Question

Ratio Analysis
Smith-John Widgets Inc.					Conclusion			Industry Average
		2009	2010	2011		2009	2010	2011
A.	Profitability
1	Profit Margin
2	Return on assets
3	Return on Common Equity
B.	Asset Utilization
4	Receivables turnover
5	Inventory Turnover
6	Fixed asset Turnover
7	Total Asset Turnover
C.	Liquidity
8	Current ratio
	Calculations For Quick Ratio
9	Quick Ratio
D.	Debt Utilization
10	Debt Total Assets

Smith's Inc, Inc., produces widgets for the wind chime industry. The company sells all products on accounts with net 30 day terms. The company has been without someone to assess the financial condition for some time (using only a bookkeeper to post activity to the general ledger accounts) and, therefore, is asking you to help with a more current assessment of the company’s position.

Part A: Below you will find a series of accounts that represent the trial balance of the business firm. These accounts encompass both income statement and balance sheet accounts.

2009   2010   2011

Accumulated depreciation 176,580 209,050 242,275

Retained earnings     337,602   510,731 648,528

Sales 3,702,480   3,961,654   3,981,462

Cash 35,750    62,635 86,595

Bonds payable 421,000 334,000   325,000

Accounts receivable   246,580   293,430   349,182

Depreciation expense 31,265 32,470 33,675

Common stock shares outstanding 80,000   80,000 80,000

Plant and equipment, at cost   984,021 1,026,880 1,151,210

Taxes 79,484   93,223   74,198

Accounts payable 62,685 116,696 188,569

Common stock, $1 par 75,000 75,000 75,000

Inventory   185,652 243,117 312,622

Prepaid expenses 6,575 21,525   26,325

Cost of goods sold 2,665,786   2,879,049   2,936,630

Interest expense 12,532 10,325 10,235

Selling and administrative expenses   765,800 773,458 788,927

Marketable securities 12,545 23,564 24,153

Other current liabilities   123,256   150,674   195,265

Capital paid in excess of par (common) 275,000 275,000   275,000

Part B: Based on the financial statements that were prepared with this data, complete the following financial ratio calculations and provide a narrative discussion of these results as compared to industry averages (provided.)

Ratios required:

Ratio Industry Average

1. Profit margin 3.2%

2. Return on assets (use ending assets) 6.0%

3. Return on common equity (use ending common equity) 15.6%

4. Receivable turnover (use ending receivables) 8.5 x

5. Inventory turnover (use ending inventory) 12.0 x

6.Fixed asset turnover (use ending fixed asset balance) 5.75 x

7. Total asset turnover (use ending assets) 1.89 x

8. Current ratio 3.10

9. Quick ratio 1.40

10. Debt to total assets (use ending assets) 37.0%

Your solution should include the required ratios for each year and then provide a narrative discussion regarding the results as they compare to the industry averages. This analysis should discuss whether or not Smith's Inc. is better or worse than the industry average but it should not stop there. You should also include a discussion as to why or how the difference can be explained, i.e., the reason for the variance. The final solution is to be provided in the Word document, with the module and part clearly identified. The narrative discussion will reference the appropriate ratio and the comparison to the appropriate industry average.

Smith's Inc.., produces wind chimes for the wind chime industry. The company sells all products on accounts with net 30 day terms. The company has been without someone to assess the financial condition and, therefore, is asking you to help.

Part A: Below you will find the trial balance of the business firm and need to be placed into the correct statement.

Required: Prepare a Income Statement and Balance Sheet for the company.

Part B: Based on the financial statements that were prepared with data above, complete the following financial ratio calculations and provide a narrative discussion of these results as compared to industry averages (provided.)

Answer 1