ACCT 1221: Accounting 2 1

Assignment 5
File name: Acct 1221_T00615142_Ali Shah Ali_Assignment 5

Q1 P18-3B Page 1110 25 Marks (20-30 min.)

Req. 1 (20-30 min.) P 18-3B
Show percentages to one decimal place so that the level of precision is comparable to
the Industry Averages.
.
Bella Tiles Inc.
Common-Size Income Statement Compared to Industry Average
For the Year Ended December 31, 2017
BELLA TILES INDUSTRY
INC. AVERAGE
Net sales 100% 100%
Cost of goods sold (17.6/29.2) 60.3% 65.9%
Gross margin (11.6/29.2) 39.7% 34.1%
Operating expenses (8.4/29.2) 28.8% 28.1%
Operating income (3.8/29.2) 11.0% 6.0%
Other expenses (0.2/29.2) 0.7% 0.4%
Net Income (3.0/29.2) 10.3% 5.6%

Bella Tiles Inc.

Common-Size Balance Sheet Compared to Industry Average
December 31, 2017
BELLA TILES INDUSTRY
INC. AVERAGE
Current assets (10.4/18.6) 55.9% 66.6%
Property, plant, equip,, net (8/18.6) 43.0% 32.3%
Other assets (0.2/18.6) 1.1% 1.1%
Total assets 100% 100%

Current liabilities (6.2/18.6) 33.3% 35.6%

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Long-term liabilities (5.2/18.6) 28.0% 19.0%

Shareholders’ equity (7.2/18.6) 38.7% 45.4%
Total liabilities and shareholders’ equity 100% 100.0%

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Req. 2
Doing a profitability analysis of Bella Tiles Inc. shows that the ratio of gross margin, ratio of
operating income, and the ratio of net income are all definitely stronger than the industry average,
which would also show the overall performance of the company is stronger than the Industry
Average.

Req. 3
After a financial analysis of the company balance sheet it shows that the ratio of current assets
and its ratio of shareholders equity are worse than the industry average but even though other
accounts such as properties are higher than the average, the company liabilities account is under
the industry average so overall I would say that the company is financially operating lower than
the industry average.

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4 Assignment 5 Template

Q2 P18-5B Page 1111 25 Marks (20-30 min.)

Req. 1
Please highlight the ratio in yellow

Avenger Hardware Ltd.

(Dollar amounts in thousands)

2017 2016

292 251.5 = 1.82

a. Current ratio: = 2.07
141 138.5

201 155
b. Inventory turnover: = 1.41 = 1.39
(149 + 137) / 2 (137 + 86) / 2

c. Accounts receivable 351.5 310

= 3.58 = 4.34
turnover: (116 + 80.5) / 2 (80.5 + 62.5) / 2

d. Times-interest- 85.5 84
= 3.29 = 4.20
earned ratio: 26 20

40.5 + 26 41.5 + 20
e. Return on assets: (446.5 + 395) / 2 = 15.8% (395 + 351.5) / = 16.5%
2

f. Return on common 40.5 – 3 41.5 - 3

shareholders’ = 28.1% = 41.7%
(161 + 105.5) / 2 (105.5 + 79) / 2
equity:

g. Earnings per 40.5 - 3 41.5 - 3

= $2.50 = $3.21
common share: 15 12

19.00 31.00
h. Price-earnings ratio: = 7.60 = 9.66
2.50 3.21

i. Book value per 161 = $10.73 105.5 = $8.79

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ACCT 1221: Accounting 2 5

common share: 15 12
Req. 2

Decisions:

a.

Avenger Hardware’s ability to pay its debts deteriorated during the 2017 year because the
receivable turnover ratio and interest earned ratio decreased. The inventory turnover improved a
just a bit because of the inventory turnover ratio improved a bit.

The attractiveness of the common shares dropped in 2017 because of the drop in the market price
of the common shares although the book value of the common shares did increase.

Req. 3
This question gave me an idea as to how to compute different ratios and percentages that can help
me analyze companies and see for example how they are performing with respect to previous
years, as well see the company’s ability to pay its debits on time or if it is a worthwhile company
to invest in.

