A
Introduction: The ratios are calculated using the information available in the financial statements of a company. Such ratios help the users of the accounting information to understand the liquidity, profitability and other related aspects of a company.
To prepare: The ratios analysis model.
A
Explanation of Solution
1. Formulate the Question
How liquid is C and P Company?
2. Gather the information from the financial statements.
The
3. Calculate the ratio.
Current ratio of both the companies has been calculated below −
C Company
Current ratio (2015) =
Current liabilities =
Current ratio (2014) =
Current liabilities =
P Company
Current ratio (2015) =
Current ratio (2014) =
4. Compare the ratio with other ratios.
2015 | 2014 | |
C Company | 1.24 | 1.02 |
P Company | 1.31 | 1.14 |
5. Interpret the ratios
Current ratio of C Company has improved a bit from 1.02 in the year 2014 to 1.24 in 2015 which means the liquidity of the company has improved.
Current ratio of P Company has improved from 1.14 in 2014 to 1.31 in 2015.
B
Introduction: The ratios are calculated using the information available in the financial statements of a company. Such ratios help the users of the accounting information to understand the liquidity, profitability and other related aspects of a company.
To prepare: The business analysis model.
B
Explanation of Solution
1. Formulate the Question
Should loan be sanctioned to C Company?
2. Gather information from the financial statements and other sources
Taking decisions about lending a loan or not is a crucial one and hence a variety of factors should be kept in mind while deciding whether C Company should be provided the required loan or not. Such factors include assessing the information gathered from balance sheet,
3. Analyze the information gathered
Analyses of the information gathered so far includes comparing the current ratio of C Company with P Company. The banker should look at the trends over time in the current ratio.
4. Make the decision
Decision needs to be taken about the loan should be sanctioned or not. Since the current ratio of the company has improved from the previous year and debts mentioned in the balance sheet are not that huge and can be paid off using the current assets, this suggests that the company has better liquidity. But only liquidity factor is not a good measure to decide about lending a loan or not, so the banker needs to look at profitability and other factors as well.
5. Monitor the decision
If the banker extends the loan, then periodic monitoring will be required and continuous analysis of the financial statements will also be required to identify the liquidity and credit paying capacity of the firm.
Want to see more full solutions like this?
Chapter 2 Solutions
Using Financial Accounting Information
- Financial statement analysis The financial statements for Nike, Inc., are presented in Appendix D at the end of the text. Use the following additional information (in thousands): Instructions 1. Determine the following measures for the fiscal years ended May 31, 2016, and May 31, 2015. Round ratios and percentages to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Asset turnover j. Return on total assets. k. Return on common stockholders equity l. Price-earnings ratio, assuming that the market price was 54.90 per share on May 29, 2016, and 52.81 per share on May 30, 2015 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forwardFinancial Statement Analysis The financial statements for Nike, Inc., are presented in Appendix C at the end of the text. The following additional information (in thousands) is available: Instructions 1. Determine the following measures for the fiscal years ended May 31, 2013 (fiscal 2012), and May 31, 2012 (fiscal 2011), rounding to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Ratio of sales to assets j. Rate earned on total assets, assuming interest expense is 23 million for the year ending May 31, 2013, and 31 million for the year ending May 31, 2012 k. Rate earned on common stockholders equity l. Price-earnings ratio, assuming that the market price was 61.66 per share on May 31, 2013, and 53.10 per share on May 31, 2012 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forwardReal-world annual report The financial statements for Nike, Inc. (NKE), are presented in Appendix E at the end of the text. The following additional information is available (in thousands): Instructions 1. Determine the following measures for the fiscal years ended May 31, 2017, and May 31, 2016. Round ratios and percentages to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory' h. Ratio of liabilities to stockholders equity i. Asset turnover j. Return on total assets, assuming interest expense is 82 million for the year ending May 31. 2017, and 33 million for the year ending May 31, 2016. k. k. Return on common stockholders equity l. Price-eamings ratio, assuming that the market price was 52.81 per share on May 31, 2017, and 54.35 per share on May 31, 2016. m. m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?arrow_forward
