Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and...

  
 
 

 
 
 
 

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Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and profes- sionals. The company has experienced significant growth in the past five years due to an increase in the popularity of star gazing, combined with an effective branding campaign and enhanced distribution network. The company has applied to the Bank of Winnipeg for a $1-million long-term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional capital assets. SWL's application and financial statements have been provided to Peter Sparks, a newly hired junior analyst with the Bank of Winnipeg. Peter has been asked by his supervisor, Maria Simms, to conduct a preliminary review of SWL's financial statements and determine whether SWL should proceed further into a more detailed analysis. Maria has asked Peter to document his recommendation and supporting analysis in a report that will be maintained in SWL's file. MARIA: "SWL has provided us with a copy of their most recent statement of financial position and income statement (Exhibit I). I know that this may not be enough to make the final decision, but it should be more than enough for you to get started." PETER: "Yes, I can obtain much information from these two statements." MARIA: "Okay, that's great. I took a quick look at the statement of financial position and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analy- sis, it is a bit concerning to see the cash decline by such a large amount." PETER: "I can definitely look into the decrease in cash." MARIA: "It may also be useful to give some thought to what the statement of financial position may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this informa- tion. Additional information on the use of the loan is provided in Exhibit II." PEĻER: "That is a great point. I will take this into consideration." MiIA: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with future due diligence, can you prepare a list of additional information that would be useful in making our final decision?" PETER: "Yes, I can most certainly do that. I will get started right away." Peter is excited about his first assignment and wants to impress Maria. Peter begins to conduct some preliminary research by searching the bank's database for industry comparables. Peter has located various industry ratios that can be used as a benchmark (Exhibit III). Required Assume the role of Peter and prepare the report. Exhibit I Financial Statements Sky Watchers Ltd. Statement of Financial Position As at December 31 2020 2019 Assets Current Cash $ 35,359 $ 134,550 Marketable securities 145,780 457,206 Accounts receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid expenses 17,500 19,500 847,859 1,141,976 Property, plant, and equipment, net 2,956,950 2,492,655 3,804,809 3,634,631 Liabilities and shareholders' equity Current Accounts payable 294,305 95,700 Accrued and other liabilities 237,595 244,760 Current portion of long-term debt 375,900 345,900 907,800 686,360 Long-term debt 1,280,330 1,601,500 Common shares (50,000 outstanding) Retained earnings 595,817 595,817 1,020,862 750,953 1,616,679 1,346,771 $3,804,809 $3,634,631 Exhibit I Financial Statements (Continued) Sky Watchers Ltd. Income Statement For the year ended December 31 2020 2019 Sales $2,975,990 $2,575,990 Cost of sales 1,368,955 1,184,955 Gross profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and administrative 134,500 102,800 Marketing and sales 175,680 155,600 Interest expense Office expense 76,820 96,090 295,980 255,000 315,000 Wages and benefits, administration Total operating expenses 315,000 1,153,470 1,049,980 Operating income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 344,909 98,239 Net income 252,615 Opening balance-retained earnings 750,953 573,338 Net income 344,909 252,615 Dividends 75,000 75,000 Closing balance-retained earnings $1,020,862 $ 750,953 Exhibit III Industry Benchmark Ratios Ratio Industry Average Profitability 2020 Return on equity 15.0% Return on assets 8.0% Financial leverage percentage 7.0% Earnings per share $ 4.40 Quality of income Profit margin 75.0% 9. 