Department of Finance
University of Ghana Business
Assignment 1
Submission: 20th February 2023
1. Comparative income statements for 2019 and 2018 follow.
Sales
Cost of Sales
Gross Profit
Operating Expenses
Operating Income
Interest Expense
Earnings Before Tax
Income Taxes
Net Income
2019
$9,434,000
7,075,400
$2,358,600
1,367,690
$ 990,910
157,500
$ 833,410
400,000
$ 433,410
2018
$7,862,000
5,660,640
$2,201,360
1,365,060
$ 836,300
126,000
$ 710,300
317,200
$ 393,100
Required:
a. Prepare a vertical common-size analysis of this statement for each year,
using sales as the base.
b. Comment briefly on the changes between the two years, based on the
vertical common-size statement.
C. Describe the qualitative characteristics of the accounting information
and how such information facilitates the decision-making of the users of
the accounting information
2. The following information is computed from Fast Food Chain's annual report for 2020.
Current assets
Property and equipment, net
Intangible assets, at cost less applicable
2020
$ 2,731,020
10,960,286
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2019
$ 2,364,916
8,516,833
amortization
294,775
$13,986,081
255,919
$11,137,668
Current liabilities
Deferred federal income taxes
Mortgage note payable
Stockholders' equity
$ 3,168,123
160,000
456,000
10,201,958
$13,986,081
$ 2,210,735
26,000
8,900,933
$11,137,668
Net sales
Cost of goods sold
Selling and administrative expense
Interest expense
Income tax expense
Net income
$33,410,599
(30,168,715)
(2,000,000)
(216,936)
(400,000)
$ 624,948
$25,804,285
(23,159,745)
(1,500,000)
(39,456)
(300,000)
$ 805,084
Note: One-third of the operating lease rental charge was $100,000 in 2020 and
$50,000 in 2019. Capitalized interest totaled $30,000 in 2020 and $20,000 in 2019.
Required:
a. Based on the above data for both years, compute:
1. times interest earned
2. fixed charge coverage
3. debt ratio
4. debt/equity ratio
5. debt to tangible net worth
b. Comment on the firm's long-term borrowing ability based on the analysis.
3.The following financial information is excerpted from the 2012 annual report of Retail
Products, Inc.
Balance Sheet
Current assets
Investments
Deferred charges
Property, plant, and equipment, net
(in thousands)
2012
2011
$ 449,195
$ 433,049
32,822
55,072
4,905
12,769
350,921
403,128
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Trademarks and leaseholds
Excess of cost over fair market value of
net
assets acquired
Assets held for disposal
Total liabilities
Total stockholders' equity
45,031
47,004
272,146
6,062
$1,161,082
276,639
10,247
$1,237,908
$ 689,535
471,547
$1,161,082
$ 721,149
516,759
$1,237,908
$2,020,526
(2,018,436)
(300,000)
(40,000)
$ (337,910)
$1,841,738
(1,787,126)
(250,000)
(30,000)
$ (225,388)
Income Statement
Net sales
Cost of goods sold
Selling and administrative
Interest expense
Net income (loss)
Required:
a. For each year compute:
1. Times interest earned
2. Debt ratio
3. Debt/equity ratio
4. Debt to tangible net worth ratio
b. Comment on the results.
c. Does a times interest earned ratio of less than 1 to 1 mean that the firm
cannot pay its interest expense?
4. Indicate the effect of each of the following transactions on the ratios listed. Use +
to indicate an increase, to indicate a decrease, and 0 to indicate no effect. Assume
an initial times interest earned ratio of 3 to 1, a debt ratio of 0.5 to 1, a debt/equity
ratio of 1.0 to 1, and total debt to tangible net worth ratio of 1.1 to 1.
Times
Interest
Transaction
Earned
Ratio
Debt Total Debt
Debt Equity Tangible
Net
Ratio Ratio
Worth
Ratio
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a. Collection of accounts
receivable.
b. Firm has decreasing profits due
to rising cost of sales.
c. Firm appropriates a substantial
amount for expansion.
d. Conversion of preferred stock
to common.
e. Repayment of a short-term
bank loan (ignore interest).
f. Payment for a valuable
trademark.
g. The stock is split two for one.
h. Purchase of equipment
financed by a long-term note
(consider interest).
i. Conversion of bonds to stock.
j. Declaration and payment of
dividend.
k. The firm experiences a rise in
the rate charged on its line of
credit.
