Financial Statement Analysis - Assume you are a mid-level executive

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 Style Links to an external site.  as outlined in the Writing Center’s  APA Formatting for Microsoft Word Links to an external site.  resource.