BMBA 100 Business Administration | 202205 D01 - Dr.

Susanne Thiessen

Assignment 2 | Home Restoration Outlet Ltd. Financial Statements & Analysis

Leonardo Costa Rezende – V00049873

1. Prepare a statement of earnings, a statement of retained earnings, and a balance

sheet.

1.1 Statement of Earnings

Home Restoration Outlet Ltd. Income Statement
For the year ended Dec 31, 2005 (In 000 of dollars)
Sales $ 2,409
Beginning Inventory $ 425

Purchases $ 1,304
Cost of goods available for sale $ 1,729
Ending Inventory $ 310

Cost of Goods Sold $ 1,419

Gross Profit $ 990

Operating expenses
Depreciation Expense $ 23
Selling Expense $ 482
Finance Cost (Interest) $ 20
General and Administrative Expenses $ 215
Total operating expenses $ 740
Net Taxable Profit $ 250
Tax (50%) $ 125
Net Income after tax $ 125

1.2 Statement of Retained Earnings

Home Restoration Outlet Ltd. Statement of Retained Earnings For the

year ended Dec 31, 2005 (In 000 of dollars)
Retained Earnings, Beginning $ 255
Net Income for the year $ 125
Dividends Declared $ 70
Retained Earnings, End $ 310
1.3 Balance Sheet

Home Restoration Outlet Ltd. Balance Sheet

For the year ended Dec 31, 2005 (In 000 of dollars)
Assets
Cash $ 40
Accounts Receivable $ 104
Prepaid Expenses $ 42
Marketable Securities $ 30
Inventory $ 310
Total Current Assets $ 526
Goodwill $ 85
Building and Equipment $ 150
Depreciation, build. & equip $ (53)
Accumulated Depreciation $ (76)
Total Non-current Assets $ 159
Total Assets $ 685
Liabilities
Accounts Payable $ 85
Note Payable $ 25
Current portion of long-term debt (loan) $ 10
Income Tax Payable $ 25
Total Current Liabilities $ 145
Long-term Debt $ 100
Total Liabilities $ 245
Common Stock $ 130
Retained Earnings $ 310
Total Equity $ 440
Total Liabilities and Equity $ 685

2. Explain the relationship between financial statements and why it is useful for
managers to understand all three.
The statement of earnings and the statement of retained earnings provide basic information
about the situation of the organization at a given time. While the first shows evidence about
inventory, revenue, expenses, taxes, and a situation of profit or loss, the second brings
demonstrations of the amount the company has, after detecting the profit or loss and future
dividends. That sum will be a reserve to absorb future losses, in any case it’s needed.

The balance sheet lists all assets, liabilities, and current and future expenses, being an essential
compass to know about the financial health of the organization on a specific date of the year.
Thus, we can affirm the documents are essential as they allow managers to have a broad and
clear view of values, making it much easier to identify whether the company is generating
profits or not, whether it is a good time to invest, or if it is more prudent to retain expenses.

All three also allow not only managers, but all stakeholders in the company, directors, and
shareholders, to have a transparent view of the company's performance. With that data
available, it is possible to understand the performance and maybe suggest a change of paths,
always aiming the company's survival.

3. Perform a "current ratio" analysis for the company and explain the company's
liquidity position.

The current ratio is a liquidity indicator, which purpose is to verify the possibility of a company
facing financial commitments in the short term. To get the current ratio, one must divide the
company’s current assets by current liabilities.

That way, it is possible to analyze the company's ability to convert its assets into financial
resources to honor possible debts or during a period of crisis. It is a useful tool for company
directors and investors.

To find the Home Restoration Outlet Ltd’s current ratio, we must verify the data below:
 Current Assets: $ 526,000
 Current Liabilities: $ 145,000

 Current Ratio: 526 / 145 = 3.627

In the case of the Home Restoration Outlet Ltd, we can see that the ratio is greater than 1.00.
That value shows that the company has enough liquidity to honor its current debts and is in a
good situation in any case of financial problems shortly.

On the other hand, a ratio much greater than one (in this case, 3,627) shows that the Home
Restoration Outlet Ltd has a very high value of assets and this may indicate not efficient
management of these resources.

Ideally, the value of the current assets should be reduced in order and promote investments in
the company. Thus, the current ratio will be closer to 1, which would be the most suitable for
this type of organization.