Week 5 Dqs

Ratios


Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?

Profit Margin

 

 

Year Ending December 2012

Year Ending December 2011

Year Ending December 2010

Revenues

40,000

35,000

33,000

Operating Expenses

   

Salaries

15,000

10,000

9,000

Maintenance and Repairs

6,000

9,000

10,000

Rental Expense

2,500

2,500

2,500

Depreciation

2,000

2,000

2,000

Fuel

4,000

3,500

2,500

Total Operating Expenses

29,500

27,000

26,000

Operating Income

10,500

8,000

7,000

Sales and Administrative Expenses

6,000

4,000

3,000

Interest Expense

2,500

2,000

1,000

Net Income

2,000

2,000

3,000



Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the net-profit margin for each of these years. Comment on the profit margin trend.

Assignment

1.      Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

 

 

Edison

Stagg

Thornton

Cash

$6,000

$5,000

$4,000

 

Short-term investments

3,000

2,500

2,000

 

Accounts receivable

2,000

2,500

3,000

 

Inventory

1,000

2,500

4,000

 

Prepaid expenses

800

800

800

 

Accounts payable

200

200

200

 

Notes payable: short-term

3,100

3,100

3,100

 

Accrued payables

300

300

300

 

Long-term liabilities

3,800

3,800

3,800

 

       

 

 

  1. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

 

2.      Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

     

 

20X5

20X4

Net credit sales

$832,000

$760,000

 

Cost of goods sold

530,000

400,000

 

Cash, Dec. 31

125,000

110,000

 

Average Accounts receivable

205,000

156,000

 

Average Inventory

70,000

50,000

 

Accounts payable, Dec. 31

115,000

108,000

 

 

 

Instructions

a.       Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

 

 

 

 

 

 

 

 

 

 

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 20X7:

 

 

 

Net sales

$1,750,000

Interest expense

120,000

Income tax expense

80,000

Preferred dividends

25,000

Net income

130,000

Average assets

1,200,000

Average common stockholders' equity

500,000

 

 

 

 

  1. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
  2. Does the firm have positive or negative financial leverage? Briefly ex­plain.

 

4.      Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

    

20X2

20X1

Current Assets

$86,000

$80,000

Property, Plant, and Equipment (net)

99,000

90,000

Intangibles

25,000

50,000

Current Liabilities

40,800

48,000

Long-Term Liabilities

153,000

160,000

Stockholders’ Equity

16,200

12,000

Net Sales

500,000

500,000

Cost of Goods Sold

322,500

350,000

Operating Expenses

93,500

85,000

    

 

a.       Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

 

 

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 

20X2

20X1

Current Assets

    $86,000

    $80,000

Property, Plant, and Equipment (net)

99,000

80,000

Intangibles

25,000

50,000

Current Liabilities

40,800

48,000

Long-Term Liabilities

     153,000

     150,000

Stockholders’ Equity

16,200

12,000

Net Sales

    500,000

     500,000

Cost of Goods Sold

    322,500

     350,000

Operating Expenses

      93,500

85,000

    

 

 

a.       Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work. 

    • 7 years ago