Vertical Analysis, Ratios The Pierce Company operates a high volume retail outlet. The following are comparative financial statements for the company:
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Comparative Income Statements |
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Comparative Income Statements |
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2008 |
2007 |
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Sales (net) |
$180,000 |
$150,000 |
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Cost of goods sold |
108,000 |
85,500 |
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Gross profit |
$72,000 |
$64,500 |
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Selling expenses |
21,600 |
15,000 |
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Administrative expenses |
23,770 |
23,410 |
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Interest expense |
3,200 |
2,800 |
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Income before taxes |
$23,430 |
$23,290 |
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Income tax expense |
7,030 |
6,990 |
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Net income |
$16,400 |
$16,300 |
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Earnings per share (6,000 shares) |
$2.73 |
$2.72 |
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Comparative Balance Sheets |
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December 31, |
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2008 |
2007 |
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Cash |
$4,200 |
$3,000 |
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Investments (short term) |
2,000 |
2,100 |
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Receivables (net) |
8,600 |
6,400 |
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Inventory |
11,300 |
9,700 |
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Noncurrent assets (net) |
129,900 |
118,800 |
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Total Assets |
$156,000 |
$140,000 |
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Accounts payable |
$12,000 |
$10,000 |
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Other current liabilities |
1,000 |
2,400 |
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Bonds payable |
40,000 |
35,000 |
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Common stock, $3 par |
18,000 |
18,000 |
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Additional paid in capital |
30,000 |
30,000 |
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Retained earnings |
54,100 |
43,600 |
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Accumulated other comprehensive income |
900 |
1,000 |
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Total Liabilities and |
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Stockholders’ Equity |
$156,000 |
$140,000 |
Additional data: The company has not issued any common stock for several years and the price of its common stock has remained relatively constant over that time. At the beginning of 2007, it had outstanding accounts receivable (net) of $7,600, an inventory of $11,000, accounts payable of $7,400, total liabilities of $44,600, and stockholders’ equity of $85,400. The company typically makes 50% of its sales on credit. Pierce Company management has become concerned. Although it feels that progress has been made in “tightening up” the company’s operating cycle, this has caused only a modest increase in profits and no increase in the company’s stock market price. Management has asked for your assistance in identifying problem areas as well as strong points.
Required
1. Prepare a vertical analysis for the 2007 and 2008 financial statements of Pierce.
2. Compute the following ratios for 2007 and 2008:
a. Current
b. Acid test
c. Inventory turnover
d. Receivables turnover
e. Payables turnover
f. Return on total assets
g. Return on stockholders’ equity
h. Debt
i. Interest coverage
3. Briefly discuss any findings that your analyses reveal.