Problem

Financial Statement AnalysisShown below is selected information from the financial stateme...

Financial Statement Analysis

Shown below is selected information from the financial statements of Dickson, Inc., a retail furniture store.

From the balance sheet:

 

 

Cash

 

$ 30,000

Accounts receivable

 

150,000

Inventory

 

200,000

Plant assets (net of accumulated depreciation)

 

500,000

Current liabilities

 

150,000

Total stockholders’ equity

 

300,000

Total assets

 

1,000,000

From the income statement:

 

 

Net sales

 

$1,500,000

Cost of goods sold

 

1,080,000

Operating expenses

 

315,000

Interest expense

 

84,000

Income tax expense

 

6,000

Net income

 

15,000

From the statement of cash flows:

 

 

Net cash provided by operating activities (including interest paid of $79,000)

 

$ 40,000

Net cash used in investing activities

 

(46,000)

Financing activities:

 

 

Amounts borrowed

$ 50,000

 

Repayment of amounts borrowed

(14,000)

 

Dividends paid

(20,000 )

 

Net cash provided by financing activities

 

16,000

Net increase in cash during the year

 

$ 10,000

Instructions

a. Explain how the interest expense shown in the income statement could be $84,000, when the interest payment appearing in the statement of cash flows is only $79,000.


b. Compute the following (round to one decimal place):

1. Current ratio

2. Quick ratio

3. Working capital

4. Debt ratio


c. Comment on these measurements and evaluate Dickson, Inc.’s short-term debt-paying ability.


d. Compute the following ratios (assume that the year-end amounts of total assets and total stockholders’ equity also represent the average amounts throughout the year):

1. Return on assets

2. Return on equity


e. Comment on the company’s performance under these measurements. Explain why the return on assets and return on equity are so different.


f. Discuss ( 1 ) the apparent safety of long-term creditors’ claims and ( 2 ) the prospects for Dickson, Inc., continuing its dividend payments at the present level.

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