liability, or (E) equity account. Choose the best or most
frequently used classification.

a. Supplies k. Wages payable

b. Notes receivable 1. Mortgage bonds payable
c. Unearned subscription revenue m. Unearned interest
d. Accounts payable n. Marketable securities
e. Retained earnings o. Paid-in capital from
f. Accounts receivable sale of treasury stock
g. Preferred stock p. Land
h. Plant q. Inventories
i. Prepaid rent r. Taxes accrued
j. Capital s. Cash

Q.2 The following information was obtained from the accounts of Alleg, Inc. as of December 31, 2012.
It is presented in scrambled order.

Common stock, authorized 21,000 shares at $1 par value, issued 10,000 shares 10,000
Additional paid-in capital 38,000
Cash 13,000
Marketable securities 17,000
Accounts receivable 26,000
Accounts payable 15,000
Current maturities of long-term debt 11,000
Mortgages payable 80,000
Bonds payable 70,000
Inventories 30,000
Land and buildings 57,000
Machinery and equipment 125,000
Goodwill 8,000
Patents 10,000
Other assets 50,000
Deferred income taxes (long-term liability) 18,000
Retained earnings 33,000
Accumulated depreciation 61,000
Required: Prepare a classified balance sheet in report form.
Q.3 The Arbor Drugs, Inc. income statement from its 1995 annual report is presented below:
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
Consolidated Statement of Income
Arbor Drugs, Inc. and Subsidiaries
Fiscal years ended July 31 1995 1994 1993
(Dollars in thousands)
Net sales 708,250 619,662 536,066
Costs and expenses
Cost of sales (522,807) (455,307) (391,996)
Selling, general, and administrative (150,929) (133,859) (118,437)
Provision for third-party settlement and
related expenses (1,100) (8,100) (17,100)
Income from operations 33,414 22,396 8,533
Interest expenses (3,135) (2,767) (2,838)
Interest income 2,459 2,095 2,061
Income before income taxes 32,738 21,724 7,756
Provision for income tax 10,971 8,946 2,147
Net income 21,767 12,778 5,609

Required:
a) Using the income statement, prepare a vertical common-size analysis for 1995, 1994, and
1993. Use net sales as a base.
b) Using the income statement, prepare a horizontal common-size analysis for 1995, 1994,
and 1993. Use 1993 as the base.
c) Comment on significant trends that appear in (a) and (b).

Q 4 solve Question number 4.9 to 4.13

P 8-1. Ahl Enterprise lists the following data for 2007 and 2006:
2007 2006
Net income $ 52,500 $ 40,000
Net sales 1,050,000 1,000,000
Average total assets 230,000 200,000
Average common equity 170,000 160,000

Required Calculate the net profit margin, return on assets, total asset turnover, and return on
common equity for
both years. Comment on the results. (For return on assets and total asset turnover, use end-of-
year total
assets; for return on common equity, use end-of-year common equity.)
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023

P 8-2. Income statement data for Starr Canning Corporation are as follows:
2007 2006
Sales $1,400,000 $1,200,000
Cost of goods sold 850,000 730,000
Selling expenses 205,000 240,000
General expenses 140,000 100,000
Income tax expense 82,000 50,000

Required a. Prepare an income statement in comparative form, stating each item for both years as
a percent of sales
(vertical common-size analysis).
b. Comment on the findings in (a)

Answers:
Question 1:

Current Assets Noncurrent Assets Current Liability Noncurrent

(CA) (NA) (CL) Liability (NL) Equity Account (E)
Unearned
Subscription Mortgage bonds
Supplies Plant revenue payable Retained Earnings

Notes receivable Land Accounts Payable Preferred Stock

Accounts
receivable Wages Payable Capital
Paid-in Capital from
Prepaid Rent Taxes accrued sale of treasury stock

Inventories Unearned Interest

Cash
Marketable
Securities
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023

Question 2:

Alleg Inc.
Balance Sheet
as of December
31, 2012
Assets: Liabilities:
Current
Current Assets: Liabilities:
Cash 13000 Accounts Payable 15000
Accounts Current maturities of long-
receivable 26000 term debt 11000
Inventories 30000 Total Current Liabilities: 26000
Marketable Securities 17000 Long-term Liabilities:
Other Assets 50000 Bonds Payable 70000
Mortgages
Total Current Assets: 136000 Payable 80000
Deferred Income Taxes 18000
Noncurrent
Assets: Total Noncurrent Liabilities: 168000
Land and
Buildings 57000
Machinery and Equipment 125000 Equity:
less: Accumulated
Depreciation (61000) Retained Earnings 33000
Goodwil
l 8000 Common Stock 10000
Patents 10000 Additional Paid-in Capital 38000
Total Fixed
Assets: 139000 Total Equity 81000
Total Assets: 275000 Total Liabilities: 275000
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023