10.0% Fixed asset turnover 2.00 Tests of liquidity 8 Cash ratio 7.0% 9. Current ratio 1.00 10 Quick ratio 0.75 11 Receivable turnover 13.00 12 Average days in accounts receivable 28.08 13 Payable turnover 19,00 14 Average days in accounts payable 19.21 15 Inventory turnover 6.50 16 Average days in inventory 56.15 Solvency and equity position 17 Times interest earned 5,40 18 Cash coverage 6.30 19 Debt to equity ratio 1.35 Miscellaneous 20 Book value per share $29.00 12 3 4 19 Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and profes- sionals. The company has experienced significant growth in the past five years due to an increase in the popularity of star gazing, combined with an effective branding campaign and enhanced distribution network. The company has applied to the Bank of Winnipeg for a $1-million long-term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional capital assets. SWL's application and financial statements have been provided to Peter Sparks, a newly hired junior analyst with the Bank of Winnipeg. Peter has been asked by his supervisor, Maria Simms, to conduct a preliminary review of SWL's financial statements and determine whether SWL should proceed further into a more detailed analysis. Maria has asked Peter to document his recommendation and supporting analysis in a report that will be maintained in SWL's file. MARIA: "SWL has provided us with a copy of their most recent statement of financial position and income statement (Exhibit I). I know that this may not be enough to make the final decision, but it should be more than enough for you to get started." PETER: "Yes, I can obtain much information from these two statements." MARIA: "Okay, that's great. I took a quick look at the statement of financial position and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analy- sis, it is a bit concerning to see the cash decline by such a large amount." PETER: "I can definitely look into the decrease in cash." MARIA: "It may also be useful to give some thought to what the statement of financial position may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this informa- tion. Additional information on the use of the loan is provided in Exhibit II." PEĻER: "That is a great point. I will take this into consideration." MiIA: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with future due diligence, can you prepare a list of additional information that would be useful in making our final decision?" PETER: "Yes, I can most certainly do that. I will get started right away." Peter is excited about his first assignment and wants to impress Maria. Peter begins to conduct some preliminary research by searching the bank's database for industry comparables. Peter has located various industry ratios that can be used as a benchmark (Exhibit III). Required Assume the role of Peter and prepare the report. Exhibit I Financial Statements Sky Watchers Ltd. Statement of Financial Position As at December 31 2020 2019 Assets Current Cash $ 35,359 $ 134,550 Marketable securities 145,780 457,206 Accounts receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid expenses 17,500 19,500 847,859 1,141,976 Property, plant, and equipment, net 2,956,950 2,492,655 3,804,809 3,634,631 Liabilities and shareholders' equity Current Accounts payable 294,305 95,700 Accrued and other liabilities 237,595 244,760 Current portion of long-term debt 375,900 345,900 907,800 686,360 Long-term debt 1,280,330 1,601,500 Common shares (50,000 outstanding) Retained earnings 595,817 595,817 1,020,862 750,953 1,616,679 1,346,771 $3,804,809 $3,634,631 Exhibit I Financial Statements (Continued) Sky Watchers Ltd. Income Statement For the year ended December 31 2020 2019 Sales $2,975,990 $2,575,990 Cost of sales 1,368,955 1,184,955 Gross profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and administrative 134,500 102,800 Marketing and sales 175,680 155,600 Interest expense Office expense 76,820 96,090 295,980 255,000 315,000 Wages and benefits, administration Total operating expenses 315,000 1,153,470 1,049,980 Operating income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 344,909 98,239 Net income 252,615 Opening balance-retained earnings 750,953 573,338 Net income 344,909 252,615 Dividends 75,000 75,000 Closing balance-retained earnings $1,020,862 $ 750,953 Exhibit III Industry Benchmark Ratios Ratio Industry Average Profitability 2020 Return on equity 15.0% Return on assets 8.0% Financial leverage percentage 7.0% Earnings per share $ 4.40 Quality of income Profit margin 75.0% 9. 