The current year financial statements for Blue Water Company and Prime Fish Company are presented...

Question:

The current year financial statements for Blue Water Company and Prime Fish Company are presented below.

Blue Water Prime Fish
Balance sheet:
Cash $41,500 $20,500
Accounts receivable (net) 40,500 32,500
Inventory 96,500 43,000
Property & equipment (net) 147,500 407,000
Other assets 84,500 310,000
Total assets $410,500 $813,000
Current liabilities $96,500 $56,500
Long-term debt (interest rate: 15%) 68,500 61,000
Capital stock ($10 par value) 151,500 517,000
Additional paid-in capital 29,500 106,500
Retained earnings 64,500 72,000
Total liabilities and stockholders' Equity $410,500 $813,000
Income statement:
Sales revenue (1/2 on credit) $439,500 $797,000
Cost of goods sold (238,500) (400,500)
Operating expenses (162,000) (311,500)
Net income $39,000 $85,000
Other data:
Per share stock price at end of current year $22.5 $20
Average income tax rate 45% 45%
Dividends declared and paid in current year $33,500 $150,500

Both companies are in the fish catching and manufacturing business. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Blue Water is more conservative, and as its president has said, "We avoid what we consider to be undue risk." Neither company is publicly held.

Required:

Complete a schedule that reflects a ratio analysis of each company.

Ratios:

Ratios are powerful accounting tools which assist in the analysis of financial capacity and resiliency. Financial ratios can be assessed for any financial or non-financial aspect of a company.

Answer and Explanation:


Balance sheet ratios assess liquidity, leverage, efficiencies, and resiliency of operations. The current and acid-test ratios assess the ability of a firm to service current obligations. A ratio greater than 1:1 indicates excess capacity to service obligations where a ratio of less than 1:1 indicates a reliance on other assets to service obligations. Leverage Ratios indicates how much a company relies on debt to support operations. A higher leverage ratio may indicate a red flag and cash flow issues in areas of downturn. Income statement ratios such as the gross profit and net income margins report the percentage of sales available to service balance sheet obligations or build resiliency.


Blue Water Prime Fish
Current Ratio (Total Current Assets / Total Current Liabilities) 1.85 1.70
Acid-Test (Quick) Ratio (Total Current Assets - Inventory) / Total Current Liabilities) 0.85 0.94
Debt to Equity (Total Liabilities / Total Equity) 67% 17%
Gross Profit (Gross Profit / Sales) 45.7% 49.7%
Net Income (Net Income / Sales) 8.9% 10.7%
Dividends as % of net income (Dividends declared and paid in current year / net income) 85.9% 177.1%


Blue Water and Prime Fish report adequate current ratios in excess of 1:1 however Bluewater?s current ratio is higher with current assets being 85% higher than necessary to support current obligations. Both companies acid test ratio is less than 1:1 however Prime Fish reports its quick assets can service 94% of current obligations. Prime fish is less leveraged than Bluewater with only 17% of debt compared to equity. Both companies report similar gross and net profitability with Prime Fish reporting slightly better performance however Prime Fish distributes more than double of net profit to shareholders which may bring resiliency of operations in question.


Blue Water % Prime Fish %
Balance sheet:
Cash $41,500 10.1% $20,500 2.5%
Accounts receivable (net) 40,500 9.9% 32,500 4.0%
Inventory 96,500 23.5% 43,000 5.3%
Total Current Assets 178,500 43.5% 96,000 11.8%
Property & equipment (net) 147,500 35.9% 407,000 50.1%
Other assets 84,500 20.6% 310,000 38.1%
Total assets $410,500 100.0% $813,000 100.0%
Current liabilities $96,500 23.5% $56,500 6.9%
Long-term debt (interest rate: 15%) 68,500 16.7% 61,000 7.5%
Total Liabilities 165,000 40.2% 117,500 14.5%
Capital stock ($10 par value) 151,500 36.9% 517,000 63.6%
Additional paid-in capital 29,500 7.2% 106,500 13.1%
Retained earnings 64,500 15.7% 72,000 8.9%
Total Equity 245,500 59.8% 695,500 85.5%
Total liabilities and stockholders' Equity $410,500 100.0% $813,000 100.0%
Income statement:
Sales revenue (1/2 on credit) $439,500 100.0% $797,000 100.0%
Cost of goods sold -238,500 -54.3% -400,500 -50.3%
Gross Profit 201,000 45.7% 396,500 49.7%
Operating expenses -162,000 -36.9% -311,500 -39.1%
Net income $39,000 8.9% $85,000 10.7%
Other data:
Per share stock price at end of current year $22.50 $20
Average income tax rate 45% 45%
Dividends declared and paid in current year $33,500 85.9% $150,500 177.1%

Learn more about this topic:

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Ratios and Proportions: Definition and Examples

from Geometry: High School

Chapter 7 / Lesson 1
300K

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