Research paper

2

Running Head: COSTCO

Campbellsville University

BA 620 Managerial Finance Group Project

Group Company Project – Part III

Professor: Dr. Sunny Onyiri

Group Members

Prathapa Reddy Anantha

Student Id :560175

Aarthi Gaddam

Student Id: 565942

Costco is an organization which will be predominantly dealing with the warehouse clubs only for the memberships. Let’s get into the details of the ratios.

Current ratio of the company or the organization is the ratio which measures the organization’s ability to compensate the short-term dues that exist within a year. The current ratio of the organization is used to confirm with the investor that the organization will have the capacity to clear the dues related to the production or process. Current ratio of the organization is the ratio of current assets to the current liabilities, if the organization has a current ratio of 1.5 means that it has $1.5 current assets for every $1 current liabilities. The company has cash equivalents of $5,000 and inventory of $80,000, accounts receivable $15,000 then the total current assets will be $100,000. The company has accounts payable amount of $60,000, short term payable amounts of $50,000, wages $15,000 which implies the total current liabilities equals to $125,000. Then the current ratio will be .80.

Debt Ratio: The ratio of the organization which shows the leverage aspects of the production or process happening. Debt ratio is the ratio between the total debts to the total assets of the organization; if the debt ratio stands above 1 then the company has more debts than its assets. Debt ratio tells the company to steadily maintain and decrease the debt while progressing in the production process so that the productivity increases (Maulita, & Tania, 2018).

The total debt of the company is $100,000 and the total assets are at $200,000 then the debt ratio is 0.5 which is safe for the organization.

Gross Profit Margin of the organization is the tool that is used by the managers to assess the efficiency and productivity of the production process and its sale. It is used for one and various products of the organization, the formula for the gross profit margin involves the net sales and cost of goods sold.

Gross profit margin= (net sales – cost of goods sold) / net sales. The percentage thus obtained in this formulation is the indication of percentage amount consumed for producing the products. The company has net sales of $25 million and cost of goods sale is $18 million then the gross profit margin will be (25 million-18 million) / 25 million which equals to 28%. So, the remaining 72% is used for the production of the units.

Times interest earned is the assessment of the organization to pay for the debts which is made for the survival of the production. The times of interest includes the earnings before taxation and the interest expense on the sum.

Accounts Receivable turnover is the factor of the organization which reveals the collection of average accounts receivable amount in how many times per year of its business. These accounts receivable turnover is used to measure the effectiveness of the business and its accounts collection. The company has accounts receivable balance of $316,000 and the ending balance of $384,000 and the net credit sales was at $3,500,000. Then the accounts receivable turnover would be $3,500,000 net sales / ($316,000 beginning receivables+ $384,000 ending receivables) *0.5 which gives the value of 10 that is the average accounts turnover.

Inventory turnover is the method which is used to determine the production and the inventory with respect to the goods sold cost.

This method is used to verify the inventory volume in the production and helps to find the effective productivity of the process.

Inventory turnover calculator = cost of goods sold/ (beginning inventory+ ending inventory) *0.5. This inventory turnover rate is then divided with 365 to get the inventory turnover period in a day if the production is going at constant pace or the pace at which the calculation is done.

Return on sales is the evaluation of the operational efficiency of the organization in terms of production, sales, and revenue aspects. Return on sales is the ratio of operating profit to the net sales. Operating profit is the earnings of the organization which is before taxation.

The operating profit of the organization is $100,000 and the net sales was $500,000 then return on sales is 100,000/500,000which is 20%. So, the organization converts this 20% into their profits.

Asset Turnover is the factor of the organization which the investors seen, which represents how the company using its assets to improve their sales. This factor is used to determine the effectiveness and stability of the company in doing business and improving their productivity.

Asset turnover= net sales/ average total assets. The assets of the company at beginning and ending of the production were $199,000 and $198,203 and the generated sales was $325,000 and having sales return of $15,000. Then the asset turnover ratio = $325,000- $15,000 / ($199,000+$ 198,203)/2 which is equal to 1.56. Therefore, for every dollar the company earns 1.56 dollars of sale revenue (STIE, & Munandar, 2020).

Return on Assets is the return that the company is deriving or the profits from the assets of the company. This return on assets is displayed and calculated in percentages. Ratio of net income to the average assets that is the average of assets in the beginning and ending of the production process is the return on assets. The company has a net income of $500,000 and the average assets of $2,000,000. Then the return on assets will be $500,000/ $2,000,000 which are equal to 25%.

Financial Leverage is the loan amount which is used to acquire the assets which can return the money which is useful for the repayment of loan. This financial leverage is used to narrow the spending of own money instead the fraction amount is lending from the financial institution and can acquire more asset which gives the return on assets and the loan amount will be paid and reduced. By this method, the financial transaction of the company will increase, and the assets will increase.

For instance, the land is to be acquired with own amount will have 50-acre land at $500,000 and with the financial leverage one can acquire 90-acre land at $900,000 where the $400,000 will be from our own money and $500,000 will be from leverage and can be repaid using the return from it at certain time of the year. Return on Equity is the factor which tells the amount of money which is returned from the certain equity shares which are present in that time. The ratio of net income to the stock equity price at that time gives the return from equity. The company has net income of $21,690,000 and the stock equity price at that period was $208,164,000 which is equal to 10.5%.

References

Maulita, D., & Tania, I. (2018). PENGARUH DEBT TO EQUITY RATIO (DER), DEBT TO ASSET RATIO (DAR), DAN LONG TERM DEBT TO EQUITY RATIO (LDER) TERHADAP PROFITABILITAS. Jurnal Akuntansi : Kajian Ilmiah Akuntansi (JAK), 5(2), 132. doi: 10.30656/jak.v5i2.669

STIE, J., & Munandar, A. (2020). The Influence Of The Level Of Cash Turnover, Accounts Receivable And Inventory On Economic Profitability At Kpri Obor Bima. Economy Deposit Journal (E-DJ), 2(1), 25-32. doi: 10.36090/e-dj.v2i1.733