Financial Analysis Case This case can be assigned as a group activity. Additional

instructions and material for this activity can be found on the Instructor Resource site and in WileyPLUS.

Kenmare Architects Ltd$.($KAL$)$ began operations on January $1,2020,$ shortly after its incorporation.

Sheila Kenmare, the company$$s only employee, consults with various clients and uses expensive equipment to complete her work. When forming the company, Sheila bought $10,000$ common shares but at the

beginning of $2021,$ the company sold $1,000$ common shares to Sheila$$s mother.

In addition to selling shares, KAL obtained financing from Sheila$$s Uncle Harry in the form of a loan

that it received on January $1,2020.$ Her uncle required the company to pay only the interest on the loan

and no principal in $2020,$ which KAL did. However, he wanted KAL to pay both interest and a portion

of the principal during $2021.$ The company made these payments evenly throughout $2021.$ Harry was

surprised when Sheila paid down more of the loan balance in $2021$ than he asked her to$.$

c$02$AFurtherLookAtFinancialStatements.indd $4717/02/205$:$38$ PM

$2-48$ CHAPTER $2$ A Further Look at Financial Statements

The following shows the financial statements of the company for the past two years:

Kenmare Architects Ltd$.$

Statement of Income

Year Ended December $31$

$20212020$

Service revenue $$120,000$ $$100,000$

Salaries expense $74,00059,000$

Rent and other office expenses $20,00020,000$

Depreciation expense $12,00012,000$

Interest expense $2,7003,600$

Income before income tax $11,3005,400$

Income tax $3,3901,890$

Net income $ $7,910$ $ $3,510$

Kenmare Architects Ltd$.$

Statement of Financial Position

December $31$

$20212020$

Cash $ $9,000$ $ $22,000$

Accounts receivable $37,0009,000$

$46,00031,000$

Equipment $84,00084,000$

Accumulated depreciation $(24,000)(12,000)$

$60,00072,000$

$$106,000$ $$103,000$

Accounts payable $ $29,580$ $ $14,490$

Current portion of bank loan payable $4,0008,000$

$33,58022,490$

Bank loan payable $26,00052,000$

$59,58074,490$

Common shares $35,00025,000$

Retained earnings $11,4203,510$

$46,42028,510$

$$106,000$ $$103,000$

Instructions

a$.$ When forming the company, how much did Sheila pay for her shares? How much did her mother

pay for her shares?

b$.$ At the end of $2020,$ what portion of the loan did Uncle Harry want paid off in $2021?$ How much of

the loan did KAL actually pay off in $2021?$ What was the total amount of cash received by Harry in

$2020$ and $2021?$

c$.$ Calculate the current ratio for each year. Has the company$$s liquidity improved or deteriorated?

d$.$ Calculate the debt to total assets ratio for each year. Did the company$$s solvency improve or

deteriorate? What effect did the change in this ratio have on the statement of income?

e$.$ Calculate the basic earnings per share of the company for each year. Why do you think that basic

EPS changed in $2021?$

f$.$ Assume that the price Sheila paid for her shares was the share price throughout $2020.$ Using that

price, calculate the price$-$earnings ratio for that year. Assume that the price Sheila$$s mother paid

for her shares was the share price throughout $2021.$ Using that price, calculate the price$-$earnings

ratio for $2021.$ Why do you think the P$-$E ratio changed? Do you think that the share price change

was justified? Why or why not?

g$.$ What was the major reason for the company to sell shares in $2021?$