Question

Phillipe Corporation 2015 Income Statement In Millions of Dolars Sales 4053 Cost of Goods Sold 2780 Depreciation 550 Earnings Before Interest and Taxes 723 Interest Paid 502 Taxable Income 221 Taxes (34%) 75 Net Income 146 Dividends 47 Addition to Retained Earnings 99 Philippe Corporation 2014 and 2015 Balance Sheets In Millions of Dollars 2014 2015 Assets Current Assets Cash 210 215 Accounts Receivable 355 310 Inventory 507 328 Total 1072 853 Fixed Assets Net Plant and Equipment 6085 6527 Total Assets 7157 7380 Liabilities and Owners Equity Current Liabilities Accounts Payable 207 298 Notes Payable 1715 1427 Total 1922 1725 Long Term Debt 1987 2308 Owners Equity Common Stock 1000 1000 Retained Earnings 2248 2347 Total 3248 3347 Total Liabilities and Owners Equity 7157 7380

1. Current and Quick Ratios  If a firm increases its quick ratio but the current ratio does not change, what has happened?  Has the liquidity of the company improved?

2. Ratios and Firm Health  Explain whether an increase in each of the following ratios means the firm is doing better or worse and why:  times interest earned, inventory turnover, days sales in receivables, total asset turnover, profit margin, return on assets.

Answer 1

	2014	Calculation	2015	Calculation
Current Ratio(Current Assets / Current Liabilities)	0.56	1072/1922	0.49	853/1725
Quick Ratio[(Current Assets - Inventories)/Current laibilities]	0.29	(1072-507)/1922	0.30	(853-328)/1725
If the firm has increases its Quick ratio then it means that it has disposed/sold inventory in cash. As a result the Inventory has decreased resulting into a increase in the denominator
of the Quick ratio and thereby incraese in the Quick ratio. But the Current ratio remains same as the outflow of inventory and inflow of cash are both set off and net effect is zero.
1.Times Interest earned:- If this ratio incraeses then it means that it is able to meet its debt obligations by paying the interest and hence the firm is Better with its increase.
2.Inevntory Turnover:- A higher Inventory turnover means that there is adequate inventory in the firm and there is no overstocking or deficiency hence a higher inventory is Better.
3.Days sales in Receivable:- A higher days sales in receivables shows that the company is not efficient in collecting the receivables and hence a higher ratio is Worse for the company.
4.Asset Turnover:- A higher Asset turnover means that the company is generating higher revenue from its assets employed and hence the higher ratio the Better it is.
5.Profit Margin:- A higher profit margin signifies that the indirect expenses are less as compared to its revenues and henc the higher the ratio is Better.
6.Return on Assets:- It shows the Income generated by the company from the assets employed , hence the higher ROA the Better it is for the company.