Suppose you are interested in evaluating Leeds and Creative companies' financial performance during 2020; both companies...

      

Transcribed Image Text:

Suppose you are interested in evaluating Leeds and Creative companies' financial performance during 2020; both companies operate in the technological sector. Given the income statement and the balance sheet of each company, answer the following questions: 1. Compile the Pro forma Income statement for Leeds and Creative companies for the year 2020 using percent of sales method. Use the information provided on the excel sheets. (3 marks) 2. Fill in the missing amounts in Leeds and Creative companies' balance sheets. (3 marks) Given that: Leeds market price per share in 2020 = $8. dividends in 2020 = $22,000. Creative market price per share in 2020 = $10. Financial Ratios Current ratio Quick ratio Inventory turnover Average age of inventory. Average collection period Average payment period Asset turnover Debt ratio Debt to equity ratio Times interest earned ratio Gross profit margin Leeds dividends in 2020 = $34,000. 3. Calculate the financial ratios for both companies in 2020. (3 marks) Note: Purchases were %70 of the cost of goods sold for both companies in 2020. Operating profit margin Net profit margin ROA ROE Leeds company Creative Creative company 4. Analyze the overall financial situation from a cross-sectional viewpoint. Compare each company's ratios with the industry average. What are the strengths and weaknesses of each company? Which company is best to invest in and why? (3 marks) Financial ratio Current ratio Quick ratio Inventory turnover Average age of inventory Average collection period Average payment period Asset turnover Debt ratio Industry Average 2 1.91 8.12 times 42 days 30 days 50 days 0.85 50% Debt to equity ratio 90% Times interest earned ratio 5 Times Gross profit margin 32% 14% 8% 7% 12% Operating profit margin Net profit margin ROA ROE 5. Prepare the cash flow statement for both companies for the year ended December 31st, 2020, using the indirect method. (3 marks) Assets Cash and Cash equivalents Accounts receivable Inventory Prepaid expenses Short term derivative assets Total current assets Property, plant, and equipment Accumulated depreciation Net property, plant, and equipment Goodwill Total Assets Liabilities Leeds company Balance Sheet December 31, 2019 and 2020 Accounts payable Wages payable Current portion of long-term debt Accrued expenses Total Current Liabilities Long-term debt Total Liabilities Owner's Equity Common stock: $2.5 par, shares issued and outstanding in 2019: 60,000; in 2020: 75,000 Paid in capital in excess of par Retained earnings Total Owner's Equity 2019 200,000 50,000 150,000 18,000 30,000 448,000 515,000 5,000 510,000 62,000 1,020,000 22,000 6,000 15,000 7,000 50,000 150,000 200,000 Missing amount 270,000 400,000 Missing amount 2020 230,000 50,500 Missing amount 25,000 40,000 505,500 700,000 5,500 Missing amount 150,000 Missing amount 30,000 6,000 21,000 Missing amount 60,000 90,000 150,000 Missing amount Missing amount Missing amount Missing amount Sales Cost of goods sold Gross Profit Leeds company Income statement December 31, 2019 and 2020 Operating Expense: Selling, general and administrative expenses Research and development expenses Utilities expense Advertisement expenses Depreciation expense Sundry expenses Total operating expenses Operating Income Interest expense Income before Income Taxes Income taxes (25%) Net Income 2019 $1,200,000 $1,500,000 760,000 440,000 120,800 600 20,000 12,000 1,000 35,000 189,400 250,600 18,000 232,600 2020 58,150 $174,450 500 18,000 Assets Cash and Cash equivalents Accounts receivable Inventory Prepaid expenses Marketable securities Total current assets Land Creative company Balance Sheet December 31, 2019 and 2020 Investments & projects Property, machinery and equipment Accumulated depreciation Net Property, machinery and equipment Total Assets Liabilities Accounts payable Notes and loans payable Accrued expenses Total Current Liabilities Long-term debt Total Liabilities Owner's Equity Common stock: $1.75 par, shares issued and outstanding in 2019: 20000; in 2020: 25000 Paid in capital in excess of par Retained earnings Total Owner's Equity 2019 200,000 70,000 50,000 12,000 20,000 352,000 180,000 80,000 400,000 12,000 388,000 1,000,000 70,000 120,000 20,000 210,000 500,000 710,000 Missing amount 85,000 170,000 290,000 2020 Missing amount 90,000 70,000 15,500 38,000 443,500 200,000 70,000 300,000 13,500 286,500 Missing amount 50,000 95,000 15,000 160,000 370,000 530,000 Missing amount Missing amount Missing amount Missing amount Sales Cost of goods sold Gross Profit Creative company Income statement December 31, 2019 and 2020 Operating Expense: Selling, general and administrative expenses Utilities expense Advertisement expenses Depreciation expense Sundry expenses Total operating expenses Operating Income Interest expense Income before Income Taxes Income taxes (25%) Net Income 2019 $800,000 520,000 280,000 80,000 23111.11 22222.22222 500 22222.22 