10.0% Fixed asset turnover 2.00 Tests of liquidity 8 Cash ratio 7.0% 9. Current ratio 1.00 10 Quick ratio 0.75 11 Receivable turnover 13.00 12 Average days in accounts receivable 28.08 13 Payable turnover 19,00 14 Average days in accounts payable 19.21 15 Inventory turnover 6.50 16 Average days in inventory 56.15 Solvency and equity position 17 Times interest earned 5,40 18 Cash coverage 6.30 19 Debt to equity ratio 1.35 Miscellaneous 20 Book value per share $29.00 12 3 4 19 Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and profes- sionals. The company has experienced significant growth in the past five years due to an increase in the popularity of star gazing, combined with an effective branding campaign and enhanced distribution network. The company has applied to the Bank of Winnipeg for a $1-million long-term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional capital assets. SWL's application and financial statements have been provided to Peter Sparks, a newly hired junior analyst with the Bank of Winnipeg. Peter has been asked by his supervisor, Maria Simms, to conduct a preliminary review of SWL's financial statements and determine whether SWL should proceed further into a more detailed analysis. Maria has asked Peter to document his recommendation and supporting analysis in a report that will be maintained in SWL's file. MARIA: "SWL has provided us with a copy of their most recent statement of financial position and income statement (Exhibit I). I know that this may not be enough to make the final decision, but it should be more than enough for you to get started." PETER: "Yes, I can obtain much information from these two statements." MARIA: "Okay, that's great. I took a quick look at the statement of financial position and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analy- sis, it is a bit concerning to see the cash decline by such a large amount." PETER: "I can definitely look into the decrease in cash." MARIA: "It may also be useful to give some thought to what the statement of financial position may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this informa- tion. Additional information on the use of the loan is provided in Exhibit II." PEĻER: "That is a great point. I will take this into consideration." MiIA: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with future due diligence, can you prepare a list of additional information that would be useful in making our final decision?" PETER: "Yes, I can most certainly do that. I will get started right away." Peter is excited about his first assignment and wants to impress Maria. Peter begins to conduct some preliminary research by searching the bank's database for industry comparables. Peter has located various industry ratios that can be used as a benchmark (Exhibit III). Required Assume the role of Peter and prepare the report. Exhibit I Financial Statements Sky Watchers Ltd. Statement of Financial Position As at December 31 2020 2019 Assets Current Cash $ 35,359 $ 134,550 Marketable securities 145,780 457,206 Accounts receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid expenses 17,500 19,500 847,859 1,141,976 Property, plant, and equipment, net 2,956,950 2,492,655 3,804,809 3,634,631 Liabilities and shareholders' equity Current Accounts payable 294,305 95,700 Accrued and other liabilities 237,595 244,760 Current portion of long-term debt 375,900 345,900 907,800 686,360 Long-term debt 1,280,330 1,601,500 Common shares (50,000 outstanding) Retained earnings 595,817 595,817 1,020,862 750,953 1,616,679 1,346,771 $3,804,809 $3,634,631 Exhibit I Financial Statements (Continued) Sky Watchers Ltd. Income Statement For the year ended December 31 2020 2019 Sales $2,975,990 $2,575,990 Cost of sales 1,368,955 1,184,955 Gross profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and administrative 134,500 102,800 Marketing and sales 175,680 155,600 Interest expense Office expense 76,820 96,090 295,980 255,000 315,000 Wages and benefits, administration Total operating expenses 315,000 1,153,470 1,049,980 Operating income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 344,909 98,239 Net income 252,615 Opening balance-retained earnings 750,953 573,338 Net income 344,909 252,615 Dividends 75,000 75,000 Closing balance-retained earnings $1,020,862 $ 750,953 Exhibit III Industry Benchmark Ratios Ratio Industry Average Profitability 2020 Return on equity 15.0% Return on assets 8.0% Financial leverage percentage 7.0% Earnings per share $ 4.40 Quality of income Profit margin 75.0% 9. 