Chapter 17, Problem 2APSA

To determine

Concept Introduction:

Financial Statement analysis is done using the components of financial statement. These components are Balance sheet, Income statement, Statement of Cash flows etc. Annual report of a company contains financial statement of that year and previous year for comparison. If the company has subsidiaries or segments, the financial statement shall be consolidated for whole business of the company.

Current Ratio:

Current Ratio is measure of the company's ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

  $CurrentRatio=\frac{Currentassets}{Currentliabilities}$

Requirement-1:

To Calculate:

The Current ratio for each year

Answer to Problem 2APSA

The Current ratios for each year are as follows:

	2019	2018	2017
Current Ratio	2.3	1.9	2.5

Explanation of Solution

The Current ratios for each year are calculated as follows:

	2019	2018	2017
Current Assets (A)	52390	37924	51748
Current Liabilities (B)	22800	19960	20300
Current Ratio (A/B)	2.3	1.9	2.5

To determine

Concept Introduction:

Financial Statement analysis is done using the components of financial statement. These components are Balance sheet, Income statement, Statement of Cash flows etc. Annual report of a company contains financial statement of that year and previous year for comparison. If the company has subsidiaries or segments, the financial statement shall be consolidated for whole business of the company.

Common Size Financial Statement:

Common Size Analysis is prepared as % format which shows readymade analysis for the financial statements. For the Income statement the common size format shows all the amounts as a % of sales revenue and for the Balance sheet the common size format shows the each items of the balance sheet as a % of the Total assets amount.

Requirement-2:

To Calculate:

The Common Size Income Statement

Answer to Problem 2APSA

The Common Size Income Statement is as follows:

KORBIN COMPANY
Common Size income Statement
	2019	2018	2017
Sales	100.00%	100.00%	100.00%
Cost of Goods Sold	51.08%	62.50%	55.36%
Gross Profit	48.92%	37.50%	44.64%
Selling Expenses	18.54%	13.80%	18.27%
Administrative Expenses	9.13%	8.80%	8.20%
Total Expenses	27.67%	22.60%	26.47%
Income before Taxes	21.25%	14.90%	18.17%
Income Taxes	7.35%	3.05%	5.64%
Net Income	13.90%	11.85%	12.53%

Explanation of Solution

The Common Size Income Statement is calculated as follows:

KORBIN COMPANY
Common Size income Statement
	2019		2018		2017
Sales	555000	100.00%	340000	100.00%	278000	100.00%
Cost of Goods Sold	283500	51.08%	212500	62.50%	153900	55.36%
Gross Profit	271500	48.92%	127500	37.50%	124100	44.64%
Selling Expenses	102900	18.54%	46920	13.80%	50800	18.27%
Administrative Expenses	50668	9.13%	29920	8.80%	22800	8.20%
Total Expenses	153568	27.67%	76840	22.60%	73600	26.47%
Income before Taxes	117932	21.25%	50660	14.90%	50500	18.17%
Income Taxes	40800	7.35%	10370	3.05%	15670	5.64%
Net Income	77132	13.90%	40290	11.85%	34830	12.53%

To determine

Concept Introduction:

Financial Statement analysis is done using the components of financial statement. These components are Balance sheet, Income statement, Statement of Cash flows etc. Annual report of a company contains financial statement of that year and previous year for comparison. If the company has subsidiaries or segments, the financial statement shall be consolidated for whole business of the company.

Requirement-3:

To Calculate:

The Trend analysis for the balance sheet items

Answer to Problem 2APSA

The Trend analysis for the balance sheet items is as follows:

KORBIN COMPANY
Comparative Balance Sheets Trend analysis
	2019	2018	2017
Assets:
Current Assets	52390	37924	51748
Trend %	101.24%	73.29%	100.00%
Long Term Investments	0	500	3950
Trend %	0.00%	12.66%	100.00%
Plant assets, net	100000	96000	60000
Trend %	166.67%	160.00%	100.00%
Total Assets	152390	134424	115698
Trend %	131.71%	116.19%	100.00%
Liabilities and Equity:
Current Liabilities	22800	19960	20300
Trend %	112.32%	98.33%	100.00%
Common Stock	72000	72000	60000
Trend %	120.00%	120.00%	100.00%
Other paid in capital	9000	9000	6000
Trend %	150.00%	150.00%	100.00%
Retained Earnings	48590	33464	29398
Trend %	165.28%	113.83%	100.00%
Total Liabilities and Equity	152390	134424	115698
Trend %	131.71%	116.19%	100.00%

