Connor Ltd. is a large private company owned by the Connor family. It operates a manufacturing business in northern Ontario. It has applied to the ICB bank for a new loan of $100 million to expand its manufacturing facilities.
You are a financial analyst with ICB. You have just been given an assignment to analyze Connor’s Year 7 financial statements and to identify any concerns about Connor’s performance and financial condition.
The following are financial statements for Connor Ltd. for Year 7:
| BALANCE SHEETS (In 000s) |
|||||
| Year 7 | Year 6 | ||||
| Asset | |||||
| Cash | $ | 13,000 | $ | 34,000 | |
| Accounts receivable | 209,000 | 198,000 | |||
| Inventory | 326,000 | 316,000 | |||
| Property, plant and equipment | 308,000 | 266,000 | |||
| $ | 856,000 | $ | 814,000 | ||
| Liabilities and Shareholders’ Equity | |||||
| Accounts payable | $ | 206,000 | $ | 212,600 | |
| Other accrued liabilities | 68,000 | 56,400 | |||
| Bonds payable | 196,000 | 196,000 | |||
| Common shares | 174,000 | 186,000 | |||
| Retained earnings | 212,000 | 171,000 | |||
| $ | 856,000 | $ | 822,000 | ||
| INCOME STATEMENT (In 000s) |
|||||||
| Year 7 | Year 6 | ||||||
| Sales | $ | 1,940,000 | $ | 1,890,000 | |||
| Cost of goods sold | (1,366,000 | ) | (1,286,000 | ) | |||
| Gross margin | 574,000 | 604,000 | |||||
| Depreciation expense | (46,000 | ) | (40,000 | ) | |||
| Other expenses | (412,000 | ) | (431,000 | ) | |||
| Income tax expense | (62,000 | ) | (69,000 | ) | |||
| Net income | $ | 54,000 | $ | 64,000 | |||
Additional Information
Connor uses the straight-line method when depreciating its property, plant, and equipment.
Interest expense was $10,000 for Year 6 and Year 7.
Required:
(a) Convert Connor’s financial statements for both Year 7 and Year 6 into common-sized financial statements using: (Enter your answers in thousands. For E.g., 1,000,000 should be entered as 1,000. Input all amounts as positive values. Omit $ sign in your response. Round the final answer to the nearest whole dollar.)
(i) Vertical analysis
| BALANCE SHEETS | |||
| Year 7 | Year 6 | ||
| Asset | |||
| Cash | $ | $ | |
| Accounts receivable | |||
| Inventory | |||
| Property, plant and equipment | |||
| $ | $ | ||
| Liabilities and Shareholders’ Equity | |||
| Accounts payable | $ | $ | |
| Other accrued liabilities | |||
| Bonds payable | |||
| Common shares | |||
| Retained earnings | |||
| $ | $ | ||
| INCOME STATEMENT | |||
| Year 7 | Year 6 | ||
| Sales | $ | $ | |
| Cost of goods sold | |||
| Gross margin | |||
| Depreciation expense | |||
| Other expenses | |||
| Income tax expense | |||
| Net income | $ | $ | |
(ii) Horizontal analysis
| BALANCE SHEETS | |||
| Year 7 | Year 6 | ||
| Asset | |||
| Cash | $ | $ | |
| Accounts receivable | |||
| Inventory | |||
| Property, plant and equipment | |||
| $ | $ | ||
| Liabilities and Shareholders’ Equity | |||
| Accounts payable | $ | $ | |
| Other accrued liabilities | |||
| Bonds payable | |||
| Common shares | |||
| Retained earnings | |||
| $ | $ | ||
| INCOME STATEMENT | |||
| Year 7 | Year 6 | ||
| Sales | $ | $ | |
| Cost of goods sold | |||
| Gross margin | |||
| Depreciation expense | |||
| Other expenses | |||
| Income tax expense | |||
| Net income | $ | $ | |
(b) Identify any financial statement items that seem to be peculiar relative to expectations. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
(c) Calculate the current ratio, debt-to-equity ratio, return on assets, and return on equity for both Year 7 and Year 6. (Round the final answers for all the ratios to two decimal places. Omit $ sign in your response.)
| Year 7 | Year 6 | |||||
| $ | $ | |||||
| Current ratio | = | = | ||||
| $ | $ | |||||
| $ | $ | |||||
| Debt to equity | = | = | ||||
| $ | $ | |||||
| $ | $ | |||||
| Return on assets | = | % | = | % | ||
| $ | $ | |||||
| $ | $ | |||||
| Return on equity | = | % | = | % | ||
| $ | $ | |||||
(d) Determine whether Connor’s liquidity, solvency, and profitability have improved or deteriorated from Year 6 to Year 7.
| Liquidity | (Click to select) Deteriorated Improved Remains the same |
| Solvency | (Click to select) Deteriorated Improved Remains the same |
| Profitability | (Click to select) Deteriorated Improved Remains the same |
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