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The following if the financial statements of ABC Company Limited. 2018 2019 Assets Cash 3,641 4,500...

  1. The following if the financial statements of ABC Company Limited.

2018

2019

Assets

Cash

3,641

4,500

Short-term investments

10,000

24,300

Accounts receivable

316,080

175,600

Inventories

643,680

357,600

Total Current Assets

973,401

562,000

Gross Fixed Assets

601,475

245,500

Less: Accumulated depreciation

131,580

73,100

Net Fixed Assets

469,895

172,400

Total assets

1,443,296

734,400

Liabilities and Equity

Accounts Payable

162,000

72,800

Notes Payable

360,000

100,000

Accurals

142,480

68,000

Total Current Liabilities

664,480

240,800

Long-term debt

500,000

161,716

Common stock (100,000 shares)

230,000

230,000

Retained Earnings

48,816

101,884

Total equity

278,816

331,884

Total liabilities and equity

1,443,296

734,400

Required:

  1. Why are ratios useful? What three groups use ratio analysis and for what reasons?

        

  1. Calculate the current and quick ratios based on the balance sheet. What can you say about the company’s liquidity position in 2018 and 2019?

        

  1. Calculate the debt ratio and liabilities-to- assets ratio in 2018 and 2019 based on the balance sheet.

        

  1. Calculate the fixed assets turnover and total assets turnover if in 2018, sales totalled $1.15 million and in 2019 sales totalled $800,000.

          

                                                                                                                        Total

Solutions

Expert Solution

a. Ratio provide useful information that might not be available by simply looking at the financial data. It crunches the financial statements into a more meaningful format that can be used for various purposes. It can also provide comparison of a firm's performance to the industry performance or to that of any other company.

The three groups that use ratio analysis are managers, bankers, and stockholders. Managers use ratio analysis to improve their performance and to help run the business in a more efficient manner. Bankers use the analysis to determine the creditworthiness of a firm so as to safeguard its funds and stockholders for stock valuation and to determine their future earnings.

b.Current ratio = current assets/ current liabililties

Quick ratio = (Current assets-inventory)/current liabilities

2018 2019

current ratio = 973401/664480 562000/240800

=1.47 =2.33

quick ratio = (973401-643680)664480 (562000-357600)/240800

=0.496 =0.849

Both current and quick ratio are higher in 2019. Hence we can say that the liquidity position of the company is better in 2019.

c. Debt ratio = total debt / total assets

2018 2019

debt ratio = 500000/1443296 161716/734400

=0.346 =0.220

liabilities to assets ratio = total liabilities / total assets

2018 2019

L/A = 1164480/1443296 402516/734400

=0.807 =0.548

(Here total liabilities = current liabilities + debt)

d.Fixed assets turnover =Net Sales/net fixed assets

Total asset turnover = Net sales/total assets

2018 2019

Sales / FA = 1,150,000/469895      800,000/172400

=2.45 =4.64

Sales/TA = 1,150,000/1443296 800000/734400

= 0.797 =1.089

jeff jeffy answered 2 years ago
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