10.0% Fixed asset turnover 2.00 Tests of liquidity 8 Cash ratio 7.0% 9. Current ratio 1.00 10 Quick ratio 0.75 11 Receivable turnover 13.00 12 Average days in accounts receivable 28.08 13 Payable turnover 19,00 14 Average days in accounts payable 19.21 15 Inventory turnover 6.50 16 Average days in inventory 56.15 Solvency and equity position 17 Times interest earned 5,40 18 Cash coverage 6.30 19 Debt to equity ratio 1.35 Miscellaneous 20 Book value per share $29.00 12 3 4 19 Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and profes- sionals. The company has experienced significant growth in the past five years due to an increase in the popularity of star gazing, combined with an effective branding campaign and enhanced distribution network. The company has applied to the Bank of Winnipeg for a $1-million long-term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional capital assets. SWL's application and financial statements have been provided to Peter Sparks, a newly hired junior analyst with the Bank of Winnipeg. Peter has been asked by his supervisor, Maria Simms, to conduct a preliminary review of SWL's financial statements and determine whether SWL should proceed further into a more detailed analysis. Maria has asked Peter to document his recommendation and supporting analysis in a report that will be maintained in SWL's file. MARIA: "SWL has provided us with a copy of their most recent statement of financial position and income statement (Exhibit I). I know that this may not be enough to make the final decision, but it should be more than enough for you to get started." PETER: "Yes, I can obtain much information from these two statements." MARIA: "Okay, that's great. I took a quick look at the statement of financial position and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analy- sis, it is a bit concerning to see the cash decline by such a large amount." PETER: "I can definitely look into the decrease in cash." MARIA: "It may also be useful to give some thought to what the statement of financial position may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this informa- tion. Additional information on the use of the loan is provided in Exhibit II." PEĻER: "That is a great point. I will take this into consideration." MiIA: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with future due diligence, can you prepare a list of additional information that would be useful in making our final decision?" PETER: "Yes, I can most certainly do that. I will get started right away." Peter is excited about his first assignment and wants to impress Maria. Peter begins to conduct some preliminary research by searching the bank's database for industry comparables. Peter has located various industry ratios that can be used as a benchmark (Exhibit III). Required Assume the role of Peter and prepare the report. Exhibit I Financial Statements Sky Watchers Ltd. Statement of Financial Position As at December 31 2020 2019 Assets Current Cash $ 35,359 $ 134,550 Marketable securities 145,780 457,206 Accounts receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid expenses 17,500 19,500 847,859 1,141,976 Property, plant, and equipment, net 2,956,950 2,492,655 3,804,809 3,634,631 Liabilities and shareholders' equity Current Accounts payable 294,305 95,700 Accrued and other liabilities 237,595 244,760 Current portion of long-term debt 375,900 345,900 907,800 686,360 Long-term debt 1,280,330 1,601,500 Common shares (50,000 outstanding) Retained earnings 595,817 595,817 1,020,862 750,953 1,616,679 1,346,771 $3,804,809 $3,634,631 Exhibit I Financial Statements (Continued) Sky Watchers Ltd. Income Statement For the year ended December 31 2020 2019 Sales $2,975,990 $2,575,990 Cost of sales 1,368,955 1,184,955 Gross profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and administrative 134,500 102,800 Marketing and sales 175,680 155,600 Interest expense Office expense 76,820 96,090 295,980 255,000 315,000 Wages and benefits, administration Total operating expenses 315,000 1,153,470 1,049,980 Operating income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 344,909 98,239 Net income 252,615 Opening balance-retained earnings 750,953 573,338 Net income 344,909 252,615 Dividends 75,000 75,000 Closing balance-retained earnings $1,020,862 $ 750,953 Exhibit III Industry Benchmark Ratios Ratio Industry Average Profitability 2020 Return on equity 15.0% Return on assets 8.0% Financial leverage percentage 7.0% Earnings per share $ 4.40 Quality of income Profit margin 75.0% 9. 