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FSA Tutorial 1

This document provides an introduction to financial statement analysis. It discusses the importance of financial statements while noting their limitations for analysis. Comparative annual financial statements can help overcome some limitations, but additional context is still needed. The document then provides financial data for Mixon Company over 3 years and Harbison Corporation for 2 years, and asks the reader to calculate various financial ratios and metrics to analyze the companies' liquidity, asset efficiency, debt levels, profitability, and returns.

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KHOO TAT SHERN DEXTON
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89 views

FSA Tutorial 1

This document provides an introduction to financial statement analysis. It discusses the importance of financial statements while noting their limitations for analysis. Comparative annual financial statements can help overcome some limitations, but additional context is still needed. The document then provides financial data for Mixon Company over 3 years and Harbison Corporation for 2 years, and asks the reader to calculate various financial ratios and metrics to analyze the companies' liquidity, asset efficiency, debt levels, profitability, and returns.

Uploaded by

KHOO TAT SHERN DEXTON
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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BBMF3063 Financial Statement Analysis

Tutorial 1 – Introduction to Financial Statement Analysis

1. Explain why financial statements are important to the decision-making process in financial analysis. Also, identify and
discuss some of their limitations for analysis purposes.

2. The preparation and analysis of comparative balance sheets and income statements are commonly applied tools of
financial statement analysis and interpretation.

Required:
a) Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include in
your discussion the extent that these limitations are overcome by use of comparative financial statements
computed over more than one year.
b) A year-to-year analysis of comparative balance sheets and income statements is a useful analysis tool. Still,
without proper care, such analysis can be misleading. Discuss factors or conditions that contribute to such a
possibility. How can additional information and supplementary data (beyond financial statements) help prevent
this possibility?

3. Express the following income statement information in common-size percents and assess whether this company’s
situation is favorable or unfavorable.

HARBISON CORPORATION
Comparative Income Statement
For Years Ended December 31, 2019 and 2018

2019 ($) 2018 ($)


Sales 720,000 535,000
Cost of goods sold 475,200 280,340
Gross Profit 244,800 254,660
Operating expenses 151,200 103,790
Net Income 93,600 150,870

4.
Mixon Company
Balance sheets 2017 to 2019

2019 ($) 2018 ($) 2017 ($)


Cash 30,800 35,625 36,800
Accounts receivable, net 88,500 62,500 49,200
Merchandise inventory 111,500 82,500 53,000
Prepaid expenses 9,700 9,375 4,000
Plant assets, net 277,500 255,000 229,500
Total assets 518,000 445,000 372,500
Accounts payable 128,900 75,250 49,250
Long-term notes payable secured by mortgages on plant assets 97,500 102,500 82,500
Common stock, $10 par value 162,500 162,500 162,500
Retained earnings 129,100 104,750 78,250
Total liabilities and equity 518,000 445,000 372,500

1
BBMF3063 Financial Statement Analysis

Tutorial 1 – Introduction to Financial Statement Analysis

Mixon Company’s income statements


for the years ended December 31, 2019 and 2018

2019 ($) 2018 ($)


Sales 672,500 530,000
Cost of goods sold 410,225 344,500
Other operating expenses 208,550 133,980
Interest expense 11,100 12,300
Income taxes 8,525 7,845
Total costs and expenses (638,400) (498,625)
Net Income 34,100 31,375
Earnings per share 2.10 1.93

Required:
1. Compare the year-end short-term liquidity position of this company at the end of 2019, 2018, and 2017 by
computing the: (a) current ratio and (b) acid-test ratio. Comment on the ratio results.

2. For the years ended December 31, 2019 and 2018, assume all sales are on credit and then compute the following:
(a) collection period, (b) accounts receivable turnover, (c) inventory turnover, and (d) days’ sales in inventory.
Comment on the changes in the ratios from 2018 to 2019.

3. Compare the long-term risk and capital structure positions of the company at the end of 2019 and 2018 by
computing the following ratios: (a) total debt to total liabilities plus equity ratio and (b) times interest earned.
Comment on these ratio results.

4. Evaluate the efficiency and profitability of the company by computing the following: (a) net profit margin, (b)
total asset turnover, and (c) return on total assets. Comment on these ratio results.

5. The following additional information about the company is known:

Common stock market price, December 31, 2019 . . . . . . $15.00


Common stock market price, December 31, 2018 . . . . . . 14.00
Annual cash dividends per share in 2019 . . . . . . . . . . . 0.60
Annual cash dividends per share in 2018 . . . . . . . . . . . 0.30

To help evaluate the profitability of the company, compute the following for 2019 and 2018: (a) return on
common stockholders’ equity, (b) price-earnings ratio on December 31, and (c) dividend yield.

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