Connor Ltd. is a large private company owned by the Connor family. It operates a manufacturing business in northern Ontario. It has applied to the ICB bank for a new loan of $100 million to expand its manufacturing facilities. 

 

You are a financial analyst with ICB. You have just been given an assignment to analyze Connor’s Year 7 financial statements and to identify any concerns about Connor’s performance and financial condition. 

 

The following are financial statements for Connor Ltd. for Year 7:

 

BALANCE SHEETS (In 000s)
	Year 7			Year 6
Asset
Cash	$	13,000		$	34,000
Accounts receivable		209,000			198,000
Inventory		326,000			316,000
Property, plant and equipment		308,000			266,000
	$	856,000		$	814,000
Liabilities and Shareholders’ Equity
Accounts payable	$	206,000		$	212,600
Other accrued liabilities		68,000			56,400
Bonds payable		196,000			196,000
Common shares		174,000			186,000
Retained earnings		212,000			171,000
	$	856,000		$	822,000

 

INCOME STATEMENT (In 000s)
	Year 7				Year 6
Sales	$	1,940,000			$	1,890,000
Cost of goods sold		(1,366,000	)			(1,286,000	)
Gross margin		574,000				604,000
Depreciation expense		(46,000	)			(40,000	)
Other expenses		(412,000	)			(431,000	)
Income tax expense		(62,000	)			(69,000	)
Net income	$	54,000			$	64,000

 

Additional Information

• Connor uses the straight-line method when depreciating its property, plant, and equipment.

• Interest expense was $10,000 for Year 6 and Year 7.

 

Required:

(a) Convert Connor’s financial statements for both Year 7 and Year 6 into common-sized financial statements using: (Enter your answers in thousands. For E.g., 1,000,000 should be entered as 1,000. Input all amounts as positive values. Omit $ sign in your response. Round the final answer to the nearest whole dollar.)

(i) Vertical analysis

 

BALANCE SHEETS
	Year 7	Year 6
Asset
Cash	$		$
Accounts receivable
Inventory
Property, plant and equipment
	$		$
Liabilities and Shareholders’ Equity
Accounts payable	$		$
Other accrued liabilities
Bonds payable
Common shares
Retained earnings
	$		$

 

INCOME STATEMENT
	Year 7	Year 6
Sales	$		$
Cost of goods sold
Gross margin
Depreciation expense
Other expenses
Income tax expense
Net income	$		$

 

(ii) Horizontal analysis

 

BALANCE SHEETS
	Year 7	Year 6
Asset
Cash	$		$
Accounts receivable
Inventory
Property, plant and equipment
	$		$
Liabilities and Shareholders’ Equity
Accounts payable	$		$
Other accrued liabilities
Bonds payable
Common shares
Retained earnings
	$		$

 

INCOME STATEMENT
	Year 7	Year 6
Sales	$		$
Cost of goods sold
Gross margin
Depreciation expense
Other expenses
Income tax expense
Net income	$		$

 

(b) Identify any financial statement items that seem to be peculiar relative to expectations. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

 

 

• Income tax expenseunanswered
• Salesunanswered
• Cost of goodsunanswered
• Bonds payableunanswered
• Accounts payableunanswered
• Accrued liabilitiesunanswered
• Retained earningsunanswered
• Gross marginunanswered
• Accounts receivableunanswered
• Equipmentunanswered
• Depreciation expenseunanswered
• Inventoryunanswered
• Income tax expenseunanswered

 

 

(c) Calculate the current ratio, debt-to-equity ratio, return on assets, and return on equity for both Year 7 and Year 6. (Round the final answers for all the ratios to two decimal places. Omit $ sign in your response.)

 

	Year 7			Year 6
	$			$
Current ratio		=			=
	$			$
	$			$
Debt to equity		=			=
	$			$
	$			$
Return on assets		=	%		=	%
	$			$
	$			$
Return on equity		=	%		=	%
	$			$

 

(d) Determine whether Connor’s liquidity, solvency, and profitability have improved or deteriorated from Year 6 to Year 7.

 

Liquidity	(Click to select)  Deteriorated  Improved  Remains the same
Solvency	(Click to select)  Deteriorated  Improved  Remains the same
Profitability	(Click to select)  Deteriorated  Improved  Remains the same

Answer rating: 100% (QA)

CONNOR LTD Ratio Analysis FormulaYear 7Year 6Trend1Current ratio... View the full answer