10.0% Fixed asset turnover 2.00 Tests of liquidity 8 Cash ratio 7.0% 9. Current ratio 1.00 10 Quick ratio 0.75 11 Receivable turnover 13.00 12 Average days in accounts receivable 28.08 13 Payable turnover 19,00 14 Average days in accounts payable 19.21 15 Inventory turnover 6.50 16 Average days in inventory 56.15 Solvency and equity position 17 Times interest earned 5,40 18 Cash coverage 6.30 19 Debt to equity ratio 1.35 Miscellaneous 20 Book value per share $29.00 12 3 4 19 Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and profes- sionals. The company has experienced significant growth in the past five years due to an increase in the popularity of star gazing, combined with an effective branding campaign and enhanced distribution network. The company has applied to the Bank of Winnipeg for a $1-million long-term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional capital assets. SWL's application and financial statements have been provided to Peter Sparks, a newly hired junior analyst with the Bank of Winnipeg. Peter has been asked by his supervisor, Maria Simms, to conduct a preliminary review of SWL's financial statements and determine whether SWL should proceed further into a more detailed analysis. Maria has asked Peter to document his recommendation and supporting analysis in a report that will be maintained in SWL's file. MARIA: "SWL has provided us with a copy of their most recent statement of financial position and income statement (Exhibit I). I know that this may not be enough to make the final decision, but it should be more than enough for you to get started." PETER: "Yes, I can obtain much information from these two statements." MARIA: "Okay, that's great. I took a quick look at the statement of financial position and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analy- sis, it is a bit concerning to see the cash decline by such a large amount." PETER: "I can definitely look into the decrease in cash." MARIA: "It may also be useful to give some thought to what the statement of financial position may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this informa- tion. Additional information on the use of the loan is provided in Exhibit II." PEĻER: "That is a great point. I will take this into consideration." MiIA: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with future due diligence, can you prepare a list of additional information that would be useful in making our final decision?" PETER: "Yes, I can most certainly do that. I will get started right away." Peter is excited about his first assignment and wants to impress Maria. Peter begins to conduct some preliminary research by searching the bank's database for industry comparables. Peter has located various industry ratios that can be used as a benchmark (Exhibit III). Required Assume the role of Peter and prepare the report. Exhibit I Financial Statements Sky Watchers Ltd. Statement of Financial Position As at December 31 2020 2019 Assets Current Cash $ 35,359 $ 134,550 Marketable securities 145,780 457,206 Accounts receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid expenses 17,500 19,500 847,859 1,141,976 Property, plant, and equipment, net 2,956,950 2,492,655 3,804,809 3,634,631 Liabilities and shareholders' equity Current Accounts payable 294,305 95,700 Accrued and other liabilities 237,595 244,760 Current portion of long-term debt 375,900 345,900 907,800 686,360 Long-term debt 1,280,330 1,601,500 Common shares (50,000 outstanding) Retained earnings 595,817 595,817 1,020,862 750,953 1,616,679 1,346,771 $3,804,809 $3,634,631 Exhibit I Financial Statements (Continued) Sky Watchers Ltd. Income Statement For the year ended December 31 2020 2019 Sales $2,975,990 $2,575,990 Cost of sales 1,368,955 1,184,955 Gross profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and administrative 134,500 102,800 Marketing and sales 175,680 155,600 Interest expense Office expense 76,820 96,090 295,980 255,000 315,000 Wages and benefits, administration Total operating expenses 315,000 1,153,470 1,049,980 Operating income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 344,909 98,239 Net income 252,615 Opening balance-retained earnings 750,953 573,338 Net income 344,909 252,615 Dividends 75,000 75,000 Closing balance-retained earnings $1,020,862 $ 750,953 Exhibit III Industry Benchmark Ratios Ratio Industry Average Profitability 2020 Return on equity 15.0% Return on assets 8.0% Financial leverage percentage 7.0% Earnings per share $ 4.40 Quality of income Profit margin 75.0% 9. 10.0% Fixed asset turnover 2.00 Tests of liquidity 8 Cash ratio 7.0% 9. Current ratio 1.00 10 Quick ratio 0.75 11 Receivable turnover 13.00 12 Average days in accounts receivable 28.08 13 Payable turnover 19,00 14 Average days in accounts payable 19.21 15 Inventory turnover 6.50 16 Average days in inventory 56.15 Solvency and equity position 17 Times interest earned 5,40 18 Cash coverage 6.30 19 Debt to equity ratio 1.35 Miscellaneous 20 Book value per share $29.00 12 3 4 19 Sky Watchers Ltd. (SWL) is a manufacturer of telescopes and binoculars, offering products to amateurs and profes- sionals. The company has experienced significant growth in the past five years due to an increase in the popularity