Accounting Decision making

ADMN1017: Ratio Analysis

1. As of the fiscal year end of April 9, 2011, the Balance Sheet of The Real Mackay Inc., a large retailer of luxury beers, revealed the following:

Cash $1,000,000

Accounts Receivable $300,000

Inventory $1,080,000

Supplies $500,000

Prepaid Expenses $390,000

Current Assets $3,270,000

Current Liabilities $1,630,000

Credit Sales $3,750,000

Cost of Goods Sold $12,000,000

Beginning Inventory $900,000

Credit terms: 2/10 net 30 (this is consistent with industry norms)

Industry Averages:

ROA 7%

Current ratio 2:1

Quick ratio .9:1

Gross Profit Margin .7 or 70%

Inventory turnover 11.5 times (this industry uses COGS when

assessing inventory turnover)

Comment on the liquidity position of The Real Mackay using the appropriate ratios and guidelines. Make sure to discuss both strengths and weaknesses of the liquidity position, and provide as much detail as possible.

2. You have been provided with the following information about Straight Company and Curly Company, both of which manufacture and market similar hair care products.

Straight Co. Curly Co.

Sales $ 16,000,000 $18,000,000

Cost of Goods Sold $ 10,000,000 $ 9,000,000

Net Income $ 2,000,000 $ 1,500,000

Total Shareholder’s Equity $ 20,000,000 $10,000,000

EPS $2.75 $2.89

Dividend Yield 9% 8.3%

Current ratio 2.7:1 3.1:1

Furthermore, you have been able to obtain the following industry averages for firms competing directly with Straight Company and Curly Company.

Gross Profit Margin 49%

Net Profit Margin 13%

ROI 9%

Current ratio 2.7:1

Analyze and suggest reasons for the different profitability ratios/positions of Straight Co. and Curly Co.

Ratio Formulas

[Dividends per Share of Common Stock / Price per Share of Common Stock] x 100%

Current Assets / Current Liabilities

Current Liabilities + Long Term Liabilities / Total Net Worth

[Gross Profit / Sales] x 100%

(Net Income – Preferred Dividends) / # shares of Common Stock

[Current Assets – (Inventories + Supplies + Prepaid Expenses)] / Current Liabilities

Long Term Debt / Total Shareholders’ Equity

Annual (Credit) Sales / (Average) Accounts Receivable

[Net Profit / Sales] x 100%

Market Price per Share of Common Stock / EPS

Cost of Goods Sold / Average Inventory

[Net Income / Total Tangible Assets] x 100%

Dividends per Share of Common Stock / EPS

(Average) Accounts Receivable x 365 days / Annual (Credit) Sales

[Net Income / Total Shareholders’ Equity] x 100%

Earnings before Interest and Taxes / Total Annual Interest Charges

Current Assets – Current Liabilities