Managerial Accounting

Spring 2017

Financial Statement Analysis

You have just been hired as a financial analyst for Purple Power Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the companys financial statements, including comparing Purple Powers performance to its major competitors. The companys financial statements for the last two years are as follows:

Purple Power Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	960,000	$	1,260,000
Marketable securities		0		300,000
Accounts receivable, net		2,700,000		1,800,000
Inventory		3,900,000		2,400,000
Prepaid expenses		240,000		180,000
Total current assets		7,800,000		5,940,000
Plant and equipment, net		9,300,000		8,940,000
Total assets	$	17,100,000	$	14,880,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,900,000	$	2,760,000
Note payable, 10%		3,600,000		3,000,000
Total liabilities		7,500,000		5,760,000
Stockholders' equity:
Common stock, $78 par value		7,800,000		7,800,000
Retained earnings		1,800,000		1,320,000
Total stockholders' equity		9,600,000		9,120,000
Total liabilities and stockholders' equity	$	17,100,000	$	14,880,000

Purple Power Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,750,000	$	12,480,000
Cost of goods sold		12,600,000		9,900,000
Gross margin		3,150,000		2,580,000
Selling and administrative expenses		1,590,000		1,560,000
Net operating income		1,560,000		1,020,000
Interest expense		360,000		300,000
Net income before taxes		1,200,000		720,000
Income taxes (30%)		360,000		216,000
Net income		840,000		504,000
Common dividends		360,000		252,000
Net income retained		480,000		252,000
Beginning retained earnings		1,320,000		1,068,000
Ending retained earnings	$	1,800,000	$	1,320,000

Remember: You did Part 1 Week 1 so you should have this file in canvas

To begin your assignment you gather the following financial data and ratios that are typical of companies in Purple Power Companys industry:
Current ratio	2.3
Acid-test ratio	1.2
Average collection period	30	days
Average sale period	60	days
Return on assets	9.5	%
Debt-to-equity ratio	0.65
Times interest earned ratio	5.7
Price-earnings ratio	10
First you decide to Present the balance sheet in common-size format and present the income statement in common-size format down through net income. (See First In Class Assignment)

You decide first to assess the companys performance in terms of debt management and profitability. Compute the following for both this year and last year
	a.	The times interest earned ratio.
	b.	The debt-to-equity ratio.
	c.	The gross margin percentage.
	d.	The return on total assets. (Total assets at the beginning of last year were $12,960,000.)
	e.	The return on equity. (Stockholders equity at the beginning of last year totaled $9,048,000. There has been no change in common stock over the last two years.)
	f.	Is the companys financial leverage positive or negative?

You decide next to assess the companys stock market performance. Assume that Purple Powers stock price at the end of this year is $72 per share and that at the end of last year it was $40. For both this year and last year, compute:
	a.	The earnings per share.
	b.	The dividend yield ratio.
	c.	The dividend payout ratio.
	d.	The price-earnings ratio.
	e.	The book value per share of common stock.

You decide, finally, to assess the companys liquidity and asset management. For both this year and last year, compute:
	a.	Working capital.
	b.	The current ratio.
	c.	The acid-test ratio.
	d.	The average collection period. (The accounts receivable at the beginning of last year totaled $1,560,000.)
	e.	The average sale period. (The inventory at the beginning of last year totaled $1,920,000.)
	f.	The operating cycle.
	g.	The total asset turnover. (The total assets at the beginning of last year totaled $14,500,000.)

5.In a one page memo evaluate the company with the information above

Submit you ratios go in the solution spreadsheet and memo in the