Financial Analysis and Portfolio Management
Added on 2020-03-13
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Answer – 1Part-1Balance sheet also known as statement of financial position shows the value of assets and liabilities of thecompany at a given date. It is the most important part of the financial statements as it reflects all theassets, liabilities and equity. The content of the balance sheet are classified into current and non-current.Current means the assets or liabilities which are expected to be settled in one year from the reporting dateand non-current means which are expected to be settled later than one year from the balance sheet date(Staff, 2017). The main content of balance sheet is as below:a.Current Assets – Shows all the current assets of the company. It generally includes cash and cashequivalents, accounts receivable, inventories, prepaid, etc.b.Non-current assets – it includes fixed assets of the company and long term investmentsc.Current liabilities – it includes liabilities expected to be settled in the next one year. It generallyincludes accounts payable, current tax liabilities, short term borrowings, etc.d.Non-current liabilities – It includes long term borrowings, etce.Equity – this represents amount belonging to the shareholders, and includes equity share capital,retained earnings, etc.Income statement shows the incomes and expenses over a period of time. It is generally prepared for theone year (Staff, 2017). The main contents of income statement are as below:a.Incomes – it shows all incomes from various sourcesb.Expenses – It shows all expenses whether operating or non-operating.c.Profit/ Loss – Net profit earned or loss incurred by the company. It is calculated as excess ofincome over its expenses.Part-2Dividends and interest payments both are paid in lieu of source of finance taken but both differs a lot interms of their nature and significance. The difference between the two is listed below: a.Dividend is paid to the shareholders whereas interest is paid to the lenders. b.The obligation and amount of interest payments are fixed by the lenders and agreed by thecompany whereas dividend payment is entirely based on the management decisions. Only whenthe company has generated profits and the management wants to distribute dividend, only thenthe dividends are paid to the shareholders whereas irrespective of the fact whether the company ishaving profit or not, the interest needs to be paid.c.The interest payments are tax deductible meaning thereby payment of interest is allowed as anexpense in tax calculation whereas dividends are not allowed as tax deductible expense. So,dividends are costlier than interests (AccountingCoach.com, 2017).d.The frequency of interest payments is fixed whereas dividend is paid on the discretion ofmanagement.Part-3Net working capital means excess of current assets over its current liabilities. It shows the liquidity of thecompany and it’s paying capacity over its current liabilities (My Accounting Course, 2017). Workingcapital is an important part of the company and its helps in running the business of the company. Withoutworking capital the company will not be able to meet its daily cash requirements.The liquidity of a company is measured through its working capital ratio. Working capital ratio is currentassets/current liabilities and it shows that how quickly a company is able to pay off its current liabilities.If the company has positive working capital, then it means that the company can pay off its currentliabilities from its current assets whereas negative working capital is a sign of warning for the companyand reflects that the company is in such a situation that it cannot even pay off its current liabilities ontime.
Answer-2Part-1(a)Income StatementSandifer Manufacturing Company Income StatementParticulars Amount Sales 4,500,000 Less: ExpensesCost of goods sold 3,375,000 Operating expenses 300,000 Depreciation 150,000 Total expenses 3,825,000 Earnings before tax 675,000 Less: Tax expense @ 30% 202,500 Net Profit 472,500 (b)Net Profit of the firm is $ 472,500(c)Gross Profit of the company is sales – cost of goods sold whereas operating profit is gross profit –operating expenses + other operating incomes and Net profit is Operating Profit – non-operatingexpenses + non-operating incomes. So, the net profit is the ultimate profit earned by thecompany.(d)From income statement, we came to know that the company is having net profit of $472,500. Thecompany’s sales are $4,500,000 which is consumed in cost of goods sold by 3,375,000 and inoperating expenses by $300,000 along with depreciation expenses of $150,000. Out of remainingamount $ 202,500 is paid as tax and remaining is net profit attributable to shareholders.Part-2The company’s net profit is $472,500. If $50,000 is reinvested in the business then the company is leftwith $422,500 ($472,500 - $50,000) for the payment of a cash dividend to Sandifer’s shareholders.
Answer-3Part-1a)Liquidity means cash or cash equivalent assets available with the company to pay off its currentliabilities. Liquidity of a company is reflected from its liquidity ratios. These ratios show theability of the company to pay off its current liabilities or ability of the company that how quicklythe company can convert its assets into cash, so that short term obligations can be paid off. b)To analyse and assess liquidity, the following liquidity ratios are used:a.Current Ratio = It compares current assets and current liabilities to determine thecompany’s ability to pay off its current liabilities from its current assets.b.Quick ratio or acid test ratio = It compares the quick current assets means current assetsexcluding inventory and prepayments with current liabilities to determine the company’sability to pay off its current obligations from its quick assets.c)If the current plan is carried on, than the revised current ratio will beCurrent Ratio=Current assets / current liabilities =($12,000,000-$2,000,000)/$6,000,000=1.67 timesSo, the current ratio will decrease from 2 times to 1.67 times.d)To compare the King carpet company liquidity with other companies, we need to check the othercompany’s current ratio or the industry average current ratio. Part-2(a)The firm’s 2015 operating profit and net profit is as below: Operating Profit =Sales X operating profit margin=$65 million X 12%=$7.8 millionNet Profit=Operating Profit – Interest expense – Tax=($7.8– (20 *6%)) - ($7.8 – (20 *6%))*30%=$4,620,000 or $ 4.62 million(b)To determine whether the firm is achieving reasonable profit margin, we need to compare thefirm’s profit margin with other companies or industry profit margin. If the firm’s margin is in linewith industry margin, then it means that the company is achieving the reasonable profit margins.(c)Return on assets shows the profitability of the firm’s assets means for $1 invested in assets thecompany is making profit of $11. Similarly, for the return on equity, it shows that for each $1invested by shareholders, the company is able to generated $21 out of it.Return on assets=Net income / total assets=4.62/42=11%
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