FINANCIAL STATEMENT ANALYSIS RC Inc. manufactures a variety of consumer products. The company’s founders have run the...

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FINANCIAL STATEMENT ANALYSIS
RC Inc. manufactures a variety of consumer products. Thecompany’s founders have run the company for 30 years and are nowinterested in retiring. Consequently, they are seeking a purchaserwho will continue its operations, and a group of investors, StewartInc, is looking into the acquisition of RC. To evaluate itsfinancial stability and operating efficiency, RC was requested toprovide the latest financial statements and selected financialratios. Summary information provided by RC is as follows:
RC INC.
Income Statement
For the Year Ended November 30, 2015
(in thousands)
Sales (net)
30,500
Interest income
      500
      Total Revenue
31,000
Cost and expenses
   Cost of goods sold
17,600
   Selling and general administrative expenses
3,550
   Depreciation and amortization expenses
1,890
   Interest Expense
     900
     Total costs and expenses
23,940
   Income before taxes
7,060
     Income taxes
2,800
   Net income
4,260
RC INC.
Balance Sheet
As of November 30, 2015
(in thousands)
2015
2014
Cash
400
500
Short-term investments
300
200
Accounts receivable (net)
                      3,200
                      2,900
Inventory
                      6,000
                      5,400
    Total current assets
                      9,900
                      9,000
Property, plant, and equipment
                      7,100
                      7,000
    Total assets
                    17,000
                     16,000
Accounts payable
                      3,700
                       3,400
Income taxes payable
                         900
                          800
Accrued expenses
                      1,700
                       1,400
    Total current liabilities
                      6,300
                       5,600
Long-term debt
                      2,000
                       1,800
    Total liabilities
                      8,300
                       7,400
Common stock ($1 par value)
                      2,700
                       2,700
Paid-in capital in excess in par
                      1,000
                       1,000
Retained earnings
                      5,000
                       4,900
    Total stockholders’ equity
                      8,700
                       8,600
    Total liabilities and equity
                    17,000
                     16,000
Selected Financial Ratios for RC, Inc.
2014
2013
Current Industry Average
Current Ratio
1.61
1.62
1.63
Acid Test Ratio
.64
.63
.68
Times Interest Earned
8.55
8.50
8.45
Profit margin on sales
13.2%
12.1%
13.0%
Asset turnover
1.84
1.83
1.84
Inventory turnover
3.17
3.21
3.18
Question #1:
A. Calculate a new set of ratios for the fiscal year 2015 for RCbased on the financial statements presented.
B. Explain the analytical use of each of the six ratiospresented, describing what the investors can learn about RC’sfinancial stability and operating efficiency.
C. Identify and discuss three limitations of ratio analysis

Answer & Explanation Solved by verified expert

3.9 Ratings (451 Votes)

A Financial Rations of 2015 Current Ratio 157 Acid test Ratio 062 Times Interest earned 884 Profit margin on sales 1397 Asset turnover 184 Inventory turnover 309 Current Ratio Current AssetsCurrent Liabilities 99006300 157 Acid test ratio current assets inventorycurrent liabilities 990060006300 062 Times Interest earned earning before tax interest expense interest 7060900900 884 Profit margin on sales Net income net sales x 100 426030500 x 100 1397 Asset Turnover Sales Average Total Assets 3050016500 184 sales 30500 Avg total assets See Answer

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Transcribed Image Text

FINANCIAL STATEMENT ANALYSISRC Inc. manufactures a variety of consumer products. Thecompany’s founders have run the company for 30 years and are nowinterested in retiring. Consequently, they are seeking a purchaserwho will continue its operations, and a group of investors, StewartInc, is looking into the acquisition of RC. To evaluate itsfinancial stability and operating efficiency, RC was requested toprovide the latest financial statements and selected financialratios. Summary information provided by RC is as follows:RC INC.Income StatementFor the Year Ended November 30, 2015(in thousands)Sales (net)30,500Interest income 500 Total Revenue31,000Cost and expenses Cost of goods sold17,600 Selling and general administrative expenses3,550 Depreciation and amortization expenses1,890 Interest Expense 900 Total costs and expenses23,940 Income before taxes7,060 Income taxes2,800 Net income4,260RC INC.Balance SheetAs of November 30, 2015(in thousands)20152014Cash400500Short-term investments300200Accounts receivable (net) 3,200 2,900Inventory 6,000 5,400 Total current assets 9,900 9,000Property, plant, and equipment 7,100 7,000 Total assets 17,000 16,000Accounts payable 3,700 3,400Income taxes payable 900 800Accrued expenses 1,700 1,400 Total current liabilities 6,300 5,600Long-term debt 2,000 1,800 Total liabilities 8,300 7,400Common stock ($1 par value) 2,700 2,700Paid-in capital in excess in par 1,000 1,000Retained earnings 5,000 4,900 Total stockholders’ equity 8,700 8,600 Total liabilities and equity 17,000 16,000Selected Financial Ratios for RC, Inc.20142013Current Industry AverageCurrent Ratio1.611.621.63Acid Test Ratio.64.63.68Times Interest Earned8.558.508.45Profit margin on sales13.2%12.1%13.0%Asset turnover1.841.831.84Inventory turnover3.173.213.18Question #1:A. Calculate a new set of ratios for the fiscal year 2015 for RCbased on the financial statements presented.B. Explain the analytical use of each of the six ratiospresented, describing what the investors can learn about RC’sfinancial stability and operating efficiency.C. Identify and discuss three limitations of ratio analysis

Sales (net)	30,500
Interest income	500
Total Revenue	31,000
Cost and expenses
Cost of goods sold	17,600
Selling and general administrative expenses	3,550
Depreciation and amortization expenses	1,890
Interest Expense	900
Total costs and expenses	23,940
Income before taxes	7,060
Income taxes	2,800
Net income	4,260

	2015	2014
Cash	400	500
Short-term investments	300	200
Accounts receivable (net)	3,200	2,900
Inventory	6,000	5,400
Total current assets	9,900	9,000
Property, plant, and equipment	7,100	7,000
Total assets	17,000	16,000

Accounts payable	3,700	3,400
Income taxes payable	900	800
Accrued expenses	1,700	1,400
Total current liabilities	6,300	5,600
Long-term debt	2,000	1,800
Total liabilities	8,300	7,400
Common stock ($1 par value)	2,700	2,700
Paid-in capital in excess in par	1,000	1,000
Retained earnings	5,000	4,900
Total stockholders’ equity	8,700	8,600
Total liabilities and equity	17,000	16,000

	2014	2013	Current Industry Average
Current Ratio	1.61	1.62	1.63
Acid Test Ratio	.64	.63	.68
Times Interest Earned	8.55	8.50	8.45
Profit margin on sales	13.2%	12.1%	13.0%
Asset turnover	1.84	1.83	1.84
Inventory turnover	3.17	3.21	3.18