Homework Answers
A)
Income Statement for the year ended 2018 and 2019
| 2018 | 2019 | |
| Revenues (A) | 164,000 | 183,000 |
| Expenses : | ||
| Rent Expense | 12,800 | 13,100 |
| Selling and admin expenses | 6,400 | 7,300 |
| Payroll expenses | 82,300 | 93,500 |
| Total Expenses (B) | 101,500 | 113,900 |
| Net income (C) = A - B | 62,500 | 69,100 |
Statement of Retained Earnings for the year ended 2018 and 2019
| 2018 | 2019 | |
| Retained Earnings Jan 1 | 164,200 | 221,900 |
| Add: Net income | 62,500 | 69,100 |
| Sub Total | 226,700 | 291,000 |
| Less: Dividend | 4,800 | 3,200 |
| Retained Earnings December 31 | 221,900 | 287,800 |
Balance Sheet at the end of 2018 and 2019
| 2018 | 2019 | |
| Assets : | ||
| Cash | 13,500 | 18,600 |
| Accounts Receivable | 1,600 | 2,800 |
| Property and equipment | 273,400 | 337,230 |
| Total Assets | 288,500 | 358,630 |
| Liabilities and shareholder's equity : | ||
| Accounts payable | 10,600 | 10,830 |
| Note payable | 16,000 | 20,000 |
| Total liabilities | 26,600 | 30,830 |
| Shareholder's equity | ||
| Common stock | 40,000 | 40,000 |
| Retained Earnings, December 31 | 221,900 | 287,800 |
| Total Shareholder's equity | 261,900 | 327,800 |
| Total liabilities and shareholder's equity | 288,500 | 358,630 |
B) Performance from the bank perspective :
Before sanctioning loans bank authority always checks the following ratios :
Debt to total assets ratio :
Debt to total assets ratio = Total debts / Total assets
2018 = 26,600 / 288,500 = 0.0922 or 9.22 %
2019 = 30,830 / 358,630 = 0.0860 or 8.60%
So, dependency on borrowed fund decreased, which is a good financial indicator .
Debt equity ratio = Total debts / Total Shareholder's equity
2018 = 26,600 / 261,900 = 0.1016 or 10.16 %
2019 = 30,830 / 327,800 = 0.0941 or 9.41 %
In capital structure , proportion of debt reduced and proportion of equity increased , which is favorable to get loan from bank.
Operating Profit ratio = [Operating income / net sales ] X 100 %
Here , there is no non operating income or expenses so, net income = net operating income.
2018 = [62,500 / 164,000] X 100 % = 38.11 %
2019 = [69,100/183,000] X 100% = 37.76 %
Operating profit ratio in both of the years are very good .In 2019 it has been decreased marginally ,which may not effect to obtain loan from the bank.
So, overall the performance of the company improved in 2019 which is favorable to obtain loan from the bank .
From the investor perspective :
Apart from the above ratios , Dividend pay out ratio is very important for them .
Dividend pay out ratio = dividend paid / net income
2018 = 4,800 / 62,500 = 0.0768 or 7.68 %
2019 = 3,200 / 69,100 = 0.0463 or 4.63%
Prospective investors will not been attracted if they need instant maximum return . So the performance is not good for attracting conservative investors but good for attracting adventurous investors , who can sacrifice today's share of profit for tomorrow's fortune .
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