FIN2212E Financial Management

TUTORIAL
CHAPTER: ANALYSIS OF FINANCIAL STATEMENT

QUESTION 1

Z Company’s total current assets, total current liabilities, and inventory for each of the past two
years follows:

Item 2018 (RM) 2019 (RM)

Total current assets 22,500 27,000
Total current liabilities 12,600 17,400
Inventory 6,900 7,200

(a) Calculate the firm’s current ratio for 2018 and 2019. [

2018 2019
Current ratio = 1.79 = 1.55

(b) Based on part (a), comment the firm’s performance in 2019.

(c) Calculate the firm’s quick ratio for 2018 and 2019.

2018 2019
Quick ratio = 1.24 = 1.14

(d) Based on part (c), comment the firm’s performance in 2019.

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QUESTION 2

Pelican Paper Company and Timberland Forest Company are rivals in the manufacturing of
craft papers. Some financial statement values for each company is as follows:

Item Pelican Paper Company Timberland Forest Company

(rival)_________
Total assets RM10,000,000 RM10,000,000
Total equity 9,000,000 5,000,000
Total debt 1,000,000 5,000,000
Annual interest 100,000 500,000
Total sales 25,000,000 25,000,000
EBIT 6,250,000 6,250,000
Net income 3,690,000 3,450,000

(a) Calculate the debt ratio for both of the companies.

Pelican Paper Company Timberland Forest Company

Debt ratio = 10% = 50%

(b) Based on part (a)’s answer, comment Pelican Paper Company’s performance.

(c) Which type of ratio of analysis is Pelican Paper Company using to evaluate its
performance?
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QUESTION 3

Below are the financial statements of Flamingo Dz Enterprise for the year ended 2020.

Flamingo Dz Enterprise
Statement of Comprehensive Income for the year ended 31 December 2020
RM
Sale revenue 770,000
Less: cost of goods sold 462,000
Gross profit 308,000
Less: general administrative expenses depreciation 148,000
Depreciation 18,900
Earnings before interest & tax (EBIT) 141,100
Less: interest expenses 12,000
Earnings before taxes 129,100
Less: taxes 32,000
Earnings after taxes 97,100

Flamingo Dz Enterprise
Statement of Financial Position for the year ended 31 December 2020

RM RM RM
ASSETS
Non-current assets:
Land and Building 150,000
Fixture & fittings 63,000
Office equipment 64,000
Motor vehicle 85,000
(-) Accumulated Depreciation (69,000) 16,000
Total non-current assets 293,000

Current assets:
Cash 15,000
Marketable securities 8,100
Account receivable 34,000
Inventories 82,000
Total current assets 139,100

TOTAL ASSETS 432,100

EQUITY AND LIABILITIES

Non-current liabilities:
Long term debt 50,000

Current liabilities:
Accounts payable 57,000
Notes payable 13,000
Accrued expenses 5,000
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Total current liabilities 75,000

Shareholder equity
Common shares 150,000
Paid in capital 60,000
Retain earning 97,100
Total shareholder equities 307,100
TOTAL EQUITY AND LIABILITIES 432,100

Based on the above financial statements, calculate the financial ratios as following:

(a) Liquidity ratio

i. Current ratio
= 1.85

ii. Quick ratio

= 0.76

(b) Leverage ratio

i. Debt ratio
= 28.9%

ii. Debt to Equity

= 0.41

(c) Efficiency ratio

i. Inventory turnover
= 5.63

ii. Fixed asset turnover

= 2.63

(d) Profitability ratio

i. Gross profit margin

= 40%

ii. Net profit margin

= 12.61%
 FIN2212E Financial Management

QUESTION 4

MIS Berhad has applied for a loan from a bank for its expansion programme. The company has
submitted the following financial statements to the bank:

MIS Berhad
Statement of Financial Position as at 31 December 2019
ASSETS RM
Fixed asset
Net fixed asset 5,250,000

Current asset
Inventories 950,000
Account receivable 200,000
Cash 400,000
Total current asset 1,550,000
Total Assets 6,800,000

LIABILITIES AND EQUITY RM

Non-current liabilities
Long term debt 3,650,000

Current liabilities
Notes payable 275,000
Account payable 175,000
Other current liabilities 95,000
Total current liabilities 545,000

Total Liabilities 4,195,000

Stockholder’s equity
Common share 2,300,000
Retained earnings 305,000
Total stockholders' equity 2,605,000
Total liabilities and stockholders' equity 6,800,000

MIS Berhad
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Statement of Comprehensive Income as at 31 December 2019

(RM)
Sales revenue 3,050,000
Less: Cost of goods sold (1,000,000)
Gross profit 2,050,000
Less: Operating expenses (1,525,000)
Operating profit 525,000
Less: Interest expenses (330,000)
Net profit before taxes 225,000
Less: Taxes (78,000)
Net profit after taxes 147,000

Based on the information above, calculate:

(a) Current ratio

= 2.84

(b) Quick ratio

= 1.10

(c) Account receivable turnover

= 15.25

(d) Number of days held in receivables

= 23.61 days

(e) Return on sales (net profit margin)

= 4.82%

(f) Number of days held in inventory

= 342 days
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QUESTION 5

In April 2019, Apple had cash of $39.14 billion, current assets of $63.34 billion, and current
liabilities of $35.51 billion. It also had inventories of $1.25 billion.

(a) What was Apple’s current ratio?

= 1.78
(b) What was Apple’s quick ratio?
= 1.75
(c) If Dell has a quick ratio of 1.13 and a current ratio of 1.19. What can you say about the
asset liquidity of Apple relative to Dell?
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QUESTION 6

For 2019, WalMart and Target had the following information (all values are in millions of dollars):

Company Sales Cost of Goods Sold Account Receivable Inventory

Walmart 469,162 352,488 6,768 43,803
Target 73,301 50,568 6,857 7,903

(a) What is each company’s accounts receivable days?

WalMart = 5.19 days
Target = 33.68 days

(b) What is each company’s inventory turnover?

WalMart =8.05
Target = 6.40

(c) Which company is managing its accounts receivable and inventory more efficiently?
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QUESTION 7

The balance sheet and income statement for the J. P. Robard Manufacturing Company are as
follows:
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Calculate the following ratios:

(a) Current ratio

=1.75

(b) Acid ratio

=1.25

(c) Debt ratio

=50%

(d) Inventory turnover

=3.30

(e) Fixed asset turnover

= 1.78

(f) Gross profit margin

= 58.75%

(g) Return on sales

=10%
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QUESTION 8

Carson Electronics’ management has long viewed BGT Electronics as an industry leader and
uses this firm as a model firm for analyzing its own performance. The balance sheets and
income statements for the two firms are as follows:
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(a) Calculate the following ratios for both Carson and BGT:

Ratio Carson BGT

(Answer) (Answer)
Current ratio = 1.14 =1.25
Debt ratio =62.50% =34.3%
Inventory turnover =24 =16.80
Return on sales =3.56% =13.2%

(b) Analyze the differences you observe between the two firms. Comment on what you view as
weaknesses in the performance of Carson as compared to that of BGT that Carson’s
management might focus on to improve its operations.
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QUESTION 11

The last two years of financial statements for Blunt Industries are as follows:
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(a) Calculate the following financial ratios for 2015 and 2016:

Ratio 2015 2016

(answer) (answer)
Current ratio 1.84 0.90
Acid-test ratio 0.78 0.24
Inventory turnover 3.10 4.06
Fixed asset turnover 2.42 3.50
Debt ratio 50% 61.30%
Gross profit margin 40% 40%
Return on sales 3.28% 4.18%

(b) Compare the firm’s financial position at the end of 2015 and 2016 in terms of its liquidity,
leverage, asset management efficiency, and profitability.