acc 206 - week 5
putulWeek 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 |
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Short-term investments | 3,000 | 2,500 | 2,000 |
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Accounts receivable | 2,000 | 2,500 | 3,000 |
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Inventory | 1,000 | 2,500 | 4,000 |
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Prepaid expenses | 800 | 800 | 800 |
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Accounts payable | 200 | 200 | 200 |
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Notes payable: short-term | 3,100 | 3,100 | 3,100 |
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Accrued payables | 300 | 300 | 300 |
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Long-term liabilities | 3,800 | 3,800 | 3,800 |
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- 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. |
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3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:
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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 |
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- Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
- 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.
12 years ago
