Question

Question CAR2: 8 Marks The financial statements of Star Corporation appear below: Star Corporation Comparative Balance Sheets December 31, 2018 - 19 Assets 2019 2018 Cash Short-term investments Accounts receivable (net) Inventory Property, plant and equipment (net) Total assets S 50,000 50,000 100,000 150,000 650.000 $1.000.000 $ 100,000 150,000 75,000 175,000 750,000 $1.250,000 Liabilities and stockholders' equity Accounts payable Short-term notes payable Bonds payable Common stock Retained earnings Total liabilities and stockholders' equity $ 50,000 100,000 200,000 375,000 275.000 $1.000.000 $ 75,000 225,000 400,000 375,000 175.000 $1.250.000 Star Corporation Income Statement For the Year Ended December 31, 2019 $1,000,000 625.000 375.000 Net sales Cost of goods sold Gross profit Expenses Operating expenses Interest expense Total expenses Income before income taxes Income tax expense Net income $105,000 45.000 150.000 225,000 67.500 $ 157.500

Answer 1

a	Particulars
1	Current ratio
	Current ratio = Current assets/Current liabilities
	Current assets (50000+50000+100000+150000)	350000
	Current liabilities (50000+100000)	150000
	Current ratio = 350000/150000	2.333333
2	Acid-test ratio
	Acid-test ratio =Current assets other than stock / Current liabilities
	Current assets other than stock (50000+50000+100000)	200000
	Current liabilities (50000+100000)	150000
	Acid-test ratio = 200000/150000	1.333333
3	Accounts receivable turnover
	Accounts receivable turnover = Sales / Average receivables
	Sales	1000000
	Average receiveables (75000+100000)/2	87500
	Accounts receivable turnover = 1000000/87500	11.42857
4	Inventory turnover
	Inventory turnover = Cost of goods sold/Average accounts payable
	Cost of goods sold	625000
	Average accounts payable (75000+50000)/2	62500
	Inventory turnover = 625000/62500	10
5	Profit margin
	Profit margin = Net income / Sales
	Net income	157500
	Sales	1000000
	Profit margin = 157500/1000000	15.75%
6	Return on assets
	Return on assets = Net income / Total assets
	Net income	157500
	Total assets	1000000
	Return on assets = 157500/1000000	15.75%
7	Assets turnover
	Assets turnover = Sales / Average assets
	Sales	1000000
	Average assets (1000000+1250000)/2	1125000
	Assets turnover = 1000000/1125000	0.888889
8	Times interest earned
	Times interest earned = Income before interest / Interest expense
	Income before interest (225000+45000)	270000
	Interest expense	45000
	Times interest earned = 270000/45000	6
9	Working capital
	Working capital = Current assets - Current liabilities
	Current assets (50000+50000+100000+150000)	350000
	Current liabilities (50000+100000)	150000
	Working capital = 350000-150000	200000
10	Debt to assets ratio
	Debt to assets ratio = Debt / Assets
	Debt	200000
	Assets	1000000
	Debt to assets ratio = 200000/1000000	20.000%

b

Vertical analysis:
Income statement	Amount ($)	Percentage of sales
Net sales	1000000	100.00%
Cost of goods sold	625000	62.50%
Gross profit	375000	37.50%
Expenses:
Operating expenses	105000	10.50%
Interest expense	45000	4.50%
Total expenses	150000	15.00%
Income before income taxes	225000	22.50%
Income tax expense	67500	6.75%
Net income	157500	15.75%

c. On examining the ratios and vertical analysis, it can be noted that the company has a good growth in 2019, compared to 2018. The ratios indicate sound financial position of the company. It has a fairly good net income margin of 16%. Also, the assets have increased compared to 2018. The liabilities have decreased. It indicates that the company could generate sufficient resources to repay its obligations