PROBLEM 15.17 Use statement analysis to evaluate a general managers claims The general manager of a medium-sized manufacturing company wants to renew the companys operating loan. In discussions with the banks lending officer, the general manager says: As the accompanying financial statements show, our working capital position has improved during the past year, and we have managed to reduce operating expenses significantly.

The partial financial statements are shown below.

TITAN MANUFACTURING LTD PARTIAL BALANCE SHEET AS AT 31 DECEMBER 2019 AND 2018

Current assets

Cash Accounts receivable Inventories Total current assets Current liabilities Accounts payable Operating loan Total current liabilities

TITAN MANUFACTURING LTD INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018

1. 1 Evaluate the general managers comments. Incorporate appropriate ratio analysis in your discussion.

2. 2 What additional financial information (if any) would you request from the general manager? Why?

2019 $ 2018 $ Current assets Cash 50 000 200 000 Accounts receivable 250 000 100 000 Inventories 500 000 400 000 Total current assets 800 000 700 000 Current liabilities Accounts payable 250 000 200 000 Operating loan 100 000 100 000 Total current liabilities 350 000 300 000 2019 $ 2018 $ Sales 1 200 000 1 500 000 Less COGS 780 000 900 000 420 000 600 000 Gross profit Operating expenses Profit before taxes 350 000 400 000 70 000 200 000 Income taxes 14 000 40 000 Net profit 56 000 160 000 2019 $ 2018 $ Current assets Cash 50 000 200 000 Accounts receivable 250 000 100 000 Inventories 500 000 400 000 Total current assets 800 000 700 000 Current liabilities Accounts payable 250 000 200 000 Operating loan 100 000 100 000 Total current liabilities 350 000 300 000 2019 $ 2018 $ Sales 1 200 000 1 500 000 Less COGS 780 000 900 000 420 000 600 000 Gross profit Operating expenses Profit before taxes 350 000 400 000 70 000 200 000 Income taxes 14 000 40 000 Net profit 56 000 160 000