Ratio Analysis

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Assignment 1: Discussion Question

Discuss the importance of quality in a firm's financial statements and how you would go about evaluating the quality of a firm’s financial statement. What do you consider to be the four main pro forma financial statements to financial forecasting, and why?

By Friday, November 8, 2013, respond to the following discussion question. Submit your response to the appropriate Discussion Area.

Assignment 2: Ratio Analysis

By Saturday, November 9, 2013 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.

Balance Sheet as of December 31, 2010
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	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		1.6X
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.