of star gazing, combined with an effective branding campaign and enhanced distribution network. The company has applied to the Bank of Winnipeg for a $1-million long-term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional capital assets. SWL's application and financial statements have been provided to Peter Sparks, a newly hired junior analyst with the Bank of Winnipeg. Peter has been asked by his supervisor, Maria Simms, to conduct a preliminary review of SWL's financial statements and determine whether SWL should proceed further into a more detailed analysis. Maria has asked Peter to document his recommendation and supporting analysis in a report that will be maintained in SWL's file. MARIA: "SWL has provided us with a copy of their most recent statement of financial position and income statement (Exhibit I). I know that this may not be enough to make the final decision, but it should be more than enough for you to get started." PETER: "Yes, I can obtain much information from these two statements." MARIA: "Okay, that's great. I took a quick look at the statement of financial position and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analy- sis, it is a bit concerning to see the cash decline by such a large amount." PETER: "I can definitely look into the decrease in cash." MARIA: "It may also be useful to give some thought to what the statement of financial position may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this informa- tion. Additional information on the use of the loan is provided in Exhibit II." PEĻER: "That is a great point. I will take this into consideration." MiIA: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with future due diligence, can you prepare a list of additional information that would be useful in making our final decision?" PETER: "Yes, I can most certainly do that. I will get started right away." Peter is excited about his first assignment and wants to impress Maria. Peter begins to conduct some preliminary research by searching the bank's database for industry comparables. Peter has located various industry ratios that can be used as a benchmark (Exhibit III). Required Assume the role of Peter and prepare the report. Exhibit I Financial Statements Sky Watchers Ltd. Statement of Financial Position As at December 31 2020 2019 Assets Current Cash $ 35,359 $ 134,550 Marketable securities 145,780 457,206 Accounts receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid expenses 17,500 19,500 847,859 1,141,976 Property, plant, and equipment, net 2,956,950 2,492,655 3,804,809 3,634,631 Liabilities and shareholders' equity Current Accounts payable 294,305 95,700 Accrued and other liabilities 237,595 244,760 Current portion of long-term debt 375,900 345,900 907,800 686,360 Long-term debt 1,280,330 1,601,500 Common shares (50,000 outstanding) Retained earnings 595,817 595,817 1,020,862 750,953 1,616,679 1,346,771 $3,804,809 $3,634,631 Exhibit I Financial Statements (Continued) Sky Watchers Ltd. Income Statement For the year ended December 31 2020 2019 Sales $2,975,990 $2,575,990 Cost of sales 1,368,955 1,184,955 Gross profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and administrative 134,500 102,800 Marketing and sales 175,680 155,600 Interest expense Office expense 76,820 96,090 295,980 255,000 315,000 Wages and benefits, administration Total operating expenses 315,000 1,153,470 1,049,980 Operating income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 344,909 98,239 Net income 252,615 Opening balance-retained earnings 750,953 573,338 Net income 344,909 252,615 Dividends 75,000 75,000 Closing balance-retained earnings $1,020,862 $ 750,953 Exhibit III Industry Benchmark Ratios Ratio Industry Average Profitability 2020 Return on equity 15.0% Return on assets 8.0% Financial leverage percentage 7.0% Earnings per share $ 4.40 Quality of income Profit margin 75.0% 9. 10.0% Fixed asset turnover 2.00 Tests of liquidity 8 Cash ratio 7.0% 9. Current ratio 1.00 10 Quick ratio 0.75 11 Receivable turnover 13.00 12 Average days in accounts receivable 28.08 13 Payable turnover 19,00 14 Average days in accounts payable 19.21 15 Inventory turnover 6.50 16 Average days in inventory 56.15 Solvency and equity position 17 Times interest earned 5,40 18 Cash coverage 6.30 19 Debt to equity ratio 1.35 Miscellaneous 20 Book value per share $29.00 12 3 4 19

Answer rating: 100% (QA)

CASH FLOW STATEMENT amount in 000 YEAR 2020 Cash flow Operating Activities Net Profit after Tax 34490900 Adjustment for Amortisation of PPE 15549000 50039900 Changes in Accounts Receivable 4852000 Inv... View the full answer