Chapter 17, Problem 2BPSB

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 2BPSB

The Current ratios for each year are as follows:

	2019	2018	2017
Current Ratio	2.5	1.7	2.2

Explanation of Solution

The Current ratios for each year are calculated as follows:

	2019	2018	2017
Current Assets (A)	54860	32660	36300
Current Liabilities (B)	22370	19180	16500
Current Ratio (A/B)	2.5	1.7	2.2

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 2BPSB

The Common Size Income Statement is as follows:

BLUEGRASS CORPORATION
Common Size income Statement
	2019	2018	2017
Sales	100.00%	100.00%	100.00%
Cost of Goods Sold	54.77%	51.91%	46.04%
Gross Profit	45.23%	48.09%	53.96%
Selling Expenses	11.41%	11.92%	12.52%
Administrative Expenses	8.43%	8.80%	10.92%
Total Expenses	19.84%	20.72%	23.44%
Income before Taxes	25.39%	27.36%	30.53%
Income Taxes	3.04%	3.56%	3.69%
Net Income	22.34%	23.80%	26.84%

Explanation of Solution

The Common Size Income Statement is calculated as follows:

BLUEGRASS CORPORATION
Common Size income Statement
	2019	2018	2017
Sales	198800	100.00%	166000	100.00%	143800	100.00%
Cost of Goods Sold	108890	54.77%	86175	51.91%	66200	46.04%
Gross Profit	89910	45.23%	79825	48.09%	77600	53.96%
Selling Expenses	22680	11.41%	19790	11.92%	18000	12.52%
Administrative Expenses	16760	8.43%	14610	8.80%	15700	10.92%
Total Expenses	39440	19.84%	34400	20.72%	33700	23.44%
Income before Taxes	50470	25.39%	45425	27.36%	43900	30.53%
Income Taxes	6050	3.04%	5910	3.56%	5300	3.69%
Net Income	44420	22.34%	39515	23.80%	38600	26.84%

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 2BPSB

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

BLUEGRASS CORPORATION
Comparative Balance Sheets Trend analysis
	2019	2018	2017
Assets:
Current Assets (A)	54860	32660	36300
Trend % = A / 36300	151.13%	89.97%	100.00%
Long Term Investments (B)	0	1700	10600
Trend % = B / 10600	0.00%	16.04%	100.00%
Plant assets, net (C)	112810	113660	79000
Trend % = C / 79000	142.80%	143.87%	100.00%
Total Assets (D)	167670	148020	125900
Trend % = D / 125900	133.18%	117.57%	100.00%
Liabilities and Equity:
Current Liabilities (E)	22370	19180	16500
Trend % = E / 16500	135.58%	116.24%	100.00%
Common Stock (F)	46500	46500	37000
Trend % = F / 37000	125.68%	125.68%	100.00%
Other paid in capital (G)	13850	13850	11300
Trend % = G / 11300	122.57%	122.57%	100.00%
Retained Earnings (H)	84950	68490	61100
Trend % = H / 61100	139.03%	112.09%	100.00%
Total Liabilities and Equity (I)	167670	148020	125900
Trend % = I / 125900	133.18%	117.57%	100.00%

Explanation of Solution

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

BLUEGRASS CORPORATION
Comparative Balance Sheets Trend analysis
	2019	2018	2017
Assets:
Current Assets (A)	54860	32660	36300
Trend % = A / 36300	151.13%	89.97%	100.00%
Long Term Investments (B)	0	1700	10600
Trend % = B / 10600	0.00%	16.04%	100.00%
Plant assets, net (C)	112810	113660	79000
Trend % = C / 79000	142.80%	143.87%	100.00%
Total Assets (D)	167670	148020	125900
Trend % = D / 125900	133.18%	117.57%	100.00%
Liabilities and Equity:
Current Liabilities (E)	22370	19180	16500
Trend % = E / 16500	135.58%	116.24%	100.00%
Common Stock (F)	46500	46500	37000
Trend % = F / 37000	125.68%	125.68%	100.00%
Other paid in capital (G)	13850	13850	11300
Trend % = G / 11300	122.57%	122.57%	100.00%
Retained Earnings (H)	84950	68490	61100
Trend % = H / 61100	139.03%	112.09%	100.00%
Total Liabilities and Equity (I)	167670	148020	125900
Trend % = I / 125900	133.18%	117.57%	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:

Major trends and ratio analysis

Answer to Problem 2BPSB

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 worsen in the year 2019
3. Plant assets grew in the last years over 143%

Explanation of Solution

The Common Size Income Statement is as follows:

BLUEGRASS CORPORATION
Common Size income Statement
	2019	2018	2017
Sales	100.00%	100.00%	100.00%
Cost of Goods Sold	54.77%	51.91%	46.04%
Gross Profit	45.23%	48.09%	53.96%
Selling Expenses	11.41%	11.92%	12.52%
Administrative Expenses	8.43%	8.80%	10.92%
Total Expenses	19.84%	20.72%	23.44%
Income before Taxes	25.39%	27.36%	30.53%
Income Taxes	3.04%	3.56%	3.69%
Net Income	22.34%	23.80%	26.84%

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

BLUEGRASS CORPORATION
Comparative Balance Sheets Trend analysis
	2019	2018	2017
Assets:
Current Assets (A)	54860	32660	36300
Trend % = A / 36300	151.13%	89.97%	100.00%
Long Term Investments (B)	0	1700	10600
Trend % = B / 10600	0.00%	16.04%	100.00%
Plant assets, net (C)	112810	113660	79000
Trend % = C / 79000	142.80%	143.87%	100.00%
Total Assets (D)	167670	148020	125900
Trend % = D / 125900	133.18%	117.57%	100.00%
Liabilities and Equity:
Current Liabilities (E)	22370	19180	16500
Trend % = E / 16500	135.58%	116.24%	100.00%
Common Stock (F)	46500	46500	37000
Trend % = F / 37000	125.68%	125.68%	100.00%
Other paid in capital (G)	13850	13850	11300
Trend % = G / 11300	122.57%	122.57%	100.00%
Retained Earnings (H)	84950	68490	61100
Trend % = H / 61100	139.03%	112.09%	100.00%
Total Liabilities and Equity (I)	167670	148020	125900
Trend % = I / 125900	133.18%	117.57%	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 worsen in the year 2019
3. Plant assets grew in the last years over 143%