# Finance assignment – analysis of income statements

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Finance assignment – analysis of income statements
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1-Horizontal Analysis of Income Statement and Balance Sheet
Prepare a three-year horizontal analysis of the income statement and balance sheet of your selected company.  Discuss the importance and meaning of horizontal analysis.  Discuss both the positive and negative trends presented in your company.

2-Ratio Analysis
Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period.   Discuss and interpret the ratios that you calculated.  Discuss potential liquidity issues based on your calculations of the current and quick ratios.  Are there any factors that could be erroneously influencing the results of the ratios?  Discuss liquidity issues of competitive companies within the same industry.

3-Recommendation
Based on your analysis would you recommend an individual invest in this company?  What strengths do you see?  What risks do you see?  It is perfectly acceptable to state that you would recommend avoiding this company as long as you provide support for your position.

4-Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

 Edison Stagg Thornton Cash \$4,000 \$2,500 \$1,000 Short-term investments 3,000 2,500 2,000 Accounts receivable 2,000 2,500 3,000 Inventory 1,000 2,500 4,000 Prepaid expenses 800 800 800 Accounts payable 200 200 200 Notes payable: short-term 3,100 3,100 3,100 Accrued payables 300 300 300 Long-term liabilities 3,800 3,800 3,800

1. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

5-Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

 19X5 19X4 Net credit sales \$832,000 \$760,000 Cost of goods sold 440,000 350,000 Cash, Dec. 31 125,000 110,000 Average Accounts receivable 180,000 140,000 Average Inventory 70,000 50,000 Accounts payable, Dec. 31 115,000 108,000

1. Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.

6-Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 19X7:

 Net sales \$1,500,000 Interest expense 120,000 Income tax expense 80,000 Preferred dividends 25,000 Net income 130,000 Average assets 1,100,000 Average common stockholders’ equity 400,000

1. Compute the gross profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
2. Does the firm have positive or negative financial leverage? Briefly ex­plain.

7-Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 20X2 20X1 Current Assets \$ 76,000 \$ 80,000 Property, Plant, and Equipment (net) 99,000 90,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 143,000 160,000 Stockholders’ Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 332,500 350,000 Operating Expenses 93,500 85,000

Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work

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