Financial Statement Analysis provides information that indicates how a company is performing. By

QUESTION

Financial Statement Analysis provides information that indicates how a company is performing. By comparing financial statements of different years, a manager can make informed decisions about investments, expenditures, and activities that impact revenues. Directions: Read the chapter in the text titled Financial Statement Analysis. Using the comparative financial statements for Baby Cakes International Inc. (see BabyCakes_Financial_Project_Data.xls linked in the lesson activities) , complete the following tasks. Note: The market price of BabyCakes Int l, Inc. common stock was $20 on December 31, 2008. Part A: Complete the 19 ratios listed below. Determine the following measures for 2008: 1 Working Capital 2 Current ratio 3 Quick ratio 4 Accounts receivable turnover 5 Number of days sales in receivables 6 Inventory turnover 7 Number of days sales in inventory 8 Ratio of fixed assets to long-term liabilities 9 Ratio of liabilities to stockholders equity 10 Number of times interest charges earned 11 Number of times preferred dividends earned 12 Ratio of net sales to assets 13 Rate earned on total assets 14 Rate earned on stockholders equity 15 Rate earned on common stockholder s equity 16 Earnings per share on common stock 17 Price-earnings ratio 18 Dividends per share of common stock 19 Dividend yield Part B: Explain what the results of each ratio indicate about the company. Part C: Complete a horizontalanalysis for the Income Statement, and explain your findings. Part D: Complete a vertical analysis for the Income Statement, and explain your findings.Baby Cakes International Inc Income Statement for the Years ended December 31, 2008 and 2007 2008 2007 Sales $1,055,000 $966,000 Sales returns 1,000 3,000 Sales Allowances 1,500 1,000 Sales Discounts 2,500 2,000 Net Sales $1,050,000 $960,000 Cost of Goods Sold 400,000 390,000 Gross Profit $650,000 $570,000 Selling Expenses $270,000 $275,000 Administrative Expenses 195,000 165,000 Total operating expenses $465,000 $440,000 Income from Operations $185,000 $130,000 Other income 20,000 15,000 $205,000 $145,000 Other expense 96,000 48,000 Income before Tax $109,000 $97,000 Income Tax Expense 41,000 30,000 NET INCOME $68,000 $67,000Baby Cakes International Inc Balance Sheet December 31, 2008 and 2007 ASSETS December 31, 2008 December 31, 2007 Current Assets Cash $165,000 $126,000 Securities 398,000 254,000 A/R 199,000 165,000 Inventory 84,000 52,000 Prepaids 25,000 18,000 Total Current Assets $871,000 $615,000 Long Term Investments 300,000 200,000 Plant Property and Equipment (net of depreciation) 1,040,000 760,000 Total Assets $2,211,000 $1,575,000 LIABILITIES Accounts Payable $290,000 $250,000 Long Term Liabilities Mortgage note payable , 8% due 2011 300,000 Bonds Payable, 12% due 2015 600,000 400,000 Total Long-term liabilities $900,000 $400,000 Total Liabilities $1,190,000 $650,000 Stockholders Equity Preferred $6 stock, $100 par $250,000 $200,000 Common Stock, $10 par 350,000 350,000 Retained Earnings 421,000 375,000 Total Stockholders Equity $1,021,000 $925,000 Total liabilities and stockholders equity $2,211,000 $1,575,000
Answer A: Working Capital = Current Assets less Current Liabilities Total Current Assets $871,000 Total Current Liabilities $290,000 Working Capital $581,000 Current Ratio = Current Assets / Current Liabilities Total Current Assets $871,000 Total Current Liabilities $290,000 Current Ratio 3.003 Quick Ratio= Quick Assets / Current Liabilities Quick Assets $762,000 Total Current Liabilities $290,000 Quick Ratio 2.63 Accounts receivable turnover= Net Sales / Average Accounts Receivables Net Sales $1,050,000 Average Accounts Receivables 182,000 Accounts receivable turnover 5.77 Number of days sales in receivables= 365 days/Accounts receivable turnover Accounts receivable turnover 5.77 Number of days sales in receivables 63.27 Inventory turnover= Cost of Goods Sold / Average Inventory Cost of Goods Sold 400,000 Average Inventory 68,000 Inventory turnover 5.88 Number of days sales in inventory = 365 days/Inventory Turnover Inventory turnover 5.88 Number of days sales in inventory 62.05 Ratio of fixed assets to long-term liabilities= Fixed Assets/Long term liabilities Fixed Assets 1,340,000 Long Term Liabilities $900,000 Ratio of fixed assets to long-term liabilities 1.49 Ratio of liabilities to stockholders equity= Liabilities / Stockholders equity Liabilities $1,190,000 Stockholders equity $1,021,000 Ratio of liabilities to stockholders equity 1.17 Number of times interest charges earned= Earnings before interest and taxes / Interest expense Earnings before Interest and taxes

00 Interest Expense 96,000 Number of times interest charges earned 2.14 Number of times preferred dividends earned= Net Income/Preferred Dividend Net Income 68000 Preferred Dividend $15,000 Number of times preferred dividends earned 4.53 Ratio of net sales to assets= Net Sales /Total Assets Net Sales $1,050,000 Total Assets $2,211,000 Ratio of net sales to assets 0.47 Rate earned on total assets= Net Income/Total Assets *100 Net Income 68000 Total Assets 2211000 Rate earned on total assets 3.08% Rate earned on stockholders equity= Net Income/Stockholders equity * 100 Net Income 68000 Total Stockholders Equity $1,021,000 Rate earned on stockholders equity 6.66% Rate earned on common stockholder s equity= Net Income/Common Stockholders equity * 100 Net Income 68000 Common Stock 350,000 Rate earned on common stockholders equity 19.43% Earnings per share on common stock= Net income / Number of common stock Net Income 68000 Number of common stock 35000 Earnings per share on common stock 1.94 Price-earnings ratio= Market Price per share / Earnings per share Market price 20 Earnings per share 1.94 Price-earnings ratio 10.29 Dividends per share of common stock= Earnings after preferred dividend/Number of common stock Earnings after preferred dividend $53,000 Number of common stock 35000 Dividends per share of common stock 1.51 Dividend yield= Dividends/Market Price per share Dividends per share of common stock 1.51 Market price 20 Dividend yield 7.57%

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