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    Income Statement and Balance Sheet to Prepare a Ratio Analysis

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    Income Statement for Joe's-Fly-by-Night Oil company for the year ended December 31, 2011

    Sales $10,000
    Less: Cost of goods sold $4,000
    Gross profit $6,000
    Less: Selling, general, & administrative expenses $3,000
    EBIT $3,000
    Less: Interest Expenses $200
    EBT $2,800
    Less: Income tax expense $1,000
    Net Income $1,800
    Dividend Paid $600
    Addition to retained earnings $1,200

    Balance Sheet for Joe's-Fly-by-Night Oil company for the year ended December 31, 2011

    Assets
    Cash $5,000
    Accounts Receivables $3,000
    Inventory $17,000
    Current Assets $25,000
    Equipment (Gross) $27,000
    Less: Accumulated Depreciation $12,000
    Equipment (Net) $15,000
    Total Asset $40,000
    Liabilities & Equity
    Accounts Payable $17,000
    Current Liabilities $17,000
    Long Term Debt $3,000
    Total Liabilities $20,000
    Common Stock (1,000 shares) $7,000
    Retained Earnings $13,000
    Total Equity $20,000
    Total Liabilities and Equity $40,000

    Prepare a ratio analysis for the fiscal year ended Dec 31, 2011. Organize your analysis per the following outline:

    (1) Liquidity
    - Current ratio
    - Quick ratio
    Comments on liquidity

    (2) Asset management
    - Total Asset turnover
    - Average collection period (ACP)
    Comments on asset management

    (3) Debt management
    - Debt ratio
    - Times interest earned
    Comments on debt management

    (4) Profitability
    - Net profit margin
    - Return on Assets (ROA)
    - Return on Equity (ROE)
    - Extended Du Pont equation
    Comments on profitability to include your comments on the sources of ROE
    revealed by the Du Pont equation

    (5) Market value ratios
    - PE ratio
    - Market to book ratio

    Comments on the market value ratios

    For the purposes of this exercise, assume the following data for Joe's Fly-By-Night Oil:

    Stock price on Dec 31, 2011...$50.00

    Number of common shares outstanding on Dec 31, 2011...1000.

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    Solution Summary

    The solution discusses using the income statement and balance sheet to prepare a ratio analysis.

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