Analyzing Financial Statements Using Ratios and Percentage Changes
Richard Company has just prepared the following comparative annual financial statements for 2012:
RICHARD COMPANY Comparative Income Statement For the Years Ended December 31, 2012, and 2011 | ||||
|
| 2012 |
| 2011 |
Sales revenue (one-half on credit) |
| $10,000 |
| $99,000 |
Cost of goods sold |
| 52,000 |
| 48,000 |
Gross profit |
| $58,000 |
| $551,000 |
Expenses (including S4.000 interest expense each year) |
|
|
|
|
| 40,000 |
| 37,000 | |
Pretax income |
| $18,000 |
| $14,000 |
Income tax on operations (30%) |
| 5,400 |
| 4,200 |
Income before extraordinary' items |
| $12,600 |
| $9,800 |
Extraordinary loss | $2,000 |
|
|
|
Less income tax saved | 600 | 1,400 |
|
|
Extraordinary gain |
|
| $3,000 |
|
Applicable income tax |
|
| 900 | 2,100 |
Net income |
| $11,200 |
| $11,900 |
RICHARD COMPANY Comparative Balance Sheet At December 31, 2012. and 2011 | ||
| 2012 | 2011 |
Assets |
|
|
Cash | $ 49,500 | $ 18,000 |
Accounts receivable (net: terms 1/10. n/30) | 37,000 | 32,000 |
Inventor | 25,000 | 38,000 |
Operational assets (net) | 95,000 | 105,000 |
Total assets | $206,500 | $193,000 |
Liabilities |
|
|
Accounts payable | $ 42,000 | $ 35,000 |
Income taxes payable | 1,000 | 500 |
Note payable, long-term | 40,000 | 40,000 |
Stockholders’ equity |
|
|
Capital stock (par 510) | 90,000 | 90,000 |
Retained earnings | 33,500 | 27,500 |
Total liabilities and stockholders' equity | $206,500 | $193,000 |
Required (round percentages and ratios to two decimal places):
1. For 2012, compute the tests of (a) profitability, (b) liquidity, (c) solvency, and (d) market. Assume that the quoted price of the stock was $23 for 2012. Dividends declared and paid during 2012 were $6,750.
2. Respond to the following for 2012:
a. Compute the percentage changes in sales, income before extraordinary items, net income, cash, inventory, and debt.
b. What appears to be the pretax interest rate on the note payable?
3. Identify at least two problems facing the company that are suggested by your responses to requirements (1) and (2).
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