Question

Problem #3 The condensed balance sheet and income statement for Major Company are presented below. MAJOR COMPANY Balance Sheet At December 31, 2019 Cash $ 25,000 Notes receivable (due August 15, 2020) 41,000 Accounts receivable (net) 50,800 Merchandise inventory 74,200 Property, plant, and equipment (net) 310,000 Intangible assets 14,800 Total assets $ 515,800 Current liabilities $ 120,200 Bonds payable (12%) (long-term) 105,000 Common stock 60,000 Retained earnings 230,600 Total liabilities and equity $ 515,800 MAJOR COMPANY Income Statement For the Year ended December 31, 2019 Sales $ 884,000 Cost of goods sold 482,400 Gross profit $ 401,600 Operating expenses 180,600 Operating income $ 221,000 Interest expense 12,600 Income before income tax $ 208,400 Income tax expense 62,520 Net income $ 145,880 Required: Use the answer sheet provided in the answer packet. Be sure to show your work! 1) Compute the following ratios for Major Company. (Round your answer to 2 decimal places.) a) Acid test ratio (Industry average = 113.24:1) b) Current ratio (Industry average = 97.88:1) c) Debt-to-Equity ratio (Industry average = 80.34:1) d) Times Interest Earned ratio (Industry average = 19.49:1) e) Return on Shareholders’ Equity (Industry average = 61.01%) f) Profit margin on sales (Industry average = 14.82%) 2) Compare Major’s ratios/returns to the fbvindustry. Is Major’s ratio/return Favorable or Unfavorable compared to the industry? 3) What does each of these ratios compared to the industry mean for Major Company?

Answer 1

A	Acid Test Ratio
	Current Asset-Inventory		1,16,800	0.97	(Industry Average:113.24:1)
	Current Liability		1,20,200
	Acid Test Ratio is lower than Industry average ratio.It means company is taking high amount
	of risk by not keeping a better liquid resources
	Low ratio could be due to better credt ters with suppliers than competitors
B	Current Ratio
	Current Asset		1,91,000	1.59	(Industry Average:97.88:1)
	Current Liability		1,20,200
	Current Ratio is lower than industry ratio
	It shows a deteriorating liquidity position of business
	It could be that a risk strategy that could lead liquidity issues for the company
C	Debt/Equity Ratio
	Debt		1,05,000	0.35	(Industry Average:80.34:1)
	Equity		2,96,000
	A ratio lower than 1 means company is relying more on equity than on debt to finance its operating Costs
	Company is relying less on debts than industry
D	Times Interest Ratio
	EBIT		2,21,000	17.54	(Industry Average:19.49:1)
	Interest Expenses		12,600
	Times interest ratio is at par with industry
	Company with high ration is not favorable for longterm investors
	It means company is not investing excess income by reinvestment
E	Return on Shareholders equity
	Net Income		1,45,880	50.20%	(Industry Average:61.01%)
	Equity		2,90,600
	Industry average is higher than company's ROE
	Higher the ration,better company is
	Investors looking for higher ROE company's
F	Profit margin on sales
	Net Profit		1,45,880	16.50%	(Industry Average:14.82%)
	Sales		8,84,000
	Profit margin is at par with industry
	It is amount of each sales remains after all expenses have been paid
	Profit margin by industry helps to consider when setting goals for business.