Question

Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2019, follow. P3-24 Zach Industries Income Statement for the Year Ended December 31, 2019 Sales revenue $160,000 Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses 106,000 $ 54,000 $ 16,000 10,000 Lease expense 1,000 Depreciation expense Total operating expense Operating profits Less: Interest expense 10,000 $ 37,000 $ 17,000 6,100 Net profits before taxes $ 10,900 Less: Taxes 4,360 $ 6,540 Net profits after taxes

Answer 1

For FY2019

Liquidity

Current Ratio= current assets / current liabilities=1.0 x

                               The best single indicator of the extent to which the claims of short-term creditors are covered by assets that have similar maturities. Generally, the higher the better.

Quick (acid test)     = (current assets - inventories) / current= 0.4x

The ability of firm to pay short-term obligations without relying on the sale of inventories.

Asset Management

Inventory turnover                  sales / inventory                                       3.5 x

Average collection period       receivables / sales / 360                           56 days

This ratio roughly estimates how many times inventory is turned over per year. This does not take into account seasonal trends.

The average length of time that the firm must wait after making a sale before receiving cash. Total sales is used rather than credit sales which is usually unavailable.

Fixed assets turnover             sales / fixed assets                                   2.1 x            This measures the utilization of plant and

Total assets turnover              sales / total assets                                    1.1 x            This measures the utilization, or turnover, of all

Debt Management

Debt to total assets                 total debt / total assets                              61.3 %

Times interest earned             EBIT / interest charges                             2.8 x

This measures the percentage of total funds provided by creditors. Creditors prefer a low debt ratio, since the lower the ratio, the greater the cushion in the event of liquidation.

The TIE ratio measures the extent to which earnings can decline before the firm is unable to meet its annual interest costs. It uses before-tax profit because interest is paid with pre-tax dollars.

Profitability

Profit margin on sales             "adjusted" net income / sales                   4.1 %

Earning power                        "adjusted" EBIT / total assets                   11.3 %

Return on assets (ROA)         "adjusted" net income / total assets          4.4 %

Return on equity (ROE)         "adjusted" net income / equity                  11.3 %

Profitability ratios show the combined effects of liquidity, asset and debt management on operating results. This ratio shows the profit per dollar of sales. If applicable, income has been adjusted upward to take into account excess compensation to owners.

A useful ratio when comparing companies with different tax situations and with different levels of debt. If applicable, income has been adjusted upward to take into account excess compensation to owners.

This measures the return after interest and taxes on total assets. If applicable, income has been adjusted upward to take into account excess compensation to owners.

This measures the rate of return on the common stockholders' investment. If applicable, income has been adjusted upward to take into account excess compensation to owners.

Income Analysis $170,000 $153,460 150,000 $136,000 $102,0001 $68,000 $34,0001 $6,540 SOL 1. Income Expenses ile Net Profit

SUMMARY OF INPUT

Cash and marketable securities	$1,500
Accounts receivable	$25,000
Inventory	$45,500
Current assets	$72,000
Fixed assets (includes building, equipment, land, vehicles, etc., less depreciation)	$78,000
Current liabilities (includes wages, accounts and taxes payable)	$69,000
Long-term liabilities (includes mortgages, notes and deferred taxes)	$22,950
Shareholder's equity	$58,050
Sales	$160,000
Cost of goods sold	$106,000
Gross profit	$54,000
Operating expenses (includes market salaries, selling, and other administrative expenses)	$37,000
*Excess compensation paid to owners (if applicable)	$0
Operating income	$17,000
Investment income	$0
Interest expense	$6,100
Income before taxes	$10,900
Taxes	$4,360
Net profit	$6,540
"Adjusted" net profit*	$6,540