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4. FINC 301 Company's working capital accounts at December 31, 2012, are given
below:
Current Assets:
Cash
Marketable Securities
Accounts Receivable
Less Allowance for Doubtful Accounts
Inventory, LIFO
Prepaid
Total Current Assets
$250,000
(20,000)
Current Liabilities:
Accounts Payable
Notes Payable
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$100,000
50,000
230,000
300,000
8,000
$688,000
$200,000
50,000
Taxes Payable
Accrued Liabilities
Total Current Liabilities
10,000
30,000
$290,000
During 2013, FINC 301 Company completed the following transactions:
a. Purchased fixed assets for cash, $20,000.
b. Exchanged FINC 301 Company common stock for land. The estimated
value of the transaction, $80,000.
c. Payment of $40,000 on short-term notes payable.
d. Sold marketable securities costing $20,000 for $25,000 cash.
e. Sold FINC 301 Company common stock for $70,000.
f.
Wrote off an account receivable in the amount of $20,000.
g. Declared a cash dividend in the amount of $5,000.
h. Paid the above cash dividend.
i.
Sold inventory costing $10,000 for $15,000 cash.
j.
Sold inventory costing $5,000 for $8,000 on account.
k. Paid accounts payable in the amount of $20,000.
l.
Sold marketable securities costing $20,000 for $20,000 cash.
m. Issued a credit memo on an account receivable, $1,000.
Required:
a. Compute the following as of December 31, 2012:
1. working capital
2. current ratio
3. Acid-test ratio (conservative)
4. Cash ratio
(These ratios are to be computed using only the December 31, 2012
data.)
5. The Clothes Clutch, a retail clothier, has had average sales of $400,000 for the last five
years, 2008-2012. The firm's total assets at the end of 2010 were $400,000.
An internal staff cost analyst has prepared the following financial data from the
annual reports. You have been hired as a consultant to help analyze the financial
position.
Current Ratio
Acid Test Ratio
Days' Sales in Receivables
2012
2.80
2.03
61
2011
2.43
1.93
58
2010
2.36
1.82
54
2009
2.10
1.61
42
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2008
2.00
1.47
35
Merchandise Inventory
Turnover
Debt Ratio
Times Interest Earned
Sales as a Percent of 1996 Sales
Net Income as a Percent of
1996
Income
Gross Profit Margin
Operating Expenses to Net
Sales
Net Profit Margin
Return on Total Assets
4.20
4.10
4.10
3.90
3.70
0.48
4.60
1.46
0.50
4.80
1.23
0.49
5.90
1.12
0.47
5.70
1.06
0.47
6.00
1.00
1.31
38.5%
11.4%
1.20
38.8%
11.3%
1.10
38.9%
11.5%
1.06
40.0%
11.4%
1.00
39.7%
11.7%
7.6%
9.4%
8.6%
9.6%
8.9%
9.6%
9.4%
10.0%
9.3%
10.7%
Required:
a. Explain the trend in liquidity. Make specific reference to the effect of
receivables and inventory on this trend.
b. Briefly describe the trend in the long-term, debt-paying ability of The
Clothes Clutch. Explain the cause(s) of this trend.
c. The net profit margin has declined substantially. Cite and discuss specific
causes of this.
d. Has the firm utilized its total assets effectively? Discuss the ability of the
firm to generate sales based on total assets. (Use DuPont analysis.)
e. Specifically cite and briefly describe two additional types of information
that would aid in your analysis.
6. Describe the importance of accounting systems and Internal Controls in the growth
and sustainability of SMEs in Ghana
7. Define corporate governance and how relevant is it for family-owned businesses
compared to limited liability companies
8. Resources are scarce and therefore the concept of value maximization is
overstretched. Discuss
9. What is finance and how is the finance function changing in the face of
digitization?
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