Question 3:

a) Vertical Common-size Analysis:

Consolidated Statement of
Income
Arbor Drugs Inc. and
Subsidiaries
Fiscal years ended July 31
1995 1994 1993
Net
Sales 100% 100% 100%
Costs and
Expenses:
Cost of Sales 73.80% 73.48% 73.13%
Selling, general & administrative 21.30% 21.60% 22.09%
Provision for third-party & related expenses 0.16% 1.31% 3.19%
Income from operations 4.72% 3.61% 1.59%
Interest Expenses 0.44% 0.45% 0.53%
Interest Income 0.35% 0.34% 0.38%
Income before income
taxes 4.62% 3.51% 1.45%
Provision for income tax 1.55% 1.44% 0.40%
Net Income 3.07% 2.06% 1.05%

b) Horizontal Common-size Analysis:

Consolidated Statement of
Income
Arbor Drugs Inc. and
Subsidaries
Fiscal years ended July 31
1995 1994 1993
Net 132.12 115.59
Sales % % 100%
Costs and
Expenses:
133.37 116.15
Cost of Sales % % 100%
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
127.43 113.02
Selling, general & administrative % % 100%
Provision for third-party & related expenses 6.43% 47.37% 100%

391.58 262.46
Income from operations % % 100%
110.46
Interest Expenses % 97.50% 100%
119.31 101.65
Interest Income % % 100%
Income before income 422.09 280.09
taxes % % 100%
510.99 416.67
Provision for income tax % % 100%
388.07 227.81
Net Income % % 100%

Part c) Significant trends observed are as follows:

1. Cost of Sales: A rising trend in the cost of sales as a percentage of net sales may indicate
increasing production costs or potential cost management challenges.

2. Selling, General, and Administrative (SG&A) Expenses: The consistent increase in

SG&A expenses as a percentage of net sales suggests a growing allocation of revenue to
operating and administrative costs, warranting a closer look to align expenses with the
company's strategic goals.

3. Provision for Third-Party Settlement and Related Expenses: The significant decrease
in this category as a percentage of net sales reflects improved management of expenses
related to third-party settlements or compliance procedures.

4. Income from Operations: The growing income from operations as a percentage of net
sales signifies increasing profitability from core operations, a positive sign for
stakeholders.

5. Interest Expenses and Income: Both interest expenses and income remain relatively
stable as percentages of net sales, requiring ongoing monitoring to ensure they don't
become a burden on profitability.

6. Provision for Income Tax: The increase in the provision for income tax as a percentage
of net sales is due to higher profits and tax liabilities, prompting the need for tax planning
strategies.

7. Net Income: The steady growth in net income as a percentage of net sales indicates
improved efficiency in generating profits from sales.
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023

Question 4:

Problem 4.9:

a) A
b) A
c) A
d) B
e) B
f) A
g) A
h) B
i) C
j) B
k) B
l) B
m) A
n) B
o) B
p) A
q) A
r) A
s) A
t) B
u) B
v) A

Problem 4.10:

a) C
b) B
c) A
d) B
e) A
f) B
g) C
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
h) B
i) B
j) A
k) B
l) A
m) B
n) B
o) A

p) B
q) A
r) B
s) B

Problem 4.11:

a)
Net Income $ 20,000.00
add: Extraordinary loss from flood $ 120,000.00
$ 140,000.00

b) 60,000
c) 60,000
d) 40,000
e) 100,000-50,000 = 50,000

Problem 4.12:

a) Net income from operations

b) 20,000 loss
c)
$ 94,000.00
$ (30,000.00)
$ (50,000.00)
$ 25,000.00
$ 39,000.00

Problem 4.13
a)
1) Receipt of Cash
Sales (210,000 ounces x $300) 63,000,000.00
COGS (210,000 x $250) (52,500,000.00)
Gross Profit 10,500,000.00
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
less: Operating Expense
Selling Expense (2,000,000.00)
Administrative Expense (1,250,000.00)
Profit before taxes 7,250,000.00
Taxes (3,625,000.00)
Net Income 3,625,000.00

2) Point of Sales
Sales (230,000 ounces x $300) 69,000,000.00
COGS (230,000 x $250) (57,500,000.00)
Gross Profit 11,500,000.00
less: Operating Expense
Selling Expense (2,000,000.00)
Administrative Expense (1,250,000.00)
Profit before taxes 8,250,000.00
Taxes (4,125,000.00)
Net Income 4,125,000.00

