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Financial Statement Analysis Problem 1

The document contains comparative balance sheets and income statements for X Corporation for the years 2011 and 2012. It also provides calculations of various financial ratios for X Corporation in 2012 to assess its liquidity, asset utilization, debt utilization, and profitability. Liquidity improved from 2011 to 2012 as indicated by higher current and acid test ratios. Accounts receivable were collected within 24 days on average, while inventory turned over every 30 days, showing efficient asset utilization. Debt to equity was moderate at 1.44 times. Profit margins and returns were also favorable.

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95 views2 pages

Financial Statement Analysis Problem 1

The document contains comparative balance sheets and income statements for X Corporation for the years 2011 and 2012. It also provides calculations of various financial ratios for X Corporation in 2012 to assess its liquidity, asset utilization, debt utilization, and profitability. Liquidity improved from 2011 to 2012 as indicated by higher current and acid test ratios. Accounts receivable were collected within 24 days on average, while inventory turned over every 30 days, showing efficient asset utilization. Debt to equity was moderate at 1.44 times. Profit margins and returns were also favorable.

Uploaded by

justine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Name________________________________________Course & Year;____________________________

X CORPORATION
Comparative Balance Sheet
Year 2011 and 2012
Increase (Decrease)
ASSETS 2012 2011 Amount Percent
Cash P 3,000 P 5,000 (2,000) (40)
Accounts receivable 40,000 25,000 15,000 60
Inventory 27,000 30,000 (3,000) (10)
Long-term investments 15,000 0 15,000 100
Land, Buildings, and Equipments (Net) 100,000 75,000 25,000 33.33
Intangible assets 10,000 10,000 0 0
Other assets 5,000 20,000 (15,000) (75)
Total assets P 200,000 P 165,000 35,000 21.21
========= =========
LIABILITES
Current liabilities P 30,000 P 47,000 (17,000) (36.17)
Long-term liabilities 88,000 74,000 14,000 18.92
Total Liabilities P 118,000 P 121,000 (3,000) (2.48)
STOCKHOLDER’S EQUITY
8% Preferred stock 10,000 9,000 1,000 11.11
Common Stock 54,000 42,000 12,000 28.57
Additional Paid in Capital 5,000 5,000 0 0
Retained earnings 13,000 (12,000) 25,000 (208.33)
Total stockholders Equity 82,000 44,000 38,000 86.36
Total Liabilities and stockholder’s Equity P 200,000 P 165,000 35,000 21.21
========= =========

X CORPORATION
Comparative Income Statement
Year 2011 and 2012

Increase (Decrease)
2012 2011 Amount Percent
Sales 500,000 642,000 (142,000) (22.12)
Less: Cost of Sales 350,000 481,500 (131,500) (27.31)
Gross Income 150,000 160,500 (10,500) (6.54)
Less: Operating expenses
Selling expense 34,500 70,000 (35,500) (50.71)
Administrative expense 40,000 60,000 (10,000) (16.67)
Other expense 20,000 50,000 (30,000) (60)
Operating income 55,500 (19,500) 75,000 (384.62)
Less; Interest expense 500 500 0 0
Net Income before tax 55,000 (20,000) 75,000 (375)
======= =======
Requirement:
1. Using a Horizontal Analysis compute the Increase or Decrease of amount and percent and interpret.
2. Using the Ratio Analysis: Compute the following ratio in year 2012:
a. Current Ratio____2.33_______________
b. Acid Test Ratio_______1.43____________
c. Account receivable turnover______15.38 times_______________
d. Average Collection period________23.73 or 24 days_______________
e. Inventory turnover_________12.28__times__________________
f. Number of day’s in inventory______29.72S or 30 days_______________
g. Total Asset Turnover______2.74 times_____________________
h. Debt to equity ratio__________1.44__________________
i. Debt ratio___________59%______________________
j. Number of times interest earned______111 times____________________
k. Gross profit ratio______ 30%________________
l. Profit margin_________11%_________________
m. Return on Asset_______25%______________________
n. Return on equity_______67.07%______________________

How do you assess the financial ratios of X Corporation in terms of


a. Liquidity
b. Asset utilization
c. Debt-utilization
d. profitability
Answer:
A. LIQUIDITY RATIO
In 2011, the current ratio was 1.28, and in 2012, it was 2.33. This indicates that in 2016, the
company had 1.28 pesos in current assets that could be converted to cash to pay every peso of
current liabilities, whereas in 2017, the company had 2.33 pesos in current assets to cover every
peso of current liability due. Although the company's liquidity was excellent in 2011, the current
ratio improved in 2012, indicating higher liquidity. Inventory made up only 39% of current assets
in 2012, with cash and accounts receivable accounting for the remaining 71%, which can be
utilized to satisfy short-term creditors quickly.
The acid test ratio of X Corporation was 0.64 in 2011 and 1.43 in 2012, indicating a significant
increase. This is favorable to the company because some customers transact more on an
account basis and earn a good interest rate, and the company has fewer short-term liabilities
that it can pay with its most liquid assets.
In 2012, the account receivable turnover was 15.38 times, implying that the company was able
to collect its average receivables in less than 24 days. This is favorable, but it is contingent on
the credit terms offered by X Corporation to its account customers. During 2012, inventory was
sold and replaced 12.28 times, with inventory being transformed into finished stocks every 30
days.

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