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Rosson Company: Analyzing financial statements, horizontal analysis, ratios

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Analyzing Financial Statements

Information below comes from the financial statements of Rosson Company.

2004 2003
Net Sales $299,000 $246,000
Other Revenues 8,000 9,000
Total Revenues 307,000 255,000
Cost of Goods Sold 172,000 138,000
S,G&A Expenses 44,000 40,000
Interest Expense 4,000 4,500
Income Tax Expense 31,000 25,400
Total Expenses 251,000 207,900
Income Before Extraordinary Items 56,000 47,100
Extraordinary Gain (net of tax) 9,000 0
Net Income $ 65,000 $ 47,100

Current Assets:
Cash $ 7,500 $ 12,500
Marketable Securities 1,000 1,500
Accounts Receivable 50,000 47,500
Inventories 150,000 145,000
Prepaid Expenses 5,000 2,500
Total Current Assets 213,500 209,000
Plant and Equipment (net) 147,000 157,000
Intangibles 30,500 0
Total Assets $391,000 $366,000

Current Liabilities:
Accounts Payable $ 58,000 $ 79,500
Other Accrued Liabilities 25,000 22,500
Total Current Liabilities 83,000 102,000
Bonds Payable 90,000 100,000
Total Liabilities 173,000 202,000

Stockholders? Equity:
Common Stock ($5 par) 130,000 130,000
Paid-In Capital in Excess of Par of Par 20,000 20,000
Retained Earnings 68,000 14,000
Total Stockholders? Equity 218,000 164,000
Total Equities $391,000 $366,000

Market price at year-end $14.00 $8.55
Dividend payments amounted to $11,000 in 2004 and $5,000 in 2003.

Perform the following analyses. If you have insufficient data to use averages in ratio computations, use year-end balances in the calculations.

a. Perform horizontal analysis of the income statement and balance sheet data. Use 2003 as the base year.
b. Perform vertical analysis of the income statement and balance sheet data for 2003 and 2004. Use sales revenue as the base figure for the income statement. Use total assets as the base figure for the balance sheet.
c. Calculate the following liquidity ratios for 2004 and 2003: (1) working capital, (2) current ratio, (3) quick (acid-test) ratio, (4) accounts receivable turnover, (5) average collection period, (6) inventory turnover, (7) number of days required to sell inventory.
d. Calculate the following solvency ratios for 2004 and 2003: (1) liabilities to total equity, (2) stockholders? equity ratio, (3) debt/equity ratio, (4) number of times interest earned, (5) plant assets to long-term liabilities.
e. Calculate the following profitability ratios for 2004 and 2003: (1) net margin, (2) turnover of assets, (3) return on investment, (4) return on equity.
f. Calculate the following stock market ratios for 2004 and 2003: (1) earnings per share, (2) book value per share, (3) price-earnings ratio, (4) dividend yield.

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Solution Summary

The solution presents the computations for all the ratio analysis together with narrative for better understanding.

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(a) Horizontal Analysis
In horizontal analysis you have to compare financial data of two or more years. For example, sales revenue from 2003 to 2004 has increased by $52000 or 20.39% (52000*100/255000). Similarly you can calculate the rise in net income: $17900 or 38%. These are very good signs for any company.
You can also put other income statement or balance sheet figures and calculate the growth or otherwise.

(b) Vertical Analysis
Income Stat: You may calculate Gross Profit Margin = Gross Profit/Sales or Net Profit Margin/Sales. These are very popular profitability ratios.

Balance Sheet: Calculate Return on Assets=Net Income/Assets, Debt to Assets = Total Liabilities/Assets, Debt to Equity = Total Liabilities/Shareholders' Equity. These are leverage and liquidity ratios.

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