Analysis of Financial Statement Assignment: 2

Date of Submission: 8-12-2020 Student ID: _____

Instructions: 
 Submit within due date.
 Mention your Name, Std. ID, class and course name at the front page of solution.
 All questions are compulsory. 
 Show all necessary calculation.
 Submit soft copy in any form like word, hand written image or scan file, (Must be a single file)
 Submit your assignment through KASBIT LMS.
Problem 1
For the year ended June 30, 2007, A.E.G. Enterprises presented the financial statements shown on
page 280.
Early in the new fiscal year, the officers of the firm formalized a substantial expansion plan. The plan will
increase fixed assets by $190,000,000. In addition, extra inventory will be needed to support expanded
production. The increase in inventory is purported to be $10,000,000.
The firm’s investment bankers have suggested the following three alternative financing plans:
Plan A: Sell preferred stock at par.
Plan B: Sell common stock at $10 per share.
Plan C: Sell long-term bonds, due in 20 years, at par ($1,000), with a stated interest rate of 16%.
A.E.G. ENTERPRISES
Balance Sheet for June 30, 2007 (in thousands)
Assets
Current assets:
Cash $ 50,000
Accounts receivable 60,000
Inventory 106,000
Total current assets $216,000
Property, plant, and equipment $504,000
Less: Accumulated depreciation 140,000 364,000
Patents and other intangible assets 20,000
Total assets $600,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 46,000
Taxes payable 15,000
Other current liabilities 32,000
Total current liabilities $ 93,000
Long-term debt 100,000
Stockholders’ equity:
Preferred stock ($100 par, 10% cumulative, 500,000 shares
authorized and issued) 50,000
Common stock ($1 par, 200,000,000 shares authorized,
100,000,000 issued) 100,000
Premium on common stock 120,000
Retained earnings 137,000
Total liabilities and stockholders’ equity $600,000

A.E.G. ENTERPRISES
Income Statement
For the Year Ended June 30, 2007
(in thousands except earnings per share)

Sales $936,000
Cost of sales 671,000
Gross profit $265,000
Operating expenses:
Selling $62,000
General 41,000 103,000
Operating income $162,000
Other items:
Interest expense 20,000
Earnings before provision for income tax $142,000
Provision for income tax 56,800
Net income $ 85,200
Earnings per share $ 0.83
Required
a. For the year ended June 30, 2007, compute:
1. Times interest earned
2. Debt ratio
3. Debt/equity ratio
4. Debt to tangible net worth ratio
b. Assuming the same financial results and statement balances, except for the increased assets and financing,
compute the same ratios as in (a) under each financing alternative. Do not attempt to adjust retained earnings for
the next year’s profits.
c. Changes in earnings and number of shares will give the following earnings per share: Plan A—0.73, Plan B—
0.69, and Plan C—0.73. Based on the information given, discuss the advantages and disadvantages of each
alternative.
d. Why does the 10% preferred stock cost the company more than the 16% bonds?
Problem 2:
Consecutive five-year balance sheets and income statements of Anne Gibson Corporation follow:
Anne Gibson Corporation
Balance Sheet
December 31, 2003 through December 31, 2007
(Dollars in thousands)
Assets: 2007 2006 2005 2004 2003
Current assets
Cash 47,200 46,000 45,000 44,000 43,000
Marketable securities 2,000 2,500 3,000 3,000 3,000
Accounts receivable,          
less allowance of          
$1,000, December 31, 2007;          
$900, December 31, 2006;          
$900, December 31, 2005;          
$800, December 31, 2004;          
 $1,200, December 31, 2003 131,000 128,000 127,000 126,000 125,000
Inventories 122,000 124,000 126,000 127,000 125,000
Prepaid expenses 3,000 2,500 2,000 1,000 1,000
Total current assets 305,200 303,000 303,000 301,000 297,000
Property, plant and equipment, net 240,000 239,000 238,000 237,500 234,000
Other assets 10,000 8,000 7,000 6,500 7,000
Total assets 555,200 550,000 548,000 545,000 538,000
Liabilities and stockholders’ equity:
Current liabilities
Accounts payable 72,000 73,000 75,000 76,000 78,500
Accrued compensation 26,000 25,000 25,500 26,000 26,000
Income taxes 11,500 12,000 13,000 12,500 11,000
Total current liabilities 109,500 110,000 113,500 114,500 115,500
Long-term debt 68,000 60,000 58,000 60,000 62,000
Deferred income taxes 25,000 24,000 23,000 22,000 21,000
Stockholders’ equity 352,700 356,000 353,500 348,500 339,500
Total liabilities and stockholders’ equity 555,200 550,000 548,000 545,000 538,000
Anne Gibson Corporation
Statement of Earnings
For Years Ended December 31, 2003–2007
(In thousands, except per share) 2007 2006 2005 2004 2003
           
Net sales 880,000 910,000 840,000 825,000 820,000
Cost of goods sold 740,000 760,000 704,000 695,000 692,000
Gross profit 140,000 150,000 136,000 130,000 128,000
Selling and administrative expense 53,000 52,000 50,000 49,800 49,000
Interest expense 6,700 5,900 5,800 5,900 6,000
Earnings from continuing operations before          
income taxes 80,300 92,100 80,200 74,300 73,000
Income taxes 26,000 27,500 28,000 23,000 22,500
Net earnings 54,300 64,600 52,200 51,300 50,500
Earnings per share $1.40 $1.65 $1.38 $1.36 $1.33
Required:
a. Using year-end balance sheet figures, compute the following for the maximum number of years, based on the
available data:
1. Days’ sales in receivables 7. Operating cycle
2. Accounts receivable turnover 8. Working capital
3. Accounts receivable turnover in days 9. Current ratio
4. Days’ sales in inventory 10. Acid-test ratio
5. Inventory turnover 11. Cash ratio
6.Inventory turnover in days 12. Sales to working capital
b. Using average balance sheet figures, as suggested in the chapter, compute the following for the maximum
number of years, based on the available data:
1. Days’ sales in receivables 3. Accounts receivable turnover in days
2. Accounts receivable turnover 4. Days’ sales in inventory
 5. Inventory turnover 9. Current ratio
6. Inventory turnover in days 10. Acid-test ratio
7. Operating cycle 11. Cash ratio
8. Working capital 12. Sales to working capital
c. Comment on trends indicated in short-term liquidity.

Problem 3:
Determine the cost of sales of a firm with the financial data given below.
Current ratio 2.5
Quick ratio or acid-test 2.0
Current liabilities $400,000
Inventory turnover 3 times