Financial Statement Analysis

You are a financial analyst and your client has approached you for some independent financial assistance. He is considering investing funds in common shares of a corporation and has identified two alternatives. They are both in the same industry and either could be bought for book value. Your client is requesting your advice on which would be the better investment.

As a financial analyst you will prepare a prospectus. A prospectus is a short description of the analysis and must include the following sections:

1. Title page
2. Vertical Analysis
3. Ratio Analysis
4. Conclusions/Recommendations

Your prospectus should be no more than 5 pages typed not including the title page.

Guidelines for the format of the written prospectus:

Title Page

The first page of the prospectus is the title page which lists the following

• FINANCIAL STATEMENT ANALYSIS
• Name of Your Consulting Firm
• Analysts ( Your) Name
• Date

Section 1: Vertical Analysis (Common Size Analysis)

Perform a vertical analysis in relation to revenue for the items on the income statement only for each of the two companies. (18 marks)

Section 2: Ratio Analysis

Compute the ratios for the following categories for each company:

• Profitability
• Liquidity
• Solvency
• market value

Present in chart form and show calculations used. (36 marks)

Discussion of ratios (46 marks) For each ratio, students should comment on some of the following

• What is the relative position of each of the corporations?
• What is being measured?
• What does it mean? Is this good news or bad

Section 3: Conclusions/Recommendations

Draw conclusions from the data that was gathered in the previous sections and determine the relevant position of each of the corporations in all of the analyses.

The conclusions/recommendations must address the following as a comparison between the two companies.

• Summarize the overall strengths and weaknesses of each corporation?
• Your final recommendation as to which company your client should invest in explaining key reasons why it is the better choice.

Bailey Ltd.
Balance Sheet
As at December 31, 2016
Cash	$66,000
Accounts Receivable(net) ***	241,000
Inventory	87,000
Prepaid Expenses	12,000
Plant and Equipment(net)	792,000
	$1,198,000
Accounts Payable & Accrued Liabilities	$191,000
Long-term Debt	635,000
Common Shares**	50,000
Retained Earnings	322,000
	$1,198,000

Bailey Ltd.
Income Statement
For the year ended December 31, 2016
Sales *	$2,797,000
Cost of Goods Sold	1,790,000
Gross Margin	1,007,000
Operating Expenses	770,000
Depreciation Expense	37,000
Operating Income	200,000
Interest Expense	70,000
Income before Income Tax	130,000
Income Tax Expense	52,000
Net Income(Loss)	$78,000

** Avg. common shares issued and outstanding 22,000 shares

*** A/R for 2015 was	$230,000
Equity for 2015 was	$310,000
total assets for 2015 was	$1,050,000
inventory for 2015	85,000
dividend 2016	60,000

Snoopy Ltd.
Balance Sheet
As at December 31, 2016
Cash	$27,000
Accounts Receivable(net)***	262,000
Inventory	110,000
Prepaid Expenses	7,000
Plant and Equipment(net)	704,000
	$1,110,000
Accounts Payable & Accrued Liabilities	$173,000
Long-term Debt	310,000
Common Shares**	200,000
Retained Earnings	427,000
	$1,110,000

** Avg. common shares issued and outstanding 25,000 shares

*** A/R for 2015 was	230,000
Equity for 2015 was	$620,000
Total assets for 2015 was	1,000,000
inventory for 2015	112,000
dividend 2016	55,000

* all Sales made on credit

Snoopy Ltd.
Income Statement
For the year ended December 31, 2016
Sales *	$2,454,000
Cost of Goods Sold	1,594,000
Gross Margin	860,000
Operating Expenses	632,000
Depreciation Expense	31,000
Operating Income	197,000
Interest Expense	43,000
Income before Income Tax	154,000
Income Tax Expense	62,000
Net Income(Loss)	92,000

* all Sales made on credit