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Mitchells Balance Sheet: Question 1)

Here are the key points I would highlight in my response: a. The CEO is not entirely correct. While the current ratio did increase slightly from 1.21 in 2018 to 1.33 in 2020, indicating higher short-term liquidity, the quick ratio remained relatively unchanged at around 1.03. The quick ratio is a more stringent test of liquidity as it excludes inventory. So liquidity did not necessarily increase significantly due to highly liquid current assets as stated. b. In terms of asset management, Habib Corporation has been increasing its reliance on fixed assets like property, plant and equipment over time as seen by the rising depreciation/total assets ratio. However, its total asset turnover ratio has been declining, indicating

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Hamna Rizwan
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112 views

Mitchells Balance Sheet: Question 1)

Here are the key points I would highlight in my response: a. The CEO is not entirely correct. While the current ratio did increase slightly from 1.21 in 2018 to 1.33 in 2020, indicating higher short-term liquidity, the quick ratio remained relatively unchanged at around 1.03. The quick ratio is a more stringent test of liquidity as it excludes inventory. So liquidity did not necessarily increase significantly due to highly liquid current assets as stated. b. In terms of asset management, Habib Corporation has been increasing its reliance on fixed assets like property, plant and equipment over time as seen by the rising depreciation/total assets ratio. However, its total asset turnover ratio has been declining, indicating

Uploaded by

Hamna Rizwan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Lahore School of Economics

Financial Statement Analysis


Sec A
Quiz

Question 1)
Mitchells
Balance Sheet
Account 2020 2019

Cash $100,000 $130,000

Accounts Receivable 420,000 460,000

Inventory 800,000 700,000

Prepaid Rent 70,000 50,000

PP & E 1,000,000 800,000

Total Assets $2,390,000 $2,140,000

Accounts Payable $300,000 $360,000

Accrued Wages 175,000 120,000

Stockholders Equity 1,915,000 1,660,000

Total Liab & S.E. $2,390,000 $2,140,000


Mitchells
Income Statement

Sales $5,000,000

Cost of Goods Sold 3,500,000

Gross Margin $1,500,000

Rent Expense $240,000

Wage Expense 800,000

Depreciation Expense 150,000

Net Income $310,000

Use the above information to calculate the cash flow from operating activities using the direct
method.

Question 2
You have been hired as an analyst for State Bank and your team is working on an independent
assessment of AFC Food Inc. is a firm that specializes in the production of freshly imported farm
products from Pakistan. Your assistant has provided you with the following data for Habib
Corporation and industry.

2019 2018 2020


Ratio 2020 Industry
average
Long-term debt 0.45 0.40 0.35 0.35
Inventory Turnover 62.65 42.42 32.25 53.25
Depreciation/Total Assets 0.25 0.014 0.018 0.015
Days’ sales in receivables 113 98 94 130.25
Debt to Equity 0.75 0.85 0.90 0.88
Profit Margin 0.082 0.07 0.06 0.075
Total Asset Turnover 0.54 0.65 0.70 0.40
Quick Ratio 1.028 1.03 1.029 1.031
Current Ratio 1.33 1.21 1.15 1.25
Times Interest Earned 0.9 4.375 4.45 4.65
Equity Multiplier 1.75 1.85 1.90 1.88
a. In the annual report to the shareholders, the CEO of Habib Corporation wrote, “2018 was a
good year for the firm with respect to our ability to meet our short-term obligations. We had
higher liquidity largely due to an increase in highly liquid current assets (cash, account
receivables and short-term marketable securities).” Is the CEO correct? Explain and use
only relevant information in your analysis.

b. What can you say about the firm's asset management? Be as complete as possible given the
above information, but do not use any irrelevant information.

c. You are asked to provide the shareholders with an assessment of the firm's solvency and
leverage. Be as complete as possible given the above information, but do not use any
irrelevant information.

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