Part A (25 marks) Please find attached a multi-year Income Statement (Appendix A1) and multi-year Balance Sheet
Question:
Part A (25 marks)
Please find attached a multi-year Income Statement (Appendix A1) and multi-year Balance Sheet (Appendix A2) for Canadian Motorbikes. This company is a (fictional) motorcycle manufacturer that brought on a new CEO in 2012. You work for an investment company that is considering investing in the motorcycle company – and, if the investment is made, whether or not to retain the CEO. You are part of a team that is evaluating the performance of the company. Your job is to calculate and interpret important financial ratios and to make comments to help make a decision on whether or not to invest. Appendix A3 contains financial ratio averages for all companies in the industry. This should be useful.
Please use the information in Appendix A1 to A3 to do the following:
Calculate the Current Ratio, Debt Ratio, Return on Assets (ROA) and Return on Equity (ROE). For the ROA and ROE, you should use the average total assets and the average total equity in your calculations. (The average is the total across two years divided by two). Calculate these values for each of 2011-2014. Interpret your calculations: what does this information mean? How is the company doing? (16 marks)
Calculate ratios related to how quickly the company pays its trade debt and how quickly it collects from its customers. These are known as Accounts Payable (AP) Turnover and Accounts Receivable (AR) Turnover. The formula for AP Turnover is: Cost of Goods Sold/average accounts payable. The formula for AR Turnover is: credit sales/average accounts receivable. Calculate the AP and AR Turnover for each of 2011-2014. Interpret your calculations: what does this information mean? How is the company doing? (9 marks)
Financial Accounting
ISBN: 978-0077862268
2nd edition
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann