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Assignment 3: Ratio Analysis
By the due date assigned solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance. Turn in your completed work to the Submissions Area through the end of the day.
Balance Sheet as of December 31, 2010
Gary and Company
Cash $45 Accounts payable $45
Receivables 66 Notes payable 45
Inventory 159 Other current liabilities 21
Marketable securities 33 Total current liabilities $111
Total current assets $303
Net fixed assets 147 Long Term Liabilities
Total Assets $450 Long-term debt 24
Total Liabilities $135
Owners Equity
Common stock $114
Retained earnings 201
Total stockholders’ equity 315
Total liabilities and equity $450
Income Statement Year 2010
Net sales $795
Cost of goods sold 660
Gross profit 135
Selling expenses 73.5
Depreciation 12
EBIT 49.5
Interest expense 4.5
EBT 45
Taxes (40%) 18
Net income 27
1. Calculate the following ratios AND interpret the result against the industry average:
Ratio Your Answer Industry Average Your Interpretation
(Good-Fair-Low-Poor)
Profit margin on sales 3%
Return on assets 9%
Receivable turnover 16X
Inventory turnover 10X
Fixed asset turnover 2X
Total asset turnover 3X
Current ratio 2X
Quick ratio 1.5X
Times interest earned 7X
2. Analysis:
Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance.
Justify all answers.
Assignment 4 Grading Criteria
Maximum Points
Has correctly calculated the ratios. 40
Has correctly analyzed and interpreted the significance of the resulting ratios and suggested actions for improvement. 40
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation 20
Total: 100
Assignment 3: Ratio Analysis
By the due date assigned solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance. Turn in your completed work to the Submissions Area through the end of the day.
Balance Sheet as of December 31,
20
1
0
Gary and Company
Cash
$
45
Accounts payables
$45
Receivables
66
Notes payables
45
Inventory
159
Other current liabilities
21
Marketable securities
33
Total current liabilities
$111
Total current assets
$303
Net fixed assets
147
Long Term Liabilities
Total Assets
$450
Long-term debt
24
Total Liabilities
$135
Owners Equity
Common stock
$114
Retained earnings
Total stockholders’ equity
315
Total liabilities and equity
$450
|
Income Statement Year 2010 |
|
|
Net sales |
$795 |
|
Cost of goods sold |
660 |
|
Gross profit |
135 |
|
Selling expenses |
73.5 |
|
Depreciation |
12 |
|
EBIT |
49.5 |
|
Interest expense |
4.5 |
|
EBT |
45 |
|
Taxes ( 40 %) |
18 |
|
Net income |
27 |
1. Calculate the following ratios AND interpret the result against the industry average:
|
Ratio |
Your Answer |
Industry Average |
Your Interpretation |
|
Profit margin on sales |
3% |
||
|
Return on assets |
9% |
||
|
Receivable turnover |
16X |
||
|
Inventory turnover |
10X |
||
|
Fixed asset turnover |
2X |
||
|
Total asset turnover |
3X |
||
|
Current ratio |
|||
|
Quick ratio |
1.5X |
||
|
Times interest earned |
7X |
2. Analysis:
Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers.
|
Assignment 4 Grading Criteria |
Maximum Points |
|
|
Has correctly calculated the ratios. |
40 | |
|
Has correctly analyzed and interpreted the significance of the resulting ratios and suggested actions for improvement. |
||
|
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation |
20 | |
|
Total: |
100 |
Please compare your answers and redo them for your satisfaction. I think you know the subject well.
I have provided for you to review and compare your answers to the following suggested answers.
Suggested Answers
Ratio
Your Answer
Industry Average
Your Interpretation
(Good-Fair-Low-Poor)
Profit margin on sales
3.40%
3%
Fair
Return on assets
6%
9%
Low
Receivable turnover
12
1.6X
Fair
Inventory turnover
5
10X
Poor
Fixed asset turnover
5.41
2X
Poor
Total asset turnover
1.76
3X
Poor
Current ratio
2.7
2X
Fair
Quick ratio
1.3
1.5X
Fair
Times interest earned
11
7X
Good
Analysis:
The firm has problems with inventory and accounts receivables management. By improving these two areas the firm can show better performance
Profit margin:
Net income/ sales = 27/795 = 3.4%
Return on assets:
Net income/ total assets = 27/450 = 6%
Receivable turnover:
Sales (credit)/ receivables = 795/66 = 12.05
Inventory turnover:
Sales/inventory = 795/159 = 5x
Fixed asset turnover:
Sales/ fixed assets = 795/147 = 5.4x
Total asset turnover:
Sales/ total assets = 795/450 = 1.77x
Current ratio:
Current assets/ current liabilities = 303/111 = 2.73
Quick ratio:
(current assets – inventory) / current liabilities = (303-159)/111 = 1.30
Times interest earned:
Earnings before interest and tax (EBIT)/ interest expense = 49.5/4.5 = 11
