AUTOMOTIVE SOLUTIONS INC.

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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.
o What are the two major objectives of accounting and how are they achieved?
o 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?
o How do internal and external stakeholders use financial accounting information?

 

 

 

Sample Solution

 

Financial Analysis of Automotive Solutions Inc. for 20Y7 and 20Y8

Purpose and Role of Accounting in Business

This report analyzes Automotive Solutions Inc.’s financial statements for 20Y7 and 20Y8. Financial accounting plays a crucial role in business by serving two major objectives:

  1. Financial Reporting: Accounting provides a standardized method to record, classify, summarize, and report financial transactions. This results in financial statements, like the ones presented here, that offer a clear picture of the company’s financial health.
  2. Decision Making: Financial statements provide valuable information for internal and external stakeholders to make informed decisions.

Information for Stakeholders

These financial statements provide a wealth of information for various stakeholders:

  • Internal Stakeholders (Management):
    • Can assess the company’s profitability, solvency, liquidity, and overall financial performance.
    • This helps in budgeting, resource allocation, strategic planning, and performance evaluation.
  • External Stakeholders:
    • Lenders and Creditors:Analyze the company’s ability to repay debts and assess the risk of lending money.
    • Investors:Evaluate the company’s potential for growth, profitability, and return on investment.

Stakeholder Use of Financial Information

  • Internal Stakeholders:
    • Management can use profitability information to identify areas for cost reduction or revenue growth.
    • Liquidity analysis helps ensure enough cash flow to meet short-term obligations.
    • Solvency analysis indicates the company’s ability to meet long-term financial commitments.
  • External Stakeholders:
    • Lenders use financial ratios derived from these statements to determine loan eligibility and interest rates.
    • Investors use this information to compare Automotive Solutions Inc. to competitors and make investment decisions.

Next Steps

This report provides a high-level overview of the financial statements. The next steps in this analysis would involve:

  • Ratio Analysis:Calculating financial ratios like profitability ratios (e.g., return on equity), liquidity ratios (e.g., current ratio), and solvency ratios (e.g., debt-to-equity ratio) to gain deeper insights into the company’s performance and financial health.
  • Trend Analysis:Comparing key metrics across multiple years (beyond 20Y7 and 20Y8) to identify trends and assess the company’s financial progress.

This comprehensive analysis will provide a clearer picture of Automotive Solutions Inc.’s financial position and inform future business decisions.

 

 

 

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