Chapter 17, Problem 2BPSB

To determine

1.

Introduction:

Current Ratio measures the ability to the company to meet its current liabilities out of its current assets. Current Assets when divided by Current liabilities give us Current Ratio. Current Ratio should be greater than 1. A current ratio less than 1 indicates difficulties in meeting it short term payments.

To determine:

The current ratios for the given years.

Answer to Problem 2BPSB

Solution:

	2017	2016	2015
Current Ratio	2.5	1.7	2.2

Explanation of Solution

Explanation:

Current Ratio = $\frac{currentassets}{currentliabilities}$

	2017	2016	2015
Current Assets	54860	32660	36300
Current liabilities	22370	19180	16500
Current Ratio	$\frac{54860}{22370}=2.5$	$\frac{32660}{19180}=1.7$	$\frac{36300}{16500}=2.2$

Conclusion

Conclusion:

Since, the current ratio is greater than 1 for all the three years, the liquidity position is strong for the company as per the current ratio.

To determine

2.

Introduction:

An income statement data is expressed in common-size percent by dividing each component of the income statement with the net sales. This facilitates the comparison of the data across years and companies within the industry.

To determine:

The income statement data in the common-size percent

Answer to Problem 2BPSB

Solution:

BLUEGLASS CORPORATION
COMMON-SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2017,2016, AND 2015
	2017	2016	2015
Sales	100%	100%	100%
Cost of goods sold	54.77%	51.91%	46.04%
Gross profit	45.23%	48.09%	53.96%
Selling expenses	11.41%	11.92%	12.52%
Administrative expenses	8.43%	8.80%	10.92%
Total expenses	19.84%	20.72%	23.44%
Income before taxes	25.39%	27.36%	30.53%
Income taxes	3.04%	3.56%	3.69%
Net income	22.34%	23.80%	26.84%

Explanation of Solution

Explanation:

The value of each component of the Income statement has been divided with sales value of respective year and is expressed in percentage.

The calculation of the common size percentage is as follows:

	2017	2016	2015
Sales	100%	100%	100%
Cost of goods sold	$\frac{108890}{198800}*100\%$	$\frac{86175}{166000}*100\%$	$\frac{66200}{143800}*100\%$
Gross profit	$\frac{89810}{198800}*100\%$	$\frac{79825}{166000}*100\%$	$\frac{77600}{143800}*100\%$
Selling expenses	$\frac{22680}{198800}*100\%$	$\frac{19790}{166000}*100\%$	$\frac{18000}{143800}*100\%$
Administrative expenses	$\frac{16760}{198800}*100\%$	$\frac{14610}{166000}*100\%$	$\frac{15700}{143800}*100\%$
Total expenses	$\frac{39440}{198800}*100\%$	$\frac{34400}{166000}*100\%$	$\frac{33700}{143800}*100\%$
Income before taxes	$\frac{50470}{198800}*100\%$	$\frac{45425}{166000}*100\%$	$\frac{43900}{143800}*100\%$
Income taxes	$\frac{6050}{198800}*100\%$	$\frac{5910}{166000}*100\%$	$\frac{5300}{143800}*100\%$
Net income	$\frac{44420}{198800}*100\%$	$\frac{39515}{166000}*100\%$	$\frac{38600}{143800}*100\%$

Conclusion

Conclusion:

Hence, the common size income statement have been computed by dividing each component of the Income statement with the respective sales .

To determine

3.

Introduction:

Trend percents analysis means the representation of various components of Income statements and Balance sheets in percentage form instead of dollar value and this is done by selecting a base year.

To Calculate:

The trend percent of the given components using the base year as given

Answer to Problem 2BPSB

Solution:

BLUEGLASS CORPORATION
TREND PERCENT COMPARATIVE BALANCE SHEET
DECEMBER 31, 2017,2016, AND 2015
	2017	2016	2015
Assets
Current Assets	151.13%	89.97%	100%
Long-term Investments	0	16.04%	100%
Plant assets, net	142.80%	143.87%	100%
Total assets	133.18%	117.57%	100%
Liabilities and Equity
Current Liabilities	135.58%	116.24%	100%
Common stock	125.66%	125.66%	100%
Other paid-in capital	122.57%	122.57%	100%
Retained earnings	139.03%	112.09%	100%
Total liabilities and equity	133.18%	117.57%	100%

Explanation of Solution

Explanation:

The calculation of trend percent as computed above has been shown below:

BLUEGLASS CORPORATION
TREND PERCENT COMPARATIVE BALANCE SHEET
DECEMBER 31, 2017,2016, AND 2015
	2017	2016	2015
Assets
Current Assets	$\frac{54860}{36300}*100\%$	$\frac{32660}{36300}*100\%$	$\frac{36300}{36300}*100\%$
Long-term Investments	0	$\frac{1700}{10600}*100\%$	100%
Plant assets, net	$\frac{112810}{79000}*100\%$	$\frac{113660}{79000}*100\%$	100%
Total assets	$\frac{167670}{125900}*100\%$	$\frac{148020}{125900}*100\%$	100%
Liabilities and Equity
Current Liabilities	$\frac{22370}{16500}*100\%$	$\frac{19180}{16500}*100\%$	100%
Common stock	$\frac{46500}{37000}*100\%$	$\frac{46500}{37000}*100\%$	100%
Other paid-in capital	$\frac{13850}{11300}*100\%$	$\frac{13850}{11300}*100\%$	100%
Retained earnings	$\frac{84950}{61100}*100\%$	$\frac{68490}{61100}*100\%$	100%
Total liabilities and equity	$\frac{167670}{125900}*100\%$	$\frac{148020}{125900}*100\%$	100%

Conclusion

Conclusion:

Hence, the trend percent balance sheet has been computed by dividing each component with the respective base year figure.

To determine

4.

Introduction:

Ratio and trend analysis are the common financial tools used by analyst to measure the company’s financial health and performance.

The common size Income statement are computed to compare the income statement of various years as a percentage of net sales. The trend percent Balance sheet is prepared by selecting a year as the base year and then it is prepared by dividing the value of each component by the value of that respective component of the base year. By comparing this data, a fair comparison of various years data can be easily made.

To determine:

Whether any significant inferences can be drawn from the ratios and percents computed above

Answer to Problem 2BPSB

Solution:

The current ratio for all the three years indicates that the company’s working capital position is strong.

The common size Income statement shows that profit margin have been decreasing over the years mainly because of increase in costs of goods sold. The other cost percentages have decreased over the years.

The trend percent balance sheet also indicates a improvement in the financial health as the asset base increased in 2016 and 2017 as compared to 2015. It was mainly because the company issued fresh capital, sold of its long term investments and invested in Plant assets.

Explanation of Solution

Explanation:

A current ratio greater than 1 is considered healthy indicating that the current assets are more than current liabilities and hence the company can pay its short term creditors.

The common size income statement shows a clear decline in the profitability of the company with a drop in gross and net profit margin in 2016 when compared to 2015. Then in 2017, the company did remarkable improvement outnumbering even the performance of 2015 and 2016.

The trend percent Balance sheet shows a decline in current assets and long term investments in 2016. The company made investments in plants in 2015 and hence, total assets also increased in 2016.It issued fresh capital in 2016 to finance its expansion. In 2016 and 2017, the total assets and liabilities based increased as the company earned and retained its profits.

Conclusion

Conclusion:

Hence, these analysis tools reveal a healthy current ratio, improved profitability and financial position in 2017 as compared to 2015.