- From the following information relating to Roberts Bank Ltd., prepare Profit and Loss Account for the year ended 31st March, 2016 alongwith the necessary schedules : Атоunt for the year ended 31-3-2016 $ (in '000) Атоunt for the year ended 31-3-2016 Items Items $ (in '000) Advertisement and publicity Depreciation on Bank's prope. ty Directors' fees, allowances and expenses Auditors' fees and expenses Law charges Postage, telegrams, telephones, etc Repairs and maintenance Insurance Other expenditure Balance of profit and loss account b/f 87 Interest/discount on advances/ bills Income on investments Interest on balances with Reserve bank of India Commission, exchange and brokerage Profit on sale of investments Interest on deposits Interest on Reserve Bank of India borrowings Payments to and provisions for employees Rent, taxes and lighting Printing and stationery 292 31,628 11,810 7 4,243 41 22 2,907 114 312 91 915 884 31,404 3,362 1,524 9,717 955 213 Following adjustments are to be made…arrow_forwardBPR Limited keeps books on Integrated Accounting System. Following balances appear in the books as on April 1, 2018 : Cr. ($) Dr. ($) 40,950 38,675 52,325 Stores Control A/c Work-in-Progress A/c Finished Goods A/c Bank A/c Creditors A/c Fixed Assets A/c 22,750 18,200 1,47,875 27,300 Debtors A/c Share Capital A/c Provision for Depreciation A/c Provision for Doubtful Debts A/c 1,82,000 11,375 3,725 6,250 Factory Overheads Outstanding A/c Pre-Paid Administration Overheads A/c 9,975 Profit & Loss A/c 72,800 3,17,100 3,17,100 The transactions for the year ended March 31, 2019 were as given below : 1,97,925 Production overheads Outstanding 11,375 2,27,500 Administration Overheads paid 2,50,250 4,550 Selling Overheads Incurred Direct Wages Indirect Wages Purchase of Materials (on credit) Materials issued to Production Materials issued for Repairs Goods Finished during the year (at cost) Credit Sales Cost of Goods Sold Production Overheads Absorbed Production Overheads paid during the at the…arrow_forwardAnalyzing Transactions Using the Financial Statement Effects Template Following are selected transactions of Mogg Company. Record the effects of each using the financial statement effects template. 1. Shareholders contribute $15,000 cash to the business in exchange for common stock. 2. Employees earn $750 in wages that have not been paid at period-end. 3. Inventory of $4,500 is purchased on credit. 4. The inventory purchased in transaction 3 is sold for $6,750 on credit. 5. The company collected the $6,750 owed to it per transaction 4. 6. Equipment is purchased for $7,500 cash. 7. Depreciation of $1,500 is recorded on the equipment from transaction 6. 8. The Supplies account had a $3,800 balance at the beginning of this period; a physical count at period-end shows that $1,200 of supplies are still available. No supplies were purchased during this period. 9. The company paid $15,000 cash toward the principal on a note payable; also, $750 cash is paid to cover this note's interest…arrow_forward
- Common-size financial statements. Prepare common-size income statements for Walmart and Starbucks using the January 2015 and September 2014 information in the popup window: Which company is doing a better job of getting sales dollars to net income? Where is the one company having an advantage over the other company in turning revenue into net income? Complete the table below. (Round to two decimal places. Net income to three decimal places.) Abbreviated Income Statements ($ in Millions) Company Account Walmart, Inc. 1/31/2015 Starbucks 9/30/2014 Sales 491,920 % 16,801 % Cost of goods sold $ -370,530 % 7,272 % Selling, general, and administrative expenses $ -94,693 % $ -11,569 % EBIT $ 26,697 % $ -2,040 % Interest expense S -2,343 % $ -26 % Taxes $ -9,011 % 764 % Net