Overview
Prior to beginning work on this paper, review Appendix B: Metric-Based Analysis of Financial Statements and each of the previously assigned chapters in your Survey of Accounting textbook, paying particular attention to Chapter 1 and to the Metric-Based Analysis sections in Chapter 1 through Chapter 8.
Assume you are a mid-level executive at Automotive Solutions Inc., and you have been assigned to analyze the company’s financial statements for 20Y7 and 20Y8 and prepare a report for upper-level organizational leaders.
The following tables show the comparative financial statements for Automotive Solutions Inc. The market price of Automotive Solutions Inc. common stock was $119 on December 31, 20Y8. The market price of Automotive Solutions Inc. common stock was $103 on December 31, 20Y7.
| AUTOMOTIVE SOLUTIONS INC. | |||||||
| Comparative Statement of Stockholders' Equity | |||||||
| For the Years Ended December 31, 20Y8 and 20Y7 | |||||||
| 20Y8 | 20Y7 | ||||||
| Preferred stock | Common stock | Retained Earnings | Preferred stock | Common stock | Retained Earnings | ||
| Balances, Jan. 1 | $500,000 | $500,000 | $5,375,000 | $500,000 | $500,000 | $4,545,000 | |
| Net income | 900,000 | 925,000 | |||||
| Dividends: | |||||||
| Preferred stock | (45,000) | (45,000) | |||||
| Common stock | _______ | _______ | (50,000) | ________ | _______ | (50,000) | |
| Balances, Dec. 31 | $500,000 | $500,000 | $6,180,000 | $500,000 | $500,000 | $5,375,000 |
| AUTOMOTIVE SOLUTIONS INC. | ||
| Comparative Income Statement | ||
| For the Years Ended December 31, 2018 and 20Y7 | ||
| 20Y8 | 20Y7 | |
| Sales | $10,000,000 | $ 9,400,000 |
| Cost of goods sold | (5,350,000) | 4,950,000) |
| Gross profit | $ 4,650,000 | $ 4,450,000 |
| Selling expenses | $(2,000,000) | $(1,880,000) |
| Administrative expenses | (1,500,000) | (1,410,000) |
| Total operating expenses | $ (3,500,000) | $(3,290,000) |
| Operating income | $ 1,150,000 | $ 1,160,000 |
| Other revenue and expense: | ||
| Other revenue | 150,000 | 140,000 |
| Other expense (interest) | (170,000) | (150,000) |
| Income before income tax | $ 1,130,000 | $ 1,150,000 |
| Income tax expense | (230,000) | (225,000) |
| Net income | $ 900,000 | $ 925,000 |
| AUTOMOTIVE SOLUTIONS INC. | ||
| Comparative Balance Sheet | ||
| December 31, 20Y8 and 20Y7 | ||
| Dec. 31, 20Y8 | Dec. 31, 20Y7 | |
| Assets | ||
| Current assets: | ||
| Cash | $ 500,000 | $ 400,000 |
| Marketable securities | 1,010,000 | 1,000,000 |
| Accounts receivable (net) | 740,000 | 510,000 |
| Inventories | 1,190,000 | 950,000 |
| Prepaid expenses | 2,50,000 | 229,000 |
| Total current assets | $3,690,000 | $3,089,000 |
| Long-term investments | 2,350,000 | 2,300,000 |
| Property, plant, and equipment (net) | 3,740,000 | 3,366,000 |
| Total assets | $9,780,000 | $8,755,000 |
| Liabilities | ||
| Current liabilities | $ 900,000 | $ 880,000 |
| Long-term liabilities: | ||
| Mortgage note payable, 10% | $ 200,000 | $ 0 |
| Bonds payable, 10% | 1,500,000 | 1,500,000 |
| Total long-term liabilities | $1,700,000 | $1,500,000 |
| Total liabilities | $2,600,000 | $2,380,000 |
| Stockholders' Equity | ||
| Preferred $0.90 stock, $10 par | $ 500,000 | $ 500,000 |
| Common stock, $5 par | 500,000 | 500,000 |
| Retained earnings | 6,180,000 | 5,375,500 |
| Total stockholders' equity | $7,180,000 | $6,375,000 |
| Total liabilities and stockholders' equity | $9,780,000 | $8,755,000 |
In your report to upper management, analyze the company’s financial statements for 20Y7 and 20Y8:
- Discuss the purpose of the report and the role of accounting in business.
- What are the two major objectives of accounting and how are they achieved?
- What kind of information do these financial statements provide to internal stakeholders, such as organizational leaders within the company, and to external stakeholders, such as lenders and current or potential investors?
- How do internal and external stakeholders use financial accounting information?
- Prepare a liquidity analysis by computing and using the appropriate ratios to assess liquidity.
- Compute a minimum of three liquidity ratios for the years ended Dec 31, 20Y8 and Dec. 31, 20Y7 and show your supporting calculations. Use the same three liquidity ratios for both years.
- Analyze the ratios computed and discuss any insights or conclusions that can be drawn from your analysis.
- Prepare a solvency analysis by computing and using the appropriate ratios to assess solvency.
- Compute a minimum of three solvency ratios for the years ended Dec 31, 20Y8 and Dec. 31, 20Y7 and show your supporting calculations. Use the same three solvency ratios for both years.
- Analyze the ratios computed and discuss any insights or conclusions that can be drawn from your analysis.
- Prepare a profitability analysis by computing and using the appropriate ratios to assess profitability.
- Compute a minimum of three profitability ratios for the years ended Dec 31, 20Y8 and Dec. 31, 20Y7 and show your supporting calculations. Use the same three profitability ratios for both years.
- Analyze the ratios computed and discuss any insights or conclusions that can be drawn from your analysis.
- Draft a summary of what the financial statements indicate about the company’s overall financial health and performance, strengths and weaknesses of the company, as well as any identified positive or negative trends and the risk of investing in the company.
The Financial Statement Analysis final paper
- must be 3 to 5 double-spaced pages in length (not including title and references pages) and formatted according to APA Style as outlined in the Writing Center’s APA Formatting for Microsoft Word resource.
- must include a separate title page with the following in title case:
- title of final paper in bold font
- Space should appear between the title and the rest of the information on the title page.
- student’s name
- name of institution (The University of Arizona Global Campus)
- course name and number
- instructor’s name
- due date
- title of final paper in bold font
- must utilize academic voice. Review the Academic Voice resource for additional guidance.
- must include an introduction and conclusion paragraph.
- Your introduction paragraph needs to end with a clear thesis statement that indicates the purpose of your paper.
- For assistance on writing Introductions & Conclusions and Writing a Thesis Statement refer to the Writing Center resources.
- must use APA Level Headings, found on the Writing Center’s APA Style Elements page, for each one of the topics discussed in the research paper as shown:
- Introduction Level 1
- Liquidity Analysis Level 1
- Solvency Analysis Level 1
- Profitability Analysis Level 1
- Summary and Conclusion Level 1
- must use at least four scholarly and/or credible sources in addition to the course text.
- The Scholarly, Peer-Reviewed, and Other Credible Sources table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source.
- To assist you in completing the research required for this assignment, review the Quick and Easy Library Research tutorial, which introduces the University of Arizona Global Campus Library and the research process, and provides some library search tips.
- To assist you in completing the research for this assignment, review Company Research in the UAGC Library tip sheet and How to Use Library OneSearch. video.
- must document any information used from sources in APA Style as outlined in the Writing Center’s APA: Citing Within Your Paper guide.
- must include a separate references page that is formatted according to APA Style as outlined in the Writing Center.
- Review the APA: Formatting Your References List resource in the Writing Center for specifications.