For the financial year 2013 the following financial statement data were availabl

Question

For the financial year 2013 the following financial statement data were available for Big Blue Pots Ltd and Small Red Pots Ltd. two competitor companies a) Prepare 2013 income statements with a vertical analysis for Big Blue Pots Ltd and Small Red Pots Ltd b) Calculate the Current ratio for each company for 2013 c) Calculate the Quick ratio for each company for 2013 d) Calculate the Profit Margin on Sales for each company for 2013 e) Calculate the Gross Profit Margin for each company for 2013 f) Based on your analysis above explain which company would you invest in?

Explanation / Answer

Current Ratio = Current Assets/ Current Liabilities

a)Vertical Analysis Big Blue Pot Company Percentage Small Red Pot Company Percentage Revenue $42,000 100.00% $63,000 100.00% Less: Cost of Sales ($20,500) -48.81% ($36,000) -57.14% Gross profit $21,500 51.19% $27,000 42.86% Less: Operating Expenses ($12,500) -29.76% ($15,500) -24.60% Earning Before Interest and Tax $9,000 21.43% $11,500 18.25% Less: Tax ($2,700) -6.43% ($3,450) -5.48% Net Income $6,300 15.00% $8,050 12.78% b) Current Ratio Big Blue Pot Company Small Red Pot Company Current Assets Cash $3,000 $8,000 Short Term Investments $900 $2,000 Inventories $10,000 $22,000 Prepaid expenses $1,500 Accounts Receivables $12,500 $8,000 Total Current Assets $27,900 $40,000 Total Current Liabilities $13,000 $22,000

Current Ratio = Current Assets/ Current Liabilities

2.15 1.82 c) Quick Ratio = (CA - Inventories)/CL 1.38 0.82 d) Gross Margin = Gross profit/sales 51.19% 42.86% e) Profit Margin = Net Income/ Sales 15.00% 12.78%

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