[SOLVED] Financial Analysis of PA Engineering Inc

This assignment involves analyzing the financial statements of PA Engineering Inc for the year ended December 2012. The provided data includes balance sheets, income statements, and cash flow statements. The analysis focuses on calculating current ratio, asset turnover ratio, and net profit margin, and interpreting their results in relation to industry averages.

FINANCIAL ACCOUNTING

Table of Contents
ACCOUNTING QUESTIONS........................................................................................................1
21. Beginning T- account.............................................................................................................1
22. Journal entries of transactions................................................................................................1
23. Journalising adjusting entries.................................................................................................3
Posting transaction and adjusting entries to T-accounts..............................................................3
24. Preparation of financial statements of PA Engineering Inc...................................................6
25. Journal closing entries............................................................................................................9
26. Calculation of ratios and interpretation..................................................................................9
REFERENCES..............................................................................................................................12

Index of Tables
Table 1 Journal of PA Engineering Inc...........................................................................................1
Table 2 Adjusting entries in the Books of PA Engineering Inc......................................................3
Table 3 Income statement of PA Engineering Inc for the year ended Dec. 31, 2012.....................6
Table 4 Statement of stockholder's equity of PA Engineering Inc for the year ended Dec. 31,
2012.................................................................................................................................................6
Table 5 Balance sheet of PA Engineering Inc as on 31st Dec, 2012...............................................7
Table 6 Statement of cash flow of PA Engineering for the year ended Dec, 2012.........................8
Table 7 Journal closing entries in the books of PA Engineering Inc...............................................9
Table 8 Calculation of ratio and interpretation................................................................................9

ACCOUNTING QUESTIONS
21. Beginning T- account
Cash
B. Bal 10,000.00
10,000.00
1

22. Journal entries of transactions
Table 1 Journal of PA Engineering Inc.
2

3

23. Journalising adjusting entries
Table 2 Adjusting entries in the Books of PA Engineering Inc.
Posting transaction and adjusting entries to T-accounts
Cash
B. Bal 10,000.00 10,000.00 (b)
(a) 20,000.00 100,000.00 (e)
(c ) 140,000.00 8,000.00 (g)
(d) 4,600.00 18,000.00 (h)
(f) 40,000.00 10,000.00 (k)
214,600.00 146,000.00
68,600.00
Land
(b) 10,000.00
4

Interest Payable
1,000.00 (n)
Income Tax Payable
10,000.00 (p)
Contributed Capital
115,000.00 B. Bal
4,600.00 (d)
119,600.00
Dividends Declared
(k) 10,000.00
Remaining Expenses
(e) 120,000.00
Accounts Receivable
( c) 60,000.00 40,000.00 (f)
60,000.00 40,000.00
20,000.00
Computers
B. Bal 80,000.00
Accounts Payable
(h) 18,000.00 20,000.00 (e)
25,000.00 (i)
18,000.00 45,000.00
27,000.00
5

Salaries and Wages Payable
15,000.00 (o)
Accumulated Depreicaiton
21,000.00 (m)
Service Revenue
200,000.00 ( c)
Interest Expense
(n) 1,000.00
Retained Earnings
Prepaid Office Supplies
B. Bal 20,000.00 27,000.00 (l)
(i) 25,000.00
45,000.00 27,000.00
18,000.00
Miscellaneous Other Assets
B. Bal 5,000.00
(g) 8,000.00
13,000.00
Notes Payable
20,000.00 (a)
Supplies Expense
(l) 27,000.00
6

Wages Expense
(o) 15,000.00
Depreciation Expense
(m) 21,000.00
Income Tax Expense
(p) 10,000.00
24. Preparation of financial statements of PA Engineering Inc
Table 3 Income statement of PA Engineering Inc for the year ended Dec. 31, 2012
Table 4 Statement of stockholder's equity of PA Engineering Inc for the year ended Dec. 31,
2012
PA Engineering, Inc.
Statement of Stockholder's Equity
For the Year Ended December 31, 2012
7

Contributed Capital: December 31, 2011, 100,000 shares $ 115,000.00
Add: January 3, 2012 issue of 4,000 shares 4,600.00
Total Contributed Capital at December 31, 2012 119,600.00
Retained Earnings:
Balance December 31, 2011 -
Add: Net Income 6,000.00
Less Dividends (10,000.00)
Balance December 31, 2012 (4,000.00)
Total Stockholder's Equity $ 115,600.00
Table 5 Balance sheet of PA Engineering Inc as on 31st Dec, 2012
Assets Amount Liabilities Amount
Current Assets Current Liabilities
Cash
$
68,600.0
0 Accounts Payable
$
27,000.0
0
Accounts Receivable
20,000.0
0
Salaries and Wages
Payable
15,000.0
0
Prepaid Office Supplies
18,000.0
0 Interest Payable 1,000.00
Income Tax
Payable
10,000.0
0
Total Current Assets
106,600.
00
Total Current
Liabilities
53,000.0
0
Long-Term Notes
Payable
20,000.0
0
Long-Term Assets
Land
10,000.0
0
Computers
80,000.0
0 Contributed Capital
119,600.
00
8

Less: Accumulated
Depreciation (enter as -)
(21,000.0
0) Retained Earnings
(4,000.00
)
Miscellaneous Other
Assets
13,000.0
0
115,600.
00
Total Long-Term
Assets
82,000.0
0
Total Assets
$
188,600.
00
Total Liabilities and
Owners' Equity
$
188,600.
00
Table 6 Statement of cash flow of PA Engineering for the year ended Dec, 2012
9

25. Journal closing entries
Table 7 Journal closing entries in the books of PA Engineering Inc
26. Calculation of ratios and interpretation
Table 8 Calculation of ratio and interpretation
Ratios
Current Ratio = Current Assets ÷ Current Liabilities
Current Assets
106,6
00.00 =
2.0
1
Current Liabilities
53,0
00.00
Current ratio results compared to industry average (2.2 to
1.0):
10

PA Engineering Inc’s CR is 2.01 which is close to the
industrial benchmark of 2.2:1. It demonstrates that company
has sound liquidity in the business because its CR is in line
with the industry average hence; company is capable to pay
deferred short-term liabilities to the suppliers timely.
Asset Turnover = Sales ÷ Assets
Sales
200,0
00.00 =
1.0
6
Assets
188,6
00.00
Asset turnover results compared to industry average (3 times
per year):
According to the determined results, it is presented that PA’s
Assets turnover ratio is 1.06 which is far to the idle industry
average of 3 times. It is a sign that firm’s managerial team
did not efficiently utilized their asset to maximize their total
earnings (Saleem and Rehman, 2011). Therefore, managers
need to focus on such areas so as to make strategic plan for
optimum assets use.
Net Profit Margin = Net Income ÷ Sales
Net Income
6,0
00.00 = 3%
Sales
200,0
00.00
Net profit margin results compared to industry average
(%5.00):
PA Engineering Inc’s net margin is 3% below the industry
average of 5% which states that firm has not generated good
return on their total sales revenues may be due to high cost of
sales and overrun of operational expenditures (Goldmann,
11

2017). It makes it essential for the company to make decisive
strategic actions for maximization of earnings and cost-
rationalized plan to control excessive cost in the business for
having enough return.
12

REFERENCES
Books and Journals
Goldmann, K., 2017. Financial Liquidity and Profitability Management in Practice of Polish
Business. In Financial Environment and Business Development. Springer International
Publishing. 14(5). pp.103-112.
Saleem, Q. and Rehman, R. U., 2011. Impacts of liquidity ratios on profitability.
Interdisciplinary Journal of Research in Business. 1(7). pp.95-98.
13