CHAPTER 2 Financial Statements and Analysis 89LG6
a. Use the preceding financial statements to complete the following table.
Assume that the industry averages given in the table are applicable for both
2002 and 2003.b. Analyze Zach Industries’ financial condition as it is related to (1) liquidity,
(2) activity, (3) debt, (4) profitability, and (5) market. Summarize the com-
pany’s overall financial condition.2–21 Integrative—Complete ratio analysis Given the following financial statements,
historical ratios, and industry averages, calculate Sterling Company’s financial
ratios for the most recent year. Analyze its overall financial situation from both
a cross-sectional and a time-series viewpoint. Break your analysis into evalua-
tions of the firm’s liquidity, activity, debt, profitability, and market.Sterling Company
Income Statement
for the Year Ended December 31, 2003Sales revenue $10,000,000Less: Cost of goods sold (^7) , (^5) (^0) (^0) , (^0) (^0) (^0)
Gross profits $ 2,500,000
Less: Operating expenses
Selling expense $300,000
General and administrative expenses 650,000
Lease expense 50,000
Depreciation expense (^2) (^0) (^0) , (^0) (^0) (^0)
Total operating expense (^1) , (^2) (^0) (^0) , (^0) (^0) (^0)
Operating profits $ 1,300,000
Less: Interest expense (^2) (^0) (^0) , (^0) (^0) (^0)
Net profits before taxes $ 1,100,000
Less: Taxes (rate = 40%) (^4) (^4) (^0) , (^0) (^0) (^0)
Net profits after taxes $ 660,000
Less: Preferred stock dividends (^5) (^0) , (^0) (^0) (^0)
Earnings available for common stockholders $
6
1
0
,
0
0
0
Earnings per share (EPS) $3.05
Industry
Ratio average Actual 2002 Actual 2003
Current ratio 1.80 1.84
Quick ratio 0.70 0.78
Inventory turnovera 2.50 2.59
Average collection perioda 37 days 36 days
Debt ratio 65% 67%
Times interest earned ratio 3.8 4.0
Gross profit margin 38% 40%
Net profit margin 3.5% 3.6%
Return on total assets 4.0% 4.0%
Return on common equity 9.5% 8.0%
Market/book ratio 1.1 1.2
aBased on a 360-day year and on end-of-year figures.