3) End of Production
Sales (200,000 ounces x $300) 60,000,000.00
COGS (200,000 x $250) (50,000,000.00)
Gross Profit 10,000,000.00
less: Operating Expense
Selling Expense (2,000,000.00)
Administrative Expense (1,250,000.00)
Profit before taxes 6,750,000.00
Taxes (3,375,000.00)
Net Income 3,375,000.00

4) Based on Delivery
Sales (190,000 ounces x $300) 57,000,000.00
COGS (190,000 x $250) (47,500,000.00)
Gross Profit 9,500,000.00
less: Operating Expense
Selling Expense (2,000,000.00)
Administrative Expense (1,250,000.00)
Profit before taxes 6,250,000.00
Taxes (3,125,000.00)
Net Income 3,125,000.00
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
1. The Utilization cash receipts when there is uncertainty about the likelihood of collecting
payment at the time of sale.

2. The point of sale represents the moment when revenue is recognized, typical occurring
when the earnings process is nearly complete, and the exchange value is determined.

3. Revenue can be recognized at the end of the production process when the item’s price is
established, and a readily accessible market exists. It’s important to note that the price is
not necessarily fixed, as it increased from $150 per ounce in 1981 to $300 per ounce in
2006.

4. Relying solely on the delivery of goods as the point of revenue recognition is generally
discouraged. While delivery is a concrete event, it often does not signify a significant
milestone in the revenue recognition process.

Question 5:

P-8-1:

Net Profit Margin:

For 2007:
Net
Net Profit Margin= Income
Net
Sales

NP
M= 52500
105000
0

NP
M= 5%

For 2006:
NP
M= 40000
100000
0
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
NP
M= 4%

Return on Assets:

For 2007:
Return on Assets= Net Income
Average Total
Assets

ROA
= 52500
230000

ROA
= 22.83%

For 2006:
ROA
= 40000
200000

ROA
= 20%

Return on Common Equity:

For 2007:
Return on Common Equity= Net Income
Average Common
Equity

RoCE= 52500
170000

RoCE= 30.88%

For 2006:
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
RoCE
= 40000
160000

RoCE
= 25%

Total Assets Turnover:

For 2007:
Total Assets Turnover= Net Sales
Average Total Assets

TAT= 1050000
230000

TAT= 4.57 times

For 2006:
TAT= 1000000
200000

TAT= 5 times

Comments on the results:

1. Net Profit Margin: The net profit margin increased from 4% in 2006 to 5% in 2007.
This indicates that the company was able to retain a higher percentage of its sales as
profit in 2007.

2. Return on Assets (ROA): The ROA increased from 20% in 2006 to approximately
22.83% in 2007. This suggests that the company generated a higher level of income
relative to its average total assets in 2007, which is a positive sign of efficiency.
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023
3. Total Asset Turnover: The total asset turnover decreased from 5 in 2006 to
approximately 4.57 in 2007. This could imply that the company was less efficient in
utilizing its assets to generate sales in 2007 compared to 2006.

4. Return on Common Equity (ROE): The ROE increased from 25% in 2006 to
approximately 30.88% in 2007, indicating that the company was more effective at
generating earnings relative to its common equity in 2007.

P-8-2:

a)
Starr Canning Corporation
Vertical Common-size analysis Income Statement
2007 2006
Sales 100% 100%

Cost of Goods Sold 60.71% 60.83%

Selling Expense 14.64% 20.00%
General Expense 10.00% 8.33%
Income Tax Expense 5.86% 4.17%
Net Income 8.79% 6.67%

b) Comments on the findings:

1. Sales: Sales have increased from $1,200,000 in 2006 to $1,400,000 in 2007, representing
a 16.67% growth in sales. This is a positive sign for the company.

2. Cost of Goods Sold: The cost of goods sold as a percentage of sales remained relatively
stable, decreasing slightly from 60.83% in 2006 to 60.71% in 2007. This indicates that
the company maintained its cost control in relation to sales.

3. Selling Expenses: Selling expenses decreased as a percentage of sales from 20.00% in

2006 to 14.64% in 2007. This suggests that the company became more efficient in
managing its selling expenses relative to sales.

4. General Expenses: General expenses increased as a percentage of sales from 8.33% in

2006 to 10.00% in 2007. This indicates that the company allocated a larger portion of its
revenue to general expenses. Further analysis is needed to understand the reasons behind
this increase.
 Assignment 1
Analysis of Financial Statements
Due date 03 November 2023

5. Income Tax Expense: Income tax expense increased as a percentage of sales from
4.17% in 2006 to 5.86% in 2007. This suggests a higher tax liability in 2007, which may
be due to increased profitability.

6. Net Income: The net income as a percentage of sales improved significantly from 6.67%
in 2006 to 8.79% in 2007. This indicates that the company's profitability relative to sales
has increased.