Question

1.                   A summary of data from the income statements and balance sheets of GCS Construction Company appears below.

                                                             2008                           2007

                Current Assets                 $366,000.00             $310,000.00

               Total assets                        $2,320,000.00         $1,740,000.00

               Long- Term Liabilities     $800,000.00              $580,000.00

               Current Liabilities              $180,000.00              $120,000.000

               Owners Equity                $1,340,000.00           $1,040,000.00

               Net Sales                           $4,600.00.00              $3,480,000.00

               Net Income                     $ 300,000.00                  $204,000.00

A.                  Compute the following liquidity measures for 2007 and 2007. Working capital and current ratio. Comment on the difference between the years.

B.                  Compute the following measures of profitability for 2007 and 2008. Profit margin, asset turnover, returns on assets, debt to equity ratio, and return on equity. Comment on the change in performance from 2007to 2008

Answer 1

(A).

Working capital = Current assets – Current liabilities

Working capital for 2008 ($366000 – $180000) = $186000

Working capital for 2007 ($310000 – $120000) = $190000

Current ratio = Current assets / Current liabilities

Current ratio for 2008 ($366000 / $180000) = 2.03

Current ratio for 2007 ($310000 / $120000) = 2.58

Thus after calculating working capital and current ratio for 2008 and 2007, it is clear that short-term liquidity of GCS Construction Company have been deteriorated because working capital and current ratio in 2008 have been decreased in 2008 in compare to 2007.

(B).

Profit margin = Net income / Net sales

Profit margin for 2008 ($300000 / $460000) = 65.22%

Profit margin for 2007 ($204000 / $3480000) = 5.86%

Assets turnover = Net sales / Total assets

Assets turnover for 2008 ($460000 / $2320000) = 19.83%

Assets turnover for 2007 ($3480000 / $1740000) = 200%

Returns on assets = Net income / Total assets

Returns on assets for 2008 ($300000 / $2320000) = 12.93%

Returns on assets for 2007 ($204000 / $1740000) = 11.72%

Debt to equity ratio = Debt / Equity

Debt to equity ratio for 2008 ($980000 / $1340000) = 73.13%

Debt to equity ratio for 2007 ($700000 / $1040000) = 67.31%

Return on equity = Net income / Equity

Return on equity for 2008 ($300000 / $1340000) = 22.39%

Return on equity for 2007 ($204000 / $1040000) = 19.61%

Profit margin ratio in 2008 have been improved because this ratio is higher in 2008 in compare to 2007 which is a good symbol.

Assets turnover in 2008 have been declined because this ratio is lower in 2008 in compare to 2007 which is not a good symbol because assets are not generating good sales in 2008 in compare to 2007.

Returns on assets have been improved in 2008 because this ratio is higher in 2008 in compare to 2007 which is a good symbol.

Debt to equity ratio have been improved in 2008 which shows that this company is using higher amount of debts in 2008 in compare to 2007.

Return on equity in 2008 have been improved because in 2008 this ratio has been increased.