The comparative balance sheet of Posner Company, for 2010 and the preceding year
ID: 2446921 • Letter: T
Question
The comparative balance sheet of Posner Company, for 2010 and the preceding year ended December 31,2009, appears below in condensed form: (year 2010 coming first)
Cash 53,000 50,000
Accounts Receivable (net) 37,000 48,000
Inventories 108,500 100,000
Investments ....... 70,000
Equipment 573,200 450,000
Accumulated Depreciation-equipment (142,000) (176,000)
629,700 542000
Accounts payable 62500 43,800
Bonds payable due 2010 ..... 100,000
Common stock $10 par 325,000 285,000
paid in capital in excess of par--common stock 80,000 55,000
retained earnings 162,200 58,200
629700 542000
The income statement for the current year is as follows:
Sales 625700
Cost of merchandise sold 340000
Gross Profit 285700
Operating expenses:
Depreciation expense 26000
other operating expenses 68000 94000
income from operations 191700
other income:
gain on sale of investment 4000
Other expense:
interest expense 6000 (2000)
income before income tax 189700
income tax 60700
net income 129000
Additional data for the current year are as follows:
a) Fully depreciated equipment costing 60,000 was scrapped, no salvage, and equipment was purchased for 183200
b) bonds payable for 100000 were retired by payment at their face amount
c) 5000 shares of common stock were issued at 13 dollars for cash.
d) cash divedends declared and paid, 25000.
1. prepare a statement of cash flows, using the indirect method of reporting cash flows from operating activities.
2. Using the balance sheet from above conduct a horizontal analysis to determine the changes in balance sheet accounts for years 2009 and 2010.
3. Using vertical analysis, compute the following analytical measures for year 2010:
.solvency measures:
current ratio
quick ratio
accounts receivable turnover
inventory turnover
.Profitability measures:
Earnings per share of common stock
dividends per share of common stock
dividend yield
perform any other analysis you feel is appropriate.
Write a brief assessment of the financial condition of this company, based upon the above analytical measures.
Assuming the current market value of common stock is $20 per share, would you recommend purchasing the stock? why or wht not?
please help.
Explanation / Answer
Posner Company 1. Cash Flow Statement for 2011 (Indirect Method) $ $ Cash Flows from Operating Activities Net Profit for the year 104000 Add : Depreciation 26000 Less : Gain on Sale of Investments -4000 Add : Dividend declared and paid 25000 Add : Income Taxes Paid 60700 107700 211700 Less : Reduction in Accounts Receivable 11000 Add : Increase in Inventories -8500 Add : Increase in Accounts Payable 18700 21200 Net Cash Flow from Operating Activities 232900 Cash Flows from Investing Activities Sale of Investments 74000 Purchase of Fixed Assets -183200 Bonds repaid -100000 Net Cash Flow from Investing Activities -209200 Cash Flows from Financing Activities Proceeds from Issue of Shares 65000 Income Tax Paid -60700 Dividends Declared and paid -25000 Net Cash Flow from Financing Activities -20700 Net Cash Inflows for the year 3000 Opening Cash Balance 50000 Closing Cash Balance 53000 2. Balance Sheets for 2009 and 2010 Horizontal Analysis of Balance Sheets Assets 2009 2010 % change in 2010 Cash 50000 53000 6% Accounts Receivable (net) 48000 37000 -23% Inventories 100000 108500 9% Investments 70000 0 -100% Equipment 450000 573200 27% Accumulated Depreciation -176000 -142000 -19% 542000 629700 16% Liabilities Accounts Payable 43800 62500 43% Bonds Payable due 2010 100000 0 -100% Common Stock $10 par 285000 325000 14% Paid in Capital in excess of par common stock 55000 80000 45% Retained Earnings 58200 162200 179% 542000 629700 16% 3. Vertical Analysis of Balance Sheets Assets 2009 2010 Analysis Analysis for 2009 for 2010 Cash 50000 53000 9% 8% Accounts Receivable (net) 48000 37000 9% 6% Inventories 100000 108500 18% 17% Investments 70000 0 13% 0% Equipment 450000 573200 83% 91% Accumulated Depreciation -176000 -142000 -32% -23% 542000 629700 100% 100% Liabilities Accounts Payable 43800 62500 8% 10% Bonds Payable due 2010 100000 0 18% 0% Common Stock $10 par 285000 325000 53% 52% Paid in Capital in excess of par 0% 0% common stock 55000 80000 10% 13% Retained Earnings 58200 162200 11% 26% 542000 629700 100% 100% Current Ratio = Current Ratio/Current Liabilities 3.18 Quick Ratio = Current Assets - Inventory/Current Liabilities 1.44 Accounts Receivable Turnover = Accounts Receivable/Sales X 365 (no of days) 22 days Inventory Turnover = Inventory/Cost of Goods Sold X 365 ( no of days) 116 days EPS for Common Stock = Earnings post taxes/No. of shares 3.97 $ per share Dividends for Common Stock = Dividends paid/No. of shares 0.77 $ per share Dividend Yield = Dividend Paid/Current Market Value per share 6% Based on the ratios as calculated above, and the vertical analysis/horizontal analysis done, the following inferences can be drawn : (i) The Company is not cash rich. (ii) It stores inventory for longer periods of time, thereby leading to cash blockage. (iii) Proceeds from shares issued are utilised for short term funding purposes and not long term ones. (iv) The Company needs to plan its payables appropriately, in order to maintain optimum cash. If the price of the Company stock is $20, my recommendation would be not to purchase the stock, since although it seems to have a favourable current ratio and accounts receivable, unless the inventory position is changed, the use of finances cannot be guaranteed.