income $ 15,343 % -1,302 % Which company is doing a better job of getting sales dollars to net income? (Select from the drop-down menus.) Walmart and Starbucks bring and cents of sales revenue to the bottom line,…arrow_forwardA Financial Analysis Statement Calculate the 2021 (year ended 12/31/21) current ratio for Twitter. Calculate the 2021 (year ended 12/31/2021) current ratio for Meta. Which company has a better current ratio and why? Explain in a short paragraph. Calculate the 2021 accounts receivable turnover ratio for Twitter. Calculate the 2021 accounts receivable turnover ratio for Meta. Calculate the average collection period for each company. Show answer as number of days plus 2 decimals. Which company has a better receivable turnover ratio and why? Explain in a short paragraph. Calculate the 2021 return on assets for Twitter. Calculate the 2021 return on assets for Meta. Which company has a better return on assets and why? Explain in a short paragraph. Calculate the 2021 debt-to-equity ratio for Twitter. Calculate the 2021 debt-to-equity ratio for Facebook. Describe in a short paragraph what the debt-to-equity ratio measures and why this would be important to a potential creditor.…arrow_forwardMaking Business Decisions: Analyzing Wal-Mart's Gross Profit Ratio You are considering an investment in the common stock of Wal-Mart. The following information is from the consolidated statements of income of Wal-Mart Stores, Inc. and Subsidiaries for the years ended January 31, 2016, and 2015 and the consolidated statements of operations for its competitor Target Corporation for the years ended January 30, 2016, and January 31, 2015 (included in the companies’ Form 10-Ks, amounts in millions of dollars): Wal-Mart Target (in millions) Year EndedJanuary 31, 2016 Year EndedJanuary 31, 2015 Year EndedJanuary 30, 2016 Year EndedJanuary 31, 2015 Sales* $478,614 $482,229 $73,785 $72,618 Cost of sales 360,984 365,086 51,997 51,278 *Described as net sales by Wal-Mart. Required: 1. Calculate the gross profit ratios for Wal-Mart and Target for 2016 and 2015. Enter the amounts as a percent, rounded to one decimal place. Wal-Mart's 2016 gross…arrow_forward
- FIN ANCIAL RATIO S Based on the financial statements for Jackson Enterprises (income statement, statement of owner’s equity, and balance sheet) shown on pages 596–597, prepare the following financial ratios. All sales are credit sales. The Accounts Receivable balance on January 1, 20--, was $21,600.1. Working capital2. Current ratio3. Quick ratio4. Return on owner’s equity5. Accounts receivable turnover and average number of days required to collect receivables6. Inventory turnover and average number of days required to sell inventoryarrow_forward3.1 Calculate the ratio (expressed to two decimal places) for 2021 to reflect each of the following: 3.1.4 An indicator of how profitable a company is relative to its total assets. 3.1.5 Determination of how easily a company can pay the interest on its outstanding debt.3.1.6 The period that the company takes to collect the money owed to it from its credit sales. Answer the following questions above by using the information below: Disney LimitedStatement of Comprehensive Income for the year ended 31 December 2021RSales 1 960 000Cost of sales 1 240 000Operating profit 472 000Interest expense 48 000Profit before tax 424 000Profit after tax 305 280 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER: 2021 (R) 2020 (R)AssetsNon-current assets 2 320 000 1 960 000Inventories 720 000 440 000Accounts receivable…arrow_forwardRequired Information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] Simon Company's year-end balance sheets follow. At December 31 Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Long-term notes payable Common stock, $10 par value Retained earnings Total liabilities and equity Current Year 1 Year Ago 2 Years Ago $ 29,387 58,429 $ 29,125 40,023 66,638 $ 23,920 69,328 88,056 7,860 224,536 $ 413,700 7,564 282,628 $ 356,638 81,206 162,500 54,468 $101,981 76,998 $ 58,464 162,500 72,221 $ 413,780 $ 356,638 For both the current year and one year ago, compute the following ratios: 43,855 3,236 184,761 $ 300,200 $ 38,438 64,354 162,580 34,988 $ 300,200 Exercise 17-6 (Algo) Common-size percents LO P2 1. Express the balance sheets in common-size percents. 2. Assuming annual sales have not changed in the last three…arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning