Chapter 12, Problem 98.1C

To determine

Financial statements help in calculating the value of the firm and also show the position of the business. Financial statement includes three statements:

1. The balance sheet (along with shareholder’s equity statement).

2. The income statement.

3. Cash flow statement.

To evaluate:

The performance of the company from the given financial statement.

Answer to Problem 98.1C

Ratio analysis

Particular	2018	2019
$\text{long-term debt to equity ratio}$	1.14	1.126
$\text{Debt to equity ratio}$	2.45	2.47
$\text{Long-term debt to total assets ratio}$	0.33	0.32
$\text{Debt to total assets ratio}$	0.71	0.71
$\text{Return on assets}$	0.0017	0.031
$\text{Return on equity}$	0.072	0.033
$\text{net profit margin}$	0.015	0.07

The increase in the sales volume of the company leads to an increased profit. The ratio analysis enables the investors and shareholders to view the company’s sound financial position.

Analysis of the company as per the given statement:

The Company increases profit from 2017 to 2019 is $47968.

The Company increases the sale from 2017 to 2019 is $119747.

The Company increases the operating profit also from 2017 to 2019 $125047.

The Company increases the Earning per share from $0.109 per share to 0.98 per share.

The Company increases the assets from 2017 to 2019 is $329878.

Explanation of Solution

For 2018

$\begin{array}{l}\text{debt management ratio}\\ \text{1}\text{. long-term debt to equity ratio=}\frac{\text{long-term debt }}{\text{total equity}}=\frac{\$1797844}{\$1579722}=1.14\\ 2.\text{ Debt to equity ratio=}\frac{\text{Total liabilities}}{\text{Total equity}}=\frac{\$3883463}{\$1579722}=2.45\\ 3.\text{ Long-term debt to total assets ratio= }\frac{\text{long-term debt }}{\text{Total Assets}}=\frac{\$1797844}{\$5463186}=0.33\\ 4.\text{ Debt to total assets ratio = }\frac{\text{Total liabilities}}{\text{Total assets}}=\frac{\$3883463}{\$5463186}=0.71\end{array}$

$\begin{array}{l}5.\text{ Return on assets =}\frac{\text{Net income +}\left[\text{interest expense }\times \left(1-\text{tax rate}\right)\right]}{Average\text{ total assets}}\\ =\frac{-113782+\left[164315\left(1-0.25\right)\right]}{5463186}=\frac{9454.25}{5463186}=0.0017\\ 6.\text{ Return on equity=}\frac{\text{net income }}{\text{Average equity}}=\frac{-113782}{1579722}=0.072\\ 7.\text{ net profit margin =}\frac{Net\text{ income}}{\text{net sales}}=\frac{-113782}{7550060}=0.015\end{array}$

For 2019

$\begin{array}{l}\text{debt management ratio}\\ \text{1}\text{. long-term debt to equity ratio=}\frac{\text{long-term debt }}{\text{total equity}}=\frac{1882279}{1671381}=1.126\\ 2.\text{ Debt to equity ratio=}\frac{\text{Total liabilities}}{\text{Total equity}}=\frac{4121683}{1671381}2.47\\ 3.\text{ Long-term debt to total assets ratio= }\frac{\text{long-term debt }}{\text{Total Assets}}=\frac{1882279}{5793064}=0.32\\ 4.\text{ Debt to total assets ratio = }\frac{\text{Total liabilities}}{\text{Total assets}}=\frac{4121683}{5793064}=0.71\end{array}$

$\begin{array}{l}5.\text{ Return on assets =}\frac{\text{Net income +}\left[\text{interest expense }\times \left(1-\text{tax rate}\right)\right]}{Average\text{ total assets}}\\ =\frac{53866+\left[160923\times \left(1-.25\right)\right]}{5628125}=\frac{174558.25}{5628125}=0.0310\\ 6.\text{ Return on equity=}\frac{\text{net income }}{\text{Average equity}}=\frac{53866}{1625551}=0.033\\ 7.\text{ net profit margin =}\frac{Net\text{ income}}{\text{net sales}}=\frac{53866}{7808043}=0.07\end{array}$

The five steps to evaluate the financial statement are:

1. Determining the economic characteristics of the industry.
2. Assessing the strategies of the company.
3. Assessing the quality of the firm’s financial statements.
4. Analyzing the current profitability ratio and risk ratio.
5. Compute the value of the firm for its shareholders.

The increase in the sales volume of the company leads to an increased profit. The ratio analysis enables the investors and shareholders to view the company’s sound financial position.