Case Situation (The Financial Statement)

A First Nation Band through their Economic Development Department has made an offer to purchase a metal fabrication business called Metals Limited. Metals Limited is located in the city of Sault Ste. Marie. There will be strong demand for the companys products and services as the local steel mill often requires metal fabrication work and regularly needs to go out of town to find a company that can complete the work.

The opening balance sheet on the first day of business on January 1, 2021, included the following: Cash $100,000, Inventory $75,000, Equipment $500,000 cost, and Long Term Bank Loan $300,000. Equity needs to be calculated.

During the year, the following items impacted the balance sheet by the end of the fiscal year December 31, 2021 since the opening day: Cash increased by $150,000, Inventory increased by $50,000, accounts receivable had a balance as at December 31, 2021, of $150,000, accounts payable had a balance as at December 31, 2021, of $50,000, and $50,000 of the long term bank loan was paid.

During the 2021 year, Metals Limited incurred the following income statement items: sales revenue of $2 Million, cost of goods sold of $900,000, depreciation of $100,000, wages of $400,000, utilities of $125,000, rent of $25,000, interest of $50,000 and other expenses of $150,000.

Case Questions

1) Prepare the opening balance sheet for Metals Limited as of January 1, 2021. Calculate the debt to equity ratio and the debt to assets ratio. How would you characterize the ratios (i.e. strong, weak, moderate) and why?

2) Prepare the balance sheet and income statement as at December 31, 2021 as per the information provided in the Case Situation.

3) Calculate the following ratios for the December 31, 2021, income statement and balance sheet: Gross profit to sales ratio, net income to sales ratio, debt to equity ratio, current ratio, receivable turnover ratio and receivables collection period using sales, and inventory turnover ratio and days sales in inventory.

4) For the year ending December 31, 2021, provide an explanation on the profitability of Metals Limited and the strength or weakness of the balance sheet using the ratios that you calculated.

5) The equipment as of opening day is depreciated using the straight-line method having an expected life of 5 years and a terminal value of nil. Calculate the depreciation expense assuming no further assets were purchased for year 3 along with the accumulated depreciation and net book value at the end of 3 years. Explain why depreciation is referred to as a non-cash expense.

6) At the end of the first year, there is another business opportunity that would require a bank term loan of $2 Million that is to be repaid back evenly over 5 years at a 5% interest rate. The payment of this debt would come from the profits of Metals Limited. Provide your explanation if Metals Limited has the financial ability to pay this new debt of $2 Million.