Explanation of Solution

The Trend analysis for the balance sheet items is calculated as follows:

KORBIN COMPANY
Comparative Balance Sheets Trend analysis
	2019	2018	2017
Assets:
Current Assets (A)	52390	37924	51748
Trend % = A / 51748	101.24%	73.29%	100.00%
Long Term Investments (B)	0	500	3950
Trend % = B / 3950	0.00%	12.66%	100.00%
Plant assets, net (C)	100000	96000	60000
Trend % = C / 60000	166.67%	160.00%	100.00%
Total Assets (D)	152390	134424	115698
Trend % = D / 115698	131.71%	116.19%	100.00%
Liabilities and Equity:
Current Liabilities (E)	22800	19960	20300
Trend % = E / 20300	112.32%	98.33%	100.00%
Common Stock (F)	72000	72000	60000
Trend % = F / 60000	120.00%	120.00%	100.00%
Other paid in capital (G)	9000	9000	6000
Trend % = G / 6000	150.00%	150.00%	100.00%
Retained Earnings (H)	48590	33464	29398
Trend % = H / 29398	165.28%	113.83%	100.00%
Total Liabilities and Equity (I)	152390	134424	115698
Trend % = I / 115698	131.71%	116.19%	100.00%

To determine

Concept Introduction:

Financial Statement analysis is done using the components of financial statement. These components are Balance sheet, Income statement, Statement of Cash flows etc. Annual report of a company contains financial statement of that year and previous year for comparison. If the company has subsidiaries or segments, the financial statement shall be consolidated for whole business of the company.

Requirement-4:

To Indicate:

1. If cost of goods sold make up greater portion of the sales for most of the years
2. If income as % of sales improves in the most recent year
3. If plant assets grew in the last years

Answer to Problem 2APSA

1. The cost of goods sold made up greater portion (>50%) of the sales for most of the years
2. The income as % of sales has improved in the year 2017
3. Plant assets grew in the last years over 167%

Explanation of Solution

The Common Size Income Statement is as follows:

KORBIN COMPANY
Common Size income Statement
	2019	2018	2017
Sales	100.00%	100.00%	100.00%
Cost of Goods Sold	51.08%	62.50%	55.36%
Gross Profit	48.92%	37.50%	44.64%
Selling Expenses	18.54%	13.80%	18.27%
Administrative Expenses	9.13%	8.80%	8.20%
Total Expenses	27.67%	22.60%	26.47%
Income before Taxes	21.25%	14.90%	18.17%
Income Taxes	7.35%	3.05%	5.64%
Net Income	13.90%	11.85%	12.53%

The Trend analysis for the balance sheet items is calculated as follows:

KORBIN COMPANY
Comparative Balance Sheets Trend analysis
	2019	2018	2017
Assets:
Current Assets (A)	52390	37924	51748
Trend % = A / 51748	101.24%	73.29%	100.00%
Long Term Investments (B)	0	500	3950
Trend % = B / 3950	0.00%	12.66%	100.00%
Plant assets, net (C)	100000	96000	60000
Trend % = C / 60000	166.67%	160.00%	100.00%
Total Assets (D)	152390	134424	115698
Trend % = D / 115698	131.71%	116.19%	100.00%
Liabilities and Equity:
Current Liabilities (E)	22800	19960	20300
Trend % = E / 20300	112.32%	98.33%	100.00%
Common Stock (F)	72000	72000	60000
Trend % = F / 60000	120.00%	120.00%	100.00%
Other paid in capital (G)	9000	9000	6000
Trend % = G / 6000	150.00%	150.00%	100.00%
Retained Earnings (H)	48590	33464	29398
Trend % = H / 29398	165.28%	113.83%	100.00%
Total Liabilities and Equity (I)	152390	134424	115698
Trend % = I / 115698	131.71%	116.19%	100.00%

Hence,

1. The cost of goods sold made up greater portion (>50%) of the sales for most of the years
2. The income as % of sales has improved in the year 2017
3. Plant assets grew in the last years over 167%