Analyzing financial statements exercise

Use this sample Income Statement and Balance Sheet to answer the questions below. You can either do the
calculations manually or use the excel file from the digital toolkit. Do your best in 30 minutes, and feel free to work
with classmates via WhatsApp.

Income Statement

Year 1 Year 2 Year 3

Revenue 19,250,000.00 67,375,000.00 134,750,000.00

COGS 13,750,000.00 55,343,750.00 105,105,000.00

Gross Profit 5,500,000.00 12,031,250.00 29,645,000.00

Operating Expenses

Salaries 7,200,000.00 10,800,000.00 13,500,000.00

Rent 1,800,000.00 1,890,000.00 1,984,500.00

Insurance 350,000.00 420,000.00 462,000.00

Phones & Internet 240,000.00 480,000.00 528,000.00

Legal & Accounting Fees 234,000.00 245,700.00 294,840.00

Depreciation 325,000.00 325,000.00 325,000.00

Marketing Expenses 300,000.00 390,000.00 468,000.00

Sales Commission 175,000.00 612,500.00 1,225,000.00

Total Operating Expenses 10,624,000.00 15,163,200.00 18,787,340.00

Operating Income Before Tax (5,124,000.00) (3,131,950.00) 10,857,660.00

Add (Subtract) to Tax Loss Carryforward 5,124,000.00 3,131,950.00 8,255,950.00

Taxable Income (Loss) 2,601,710.00

Tax Expense 650,427.50

Net Income (5,124,000.00) (3,131,950.00) 10,207,232.50

Off-Balance Sheet Items

Tax Loss Carryforward 5,124,000.00 8,255,950.00 -

Balance Sheet

Year 1 Year 2 Year 3

Assets

Current Assets

Cash 2,006,750.00 3,643,750.00 12,062,325.00

Accounts Receivable 320,000.00 12,375,000.00 25,942,543.00

Inventory 192,000.00 6,187,500.00 10,377,017.20

Long-Term Assets
 Equipment 2,000,000.00 2,000,000.00 7,200,000.00

Business Vehicle 1,502,000.00 1,502,000.00 2,300,000.00

Accumulated Depreciation (325,000.00) (650,000.00) (975,000.00)

Total Assets 5,695,750.00 25,058,250.00 56,906,885.20

Liabilities

Current Liabilities

Accounts Payable 675,070.00 16,937,500.00 30,712,017.20

Bank Overdraft 144,680.00 3,376,700.00 5,443,585.50

Loan from friend - 3,000,000.00 300,000.00

Long Term Liabilities

Loan from friend - - -

Bank loan - - 8,500,000.00

Equity

Capital Contributions 10,000,000.00 10,000,000.00 10,000,000.00

Retained Earnings (5,124,000.00) (8,255,950.00) 1,951,282.50

Total Liabilities and Equity 5,695,750.00 25,058,250.00 56,906,885.20

Question 1:
By what percentage did sales go up from year 1 to year 2?

Increase amount = sales Y2- sales Y1

Increase amount =67,375,000.00 - 19,250,000.00
Ans=48,125,000.00

% increase = *48,125,000.00/19,250,000.00 )*100

% = 250
Question 2:
By what percentage did marketing expenses increase from year 2 to year 3?

Increase amount =ME Y3- ME Y2

Increase amount =468,000.00 - 390,000.00
Ans=78,000.00

% increase = *78,000/390,000 )*100

% = 20
Question 3:
What percentage of revenue was Cost of Goods Sold in years 1, 2 and 3?

Year 1 Year 2: Year 3:

COGS 13,750,000 55,343,750 105,105,000 COGS

REVENUE 19,250,000 67,375,000 134,750,000 /REVENUE

% 71.428 82.142 78 *100
Question 4:
What percentage of revenue was Operating Expenses in years 1, 2 and 3?
Year 1 Year 2: Year 3:

OP 10,624,000 15,163,200 18,787,340 OP

REVENUE 19,250,000 67,375,000 134,750,000 /REVENUE

% 55.189 22.505 13.942 *100

Question 5:
What ratio could best measure liquidity and what is the ratio for Years 1 and 3?

Current Ratio
CR=CA/CL

Year1 Year2 Year3

2,006,750 3,643,750 12,062,325

320,000 12,375,000 25,942,543

192,000 6,187,500 10,377,017

Total Assets 2,518,750 22,206,250 48,381,885

675,070 16,937,500 30,712,017.20

144,680 3,376,700 5,443,585.50

3,000,000 300,000

Total Liability 819,750 23,314,200 36,455,603 TA/TL=CR

Ratio 3.072583 0.95247746 1.327145388

Year1: 3.0725
Year 3: 1.327

Question 6:
What ratio can be used to measure leverage and what was it for Years 2 and 3?

Debt ratio
DR = (short term debt+long term debt)/total assets

Year1 Year2 Year3

Total
5,695,750.00 25,058,250.00 56,906,885.20
Assets

Bank
144,680.00 3,376,700.00 5,443,585.50
Overdraft
Loan from
3,000,000.00 300,000.00
friend
 Long
Term
Liabilities
Loan from
friend
Bank loan 8,500,000.00

Total debt 144,680.00 6,376,700.00 14,243,585.50

Debt Ratio 0.0254014 0.254475073 0.250296347

Year 2: 0.254475073
Year 3: 0.250296347
I have learnt that account payable does not factor in debt definition.

Question 7:
What was the inventory turnover ratio for Years 2 and 3? The average in milk processing is 23 and the average in
yogurt, butter, cheese, etc. is 13.

Year 1 Year 2 Year 3

COGS 13,750,000.00 55,343,750.00 105,105,000.00

Inventory 192,000.00 6,187,500.00 10,377,017.20

AIT 71.6145833 8.94444444 10.12863311

Year 2: 8.94444444

Year 3: 10.12863311

Question 8
Using the information, you just discovered in this analysis along with anything else you see, what is your overall
assessment of the financials of this company?

The company has a low risk in debt ratio hence below 0.7 meaning have less risks of failing to service their loans
abligation.