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

Particulars	2020	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 depreciationbuildings	(21,000)	(11,000)
Equipment	1,93,000	68,000
Accumulated depreciationequipment	(28,000)	(10,000)
Totals Assets	$5,69,000	$3,86,000
Liabilities and Stockholders Equity
Accounts payable	$ 23,000	$ 40,000
Accrued expenses payable	10,000	0
Bonds payable	1,10,000	150,000
Common stock ($1 par)	220,000	60,000
Retained earnings	206,000	136,000
Totals Liabilities and Stockholders Equity	$5,69,000	$3,86,000

Reynolds Company

Comparative Statements of Financial Performance

For the Year Ended December 31, 2020

Particulars	Amount ($)
Sales revenue	$8,90,000
Less: Cost of goods sold	$465,000
Gross Profit	4,25,000
Less : Operating expenses	221,000
Income from operations	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:

1. Operating expenses include depreciation expense of $30,000.
2. Operating expenses include amortization expense of $2,000.
3. Operating expenses include impairment expense of $1,000.
4. Charges from prepaid expenses $2,000
5. Land was sold at its book value for cash.
6. Bonds of $30,000 were converted into common stock.
7. Cash dividends of $55,000 were declared and paid in 2020.
8. Equipment with a cost of $166,000 was purchased for cash.
9. Equipment with a cost of $41,000 and a book value of $36,000 was sold for $34,000 cash.
10. Bonds of $40,000 were redeemed at their face value for cash.
11. Common stock ($1 par) of $160,000 was issued for cash.
12. 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 companys 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 companys 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

1. Working capital
2. Current ratio
3. Acid-test ratio
4. Accounts receivable turnover ratio
5. Collection period
6. Days to sell inventory
7. Total debt to equity
8. Long-term debt to equity
9. Times interest earned
10. Return on assets
11. Return on common equity
12. Gross profit margin
13. Operating profit margin (pretax)
14. Net profit margin
15. Cash turnover
16. Accounts receivable turnover
17. Inventory turnover
18. Working capital turnover
19. PPE turnover
20. Total asset turnover
21. Price-to-earnings
22. Earnings yield
23. Dividend yield
24. Dividend payout rate
25. Price-to-book

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. Justify the Altman Z-Score Test and comment