THE BALANCE SHEET OF NICKEL INDUSTRIES SHOWS THAT THE COMPANY IS CA...

5. The balance sheet of Nickel Industries shows that the company is capable of paying its short-term liabilities. There is cash of $180,000,

which is more than enough to settle the accounts payable of $75,000. Therefore the recommendation should be made that your company

grants credit to Nickel Industries.

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Question Comparative financial statement data for Donovan Company and Maltese Company, two competitors in the same industry, appear below.

All balance sheet data are as of December 31, 2012, and December 31, 2011.

Donovan Company Maltese Company

2012 2011 2012 2011

Net sales $1,549,035 $339,038

Cost of goods sold 1,080,490 241,000

Operating expenses 302,275 79,000

Interest expense 8,980 2,252

Income tax expense 54,500 6,650

Current Assets 325,975 312,410 83,336 79,467

Common Stock, $10 par 500,000 500,000 120,000 120,000

Retained earnings 173,460 146,595 38,096 28,998

Non-current liabilities 108,500 90,000 29,620 25,000

Current liabilities 65,325 75,815 35,348 30,281

REQUIRED:

(a) Prepare a common-size 2012 income statement using the data for Donovan Company and Maltese Company in columnar form.

(b) Comment on the relative profitability of the companies by computing the return on assets (Net income/(Average total assets) and the return on

total equity (Net income / (Average Shareholders’ Equity) ratios for both companies.

Answer Donovan Company

Maltese Company

Condensed Income Statement

For the Year Ended December 31, 2012

Dollars % Dollars %

Net sales $1,549,035 100.0% $339,038 100.0%

Cost of goods sold 1,080,490 69.8% 241,000 71.1%

Gross Profit 468,545 30.2% 98,038 28.9%

Operating Expenses 302,275 19.5% 79,000 23.3%

Income from operations 166,270 10.7% 19,038 5.6%

Other income and expense:

Interest expense 8,980 0.6% 2,252 0.7%

Income before income taxes 157,290 10.1% 16,786 4.9%

Income tax expense 54,500 3.5% 6,650 1.9%

Net income $102,790 6.6% $10,136 3.0%

(b) Donovan Company appears to be more profitable. It has higher relative gross profit, income from operations, income before taxes,

and net income.

Donovan’s return on total assets of 12.4% ($102,790 ÷ $829,848)

is higher than Maltese’s return on total assets of 4.7% ($10,136 ÷

$214,172)

. Also, Donovan’s return on total equity of 15.6% ($102,720 ÷ $660,028)

is higher than Maltese’s return on total equity of 6.6%

($10,136 ÷ $154,047)

.

Calculations:

$102,790 is Donovan’s 2012 net income. Donovan’s 2012 average total assets are calculated as:

ASSETS = LIABILITIES+Shareholders’ EQUITY

2012 (TOTAL ASSETS - 325,975) = (108,500+65,325) + (500,000 + 173,460)

TOTAL ASSETS = $847,285

2011 (TOTAL ASSETS - 312,410) = (90,000+75,815) + (500,000 + 146,595)

TOTAL ASSETS = $812,410

AVERAGE TOTAL ASSETS = $1,659,695 ÷ 2 = $829,848

$10,136 is Maltese’s 2012 net income. Maltese’s 2012 average total assets are calculated as:

ASSETS = LIABILITIES + Shareholders’ EQUITY

2012 (TOTAL ASSETS - 83,336) = (29,620+35,348) + (120,000+ 38,096)

TOTAL ASSETS = $223,064

2011 (TOTAL ASSETS - 79,467) = (25,000+30,281) + (120,000+ 29,998)

TOTAL ASSETS = $205,279

AVERAGE TOTAL ASSETS = $428,343 ÷ 2 = $214,172

Question Use the current asset section of the balance sheets of the El Paso Company as of January 31, 2012 and 2011 presented below to answer

the questions that follow.

2012 2011

Cash and cash equivalents $ 75,000 $ 58,800

Trade accounts receivable, net 157,500 193,200

Inventory 208,200 253,400

Other current assets 18,400 15,500

Total current assets $ 459,100 $ 520,900

Total assets $2,650,000 $3,430,000

Required:

(a) In the spaces provided below, complete a Percentage Change analysis of the current asset section of El Paso Company's balance sheet for