Overview
Financial Statement Analysis
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 StyleLinks to an external site. as outlined in the Writing Center’s APA Formatting for Microsoft WordLinks to an external site. 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
must utilize academic voice. Review the Academic VoiceLinks to an external site. 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 & ConclusionsLinks to an external site. and Writing a Thesis StatementLinks to an external site., refer to the Writing Center resources.
must use APA Level Headings, found on the Writing Center’s APA Style ElementsLinks to an external site. 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 SourcesLinks to an external site. 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 ResearchLinks to an external site. 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 LibraryLinks to an external site. tip sheet and How to Use Library OneSearchLinks to an external site. video.
must document any information used from sources in APA Style as outlined in the Writing Center’s APA: Citing Within Your PaperLinks to an external site. guide.