Comprehensive Problem [Overview of Financial Statement Analysis]
Q.No.1.
The comparative financial statements of Reynolds Company are presented below:
Reynolds Company
Comparative Statements of Financial Position
December 31
2020
Particulars
2019
Assets
Cash
$54,000
$37,000
Accounts receivable
68,000
26,000
Inventory
54,000
0
Prepaid expenses
4,000
6,000
Land
45,000
70,000
Buildings
2,00,000
2,00,000
Accumulated depreciation—buildings
(21,000)
(11,000)
Equipment
1,93,000
68,000
Accumulated depreciation—equipment
(28,000)
(10,000)
$5,69,000
$3,86,000
$ 23,000
$ 40,000
10,000
0
Bonds payable
1,10,000
150,000
Common stock ($1 par)
220,000
60,000
Retained earnings
206,000
136,000
$5,69,000
$3,86,000
Totals Assets
Liabilities and Stockholders’ Equity
Accounts payable
Accrued expenses payable
Totals Liabilities and Stockholders’ Equity
Particulars
Reynolds Company
Statements of Financial Performance
For the Year Ended December 31, 2020
Amount ($)
Sales revenue
$8,90,000
Less: Cost of goods sold
$465,000
Gross Profit
Less : Operating expenses
Income from operations
4,25,000
221,000
2,04,000
Less: Interest expenses
(12,000)
Less: Loss on sale of equipment
(2,000)
Earnings before taxes
1,90,000
Less: Income tax expenses
65,000
Net Income
$1,25,000
================
Additional information:
(i) Operating expenses include depreciation expense of $30,000.
(ii) Operating expenses include amortization expense of $2,000.
(iii) Operating expenses include impairment expense of $1,000.
(iv) Charges from prepaid expenses $2,000
(v) Land was sold at its book value for cash.
(vi) Bonds of $30,000 were converted into common stock.
(vii) Cash dividends of $55,000 were declared and paid in 2020.
(viii) Equipment with a cost of $166,000 was purchased for cash.
(ix) Equipment with a cost of $41,000 and a book value of $36,000 was sold for $34,000 cash.
(x) Bonds of $40,000 were redeemed at their face value for cash.
(xi) Common stock ($1 par) of $160,000 was issued for cash.
(xii) Accounts payable pertain to merchandise suppliers.
Required:
1. Prepare a statement of cash flow statement for 2020, under the indirect method.
2. Prepare a statement of cash flow statement for 2020, under the direct method.
3. Prepare a statement of free cash flow for 2020.
4. Explain the primary reason why: (a) the amount of cash provided by operating activities was
substantially greater than the net income. (b) There was a net decrease in cash over the year, despite the
substantial amount of cash provided by operating activities.
5. Prepare a supplementary schedule that should accompany the statement of cash flows in order to
disclose the non-cash aspects of the company’s investing and financing activities.
6. Explain how Reynolds Company achieved positive cash flows from operating activities, despite
incurring a net loss for the year.
7. Does the financial position appear to be improving or deteriorating? Explain.
8. Reynolds Company controller thinks that through more efficient cash management, the company could
have held the increase in accounts receivable for the year to $10,000; without affecting the net income.
Explain how holding down the growth in receivable affects cash. Compute the effect that limiting the
growth in receivable to $10,000 would have on the company’s net increase or decrease in cash or cash
equivalents for the year.
9. Prepare the Horizontal analysis for 2020
10. Prepare the Vertical analysis for 2020.
11. Calculate the following ratios for Reynolds publications as of June 30, 2020 (i) Working capital (ii)
Current ratio (iii) Acid-test ratio (iv) Accounts receivable turnover ratio (v) Average Collection period (vi)
Days to sell inventory (vii) Total debt to equity (viii) Long-term debt to equity (ix) Times interest earned
(x) Return on assets (xi) Return on common equity (xii) Gross profit margin (xiii) Operating profit margin
(pretax) (xiv) Net profit margin (xv) Cash turnover (xvi) Accounts payable turnover (xvii) Inventory
turnover (xviii) Working capital turnover (xix) PPE turnover (xx) Total asset turnover (xxi) Price-toearnings (xxii) Earnings yield (xxiii) Dividend yield (xxiv) Dividend payout rate (xxv) Price-to-book
(xxvi) Cash ratio (xxvii) CFO ratio (xxviii) Average days inventory in stock (xxix) Operating cycle (xxx)
Net trade cycle or cash cycle (xxxi) Average PPE age (xxxii) Average days payables outstanding (xxxiii)
Average PPE useful life (xxxiv) Return on invested capital (ROIC) (xxxv) Cash return on assets (xxxvi)
Financial leverage (xxxvi) CFO to interest (xxxvii) CFO to debt (xxxviii) Cash flow adequacy (xxxix) CFO
to Operating earnings (xxxx) Current cash
debt coverage (xxxxi) Dividend cover (xxxxii) Dividend
per share (xxxxiii) Operating Cash Flow Ratio (OCF Ratio or CFO Ratio) (xxxxiv) Operating Cash Flow to
Long-Term Debt (OCF/ LTD) (xxxxv) Operating Cash Flow to Total Debt Ratio (OCF/ TD)
12. What does each of the following ratios indicate? Mention in one or two sentences only. [Methods of
classification are not required]. (a) Current ratio (b) Acid-test ratio (c) Accounts receivable turnover ratio
(d) Average collection period (e) Inventory turnover (f) Working capital turnover (g) PPE turnover (h)
Total asset turnover (i) Price-to-earnings (j) Time Interest earned (k) Operating profit margin (l) Price
earnings ratio.
13. Is it becoming easier for the company to meet its current debts on time and to take advantage of cash
discounts?
14. Is the company collecting its accounts receivable more rapidly over time?
15. Is the company’s investment in accounts receivable decreasing?
16. Are dollars invested in inventory increasing?
17. Is the company’s investment in plant assets increasing?
18. Is the owner’s investment becoming more profitable?
19. Is the company using its assets efficiently?
20. Did the dollar amount of selling expenses decrease during the three-year period
21. Justify the Altman Z-Score Test and comment
9,10,11,12