Financial Analysis Case This case can be assigned as a group activity. Additional instructions and material for
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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 LtdKAL began operations on January shortly after its incorporation.
Sheila Kenmare, the companys only employee, consults with various clients and uses expensive equipment to complete her work. When forming the company, Sheila bought common shares but at the
beginning of the company sold common shares to Sheilas mother.
In addition to selling shares, KAL obtained financing from Sheilas Uncle Harry in the form of a loan
that it received on January Her uncle required the company to pay only the interest on the loan
and no principal in which KAL did. However, he wanted KAL to pay both interest and a portion
of the principal during The company made these payments evenly throughout Harry was
surprised when Sheila paid down more of the loan balance in than he asked her to
cAFurtherLookAtFinancialStatements.indd : PM
CHAPTER 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
Service revenue $ $
Salaries expense
Rent and other office expenses
Depreciation expense
Interest expense
Income before income tax
Income tax
Net income $ $
Kenmare Architects Ltd
Statement of Financial Position
December
Cash $ $
Accounts receivable
Equipment
Accumulated depreciation
$ $
Accounts payable $ $
Current portion of bank loan payable
Bank loan payable
Common shares
Retained earnings
$ $
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 what portion of the loan did Uncle Harry want paid off in How much of
the loan did KAL actually pay off in What was the total amount of cash received by Harry in
and
c Calculate the current ratio for each year. Has the companys liquidity improved or deteriorated?
d Calculate the debt to total assets ratio for each year. Did the companys 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
f Assume that the price Sheila paid for her shares was the share price throughout Using that
price, calculate the priceearnings ratio for that year. Assume that the price Sheilas mother paid
for her shares was the share price throughout Using that price, calculate the priceearnings
ratio for Why do you think the PE 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
Related Book For
Financial Accounting Tools for Business Decision Making
ISBN: 978-1119368458
7th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
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