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Q3 P18-8B Page 1115 50 Marks (40-60 min.)

Req. 1
Show percentage to one decimal place.
Jens Hardware Inc.
Horizontal Analysis of Balance Sheets
December 31, 2017 and 2016
CHANGE %
ASSETS (Change / 2016 Accounts)
Cash $6,000 38.5
Accounts receivable 12,050 57.4
Merchandise inventory (4000) (9.5)
Prepaid expenses (500) (33.5)
Property, plant, and equipment 13,000 (8.3)
Accumulated amortization 10,000 (41.7)
Goodwill 0 0
Total assets $16,550 7.3

LIABILITIES
Accounts Payable (3,500) (18.9)
Notes Payable (1,500) (42.9)
Mortgage Payable (5,000) (11.1)
Total Liabilities (10,000) (14.9)

SHAREHOLDERS’ EQUITY
Preferred Shares 0 0
Common Shares 16,000 24.6
Retained Earnings 10,550 21.9
Total Shareholders’ Equity 26,550 16.5

Total liabilities and shareholders’ equity $16,550 7.3

There are a couple points to analyze, first there is a reduction in inventory which could call
into question the company’s ability to fulfill customer orders. Secondly, there is a big
accounts receivable hike which can also be a cause for worry because of the timeliness of
the payments. Lastly, we can look and see the issuance of common shares, which may
have paid some liabilities but that also means for ownership of the company was given up
in return.

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Req. 2
Jens Hardware Inc.
Vertical Income Statement Analysis
December 31, 2017
AMOUNT %
Net Sales $330,000 100
Cost of Goods Sold 190,000 57.6
Gross Margin 140,000 42.4
Operating Expenses:
Selling Expenses 40,000 12.1
Administrative Expenses 23,000 7.0
Interest Expense 6,000 1.8
Total operating expense 69,000 20.9

Operating Income 71,000 21.5

Income Tax 21,300 6.5
Net Income $49,7000 15.1

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Req. 3
Highlight the ratio in yellow
a. Current ratio:

(21,600 + 33,050 +38,000 + 1000) = 5.51

(15,000 + 2,000)

b. Acid-test ratio:

21,600+33,050 = 3.21
15,000 + 2,000

c. Inventory turnover:

190,000 = 4.75
(38,000 + 42,000) / 2

d. Days’ sales in receivables:

(33,050 + 21,000) / 2 = 29.89 Days

(330,000 / 365)

e. Debt ratio: 57,000 / 244,650

= 0.233

f. Times-interest-earned ratio:

71,000 + 6,000 = 12.83

6,000

g. Rate of return on net sales: 49,700 / 330,000

= 15.1%

h. Rate of return on total assets:

49,700 + 6,000 = 23.6%

(244,650 + 228,100) / 2

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i. rate of return on common shareholders’ equity:

49,700 – 16,000 = 26.6%

(161,100 – 48,000) + (187,650 – 48,000) / 2

j. Price–earnings ratio:

9 = 2.67
(49,700 – 16,000) / ((12,000 + 8,000) / 2)

k. Dividend yield:

23,150 /
12,000 = 21.44%
9

Req. 4
A. Current ratio:
Jen’s Hardware’s current ratio is very high compared to the industry average, this tells us that
they are a good amount of cash to invest with and grow the company and they their risk to
creditors is low.
B. Debt ratio:
The debt ratio is lower than the industry average, this means that they owe less money to creditors
and can probably make their payments on time. They also would be able to borrow more
money in order to use it to grow the company in terms of equipment or investment.
C. Price-earnings ratio:
The price earnings ratio is lower than industry average so there most probably is not much
potential in the market for high growth.
D. Dividend yield:
The yield is a lot higher compared to industry average and so they must have had a unique
dividend paid out considering it takes a big portion of their net income.
Overall:

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Overall, the company has strong assets, and small amount of liabilities in comparison,
also they should probably borrow some money to bring down the rate of dividends that
the company pays by buying some of the shares back.

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