148,056 131,944 25,000 106,944.448 26,736 $80,208 2020 $900,000 2,000 35,000 Suppose you are interested in evaluating Leeds and Creative companies' financial performance during 2020; both companies operate in the technological sector. Given the income statement and the balance sheet of each company, answer the following questions: 1. Compile the Pro forma Income statement for Leeds and Creative companies for the year 2020 using percent of sales method. Use the information provided on the excel sheets. (3 marks) 2. Fill in the missing amounts in Leeds and Creative companies' balance sheets. (3 marks) Given that: Leeds market price per share in 2020 = $8. dividends in 2020 = $22,000. Creative market price per share in 2020 = $10. Financial Ratios Current ratio Quick ratio Inventory turnover Average age of inventory. Average collection period Average payment period Asset turnover Debt ratio Debt to equity ratio Times interest earned ratio Gross profit margin Leeds dividends in 2020 = $34,000. 3. Calculate the financial ratios for both companies in 2020. (3 marks) Note: Purchases were %70 of the cost of goods sold for both companies in 2020. Operating profit margin Net profit margin ROA ROE Leeds company Creative Creative company 4. Analyze the overall financial situation from a cross-sectional viewpoint. Compare each company's ratios with the industry average. What are the strengths and weaknesses of each company? Which company is best to invest in and why? (3 marks) Financial ratio Current ratio Quick ratio Inventory turnover Average age of inventory Average collection period Average payment period Asset turnover Debt ratio Industry Average 2 1.91 8.12 times 42 days 30 days 50 days 0.85 50% Debt to equity ratio 90% Times interest earned ratio 5 Times Gross profit margin 32% 14% 8% 7% 12% Operating profit margin Net profit margin ROA ROE 5. Prepare the cash flow statement for both companies for the year ended December 31st, 2020, using the indirect method. (3 marks) Assets Cash and Cash equivalents Accounts receivable Inventory Prepaid expenses Short term derivative assets Total current assets Property, plant, and equipment Accumulated depreciation Net property, plant, and equipment Goodwill Total Assets Liabilities Leeds company Balance Sheet December 31, 2019 and 2020 Accounts payable Wages payable Current portion of long-term debt Accrued expenses Total Current Liabilities Long-term debt Total Liabilities Owner's Equity Common stock: $2.5 par, shares issued and outstanding in 2019: 60,000; in 2020: 75,000 Paid in capital in excess of par Retained earnings Total Owner's Equity 2019 200,000 50,000 150,000 18,000 30,000 448,000 515,000 5,000 510,000 62,000 1,020,000 22,000 6,000 15,000 7,000 50,000 150,000 200,000 Missing amount 270,000 400,000 Missing amount 2020 230,000 50,500 Missing amount 25,000 40,000 505,500 700,000 5,500 Missing amount 150,000 Missing amount 30,000 6,000 21,000 Missing amount 60,000 90,000 150,000 Missing amount Missing amount Missing amount Missing amount Sales Cost of goods sold Gross Profit Leeds company Income statement December 31, 2019 and 2020 Operating Expense: Selling, general and administrative expenses Research and development expenses Utilities expense Advertisement expenses Depreciation expense Sundry expenses Total operating expenses Operating Income Interest expense Income before Income Taxes Income taxes (25%) Net Income 2019 $1,200,000 $1,500,000 760,000 440,000 120,800 600 20,000 12,000 1,000 35,000 189,400 250,600 18,000 232,600 2020 58,150 $174,450 500 18,000 Assets Cash and Cash equivalents Accounts receivable Inventory Prepaid expenses Marketable securities Total current assets Land Creative company Balance Sheet December 31, 2019 and 2020 Investments & projects Property, machinery and equipment Accumulated depreciation Net Property, machinery and equipment Total Assets Liabilities Accounts payable Notes and loans payable Accrued expenses Total Current Liabilities Long-term debt Total Liabilities Owner's Equity Common stock: $1.75 par, shares issued and outstanding in 2019: 20000; in 2020: 25000 Paid in capital in excess of par Retained earnings Total Owner's Equity 2019 200,000 70,000 50,000 12,000 20,000 352,000 180,000 80,000 400,000 12,000 388,000 1,000,000 70,000 120,000 20,000 210,000 500,000 710,000 Missing amount 85,000 170,000 290,000 2020 Missing amount 90,000 70,000 15,500 38,000 443,500 200,000 70,000 300,000 13,500 286,500 Missing amount 50,000 95,000 15,000 160,000 370,000 530,000 Missing amount Missing amount Missing amount Missing amount Sales Cost of goods sold Gross Profit Creative company Income statement December 31, 2019 and 2020 Operating Expense: Selling, general and administrative expenses Utilities expense Advertisement expenses Depreciation expense Sundry expenses Total operating expenses Operating Income Interest expense Income before Income Taxes Income taxes (25%) Net Income 2019 $800,000 520,000 280,000 80,000 23111.11 22222.22222 500 22222.22 148,056 131,944 25,000 106,944.448 26,736 $80,208 2020 $900,000 2,000 35,000