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Trend Analysis - The following data pertain to Company B: (in thousands) Year 2 Year 1...

Trend Analysis - The following data pertain to Company B:

(in thousands) Year 2 Year 1
Revenue $1,285,876 $1,364,550
Net income 56,644 42,906
Accounts receivable 149,178 168,666
Inventory 158,541 179,688
Total current assets 670,337 649,903
Total asset 859,907 849,399
Total current liabilities 227,807 232,074
Total long-term liabilities 36,483 40,787
Total stockholder equity 595,617 576,538

Common-Size Income Statements - Company B reported the following income statements:

COMPANY B
INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER YEAR 2 AND YEAR 1
(in thousands) Year 2 Year 1
Sales revenue $1,285,876 $1,364,550
Costs of goods sold 682,954 743,817
Gross profit 602,922 620,733
Selling and administrative expenses 525,448 551,097
Income from operations 77,474 69,636
Interest expense (498) (652)
Interest income 903 2,371
Other income 3,506 5,455
Income before income taxes 81,385 76,810
Income tax expense 24,741 33,904
Net income 56,644 42,906

Using the data provided above, compute the following ratios for Company B for Years 1 and Years 2.

(a) Gross profit margin ratio

(b) Return on sales

(c) Asset turnover

(d) Return on assets

(e) Working capital

(f) Current ratio

(g) Accounts receivable turnover

(h) Inventory-on-hand period

(i) Long-term debt to assets

(j) Long-term debt to equity

(k) Times-interest-earned

(l) Return on equity

Please explain the formulas utilized to answer the financial ratios.

Solutions

Expert Solution

The answers are as follows: Year 1 Year 2

Gross Profit margin ratio 620733/1364550=0.4549 602922/1285876 =0.4689

Return on Sales 42906/1364550=3.144% 56644/1285876=4.4051%

Assets Turnover 1364550/854653=1.5966 1285876/854653=1.5046

(Average Assets have been used for calculating asset turnover)

Return on Assets 42906/849399=5.05% 56644/859907=6.5872%

Working Capital 649903-232074=417829 670337-227807=442530

Current Ratio 649903/232074=2.8004 670337/227807=2.9426

Accounts Receivable Turnover 1364550/158922=8.5863 1285876/158922=8.0912

(Average Receivable have been used to calculate the ratio.Since credit sales are not given the entire sales are assumed to be credit sales)

Inventory on hand period (169114.5/743817)*365=82.98 days (169114.5/682954)*365=90.38 days

Average Inventory has been used to calculate the ratio

Long Term Debt to Assets 40787/849399=0.048 36483/859907= 0.0424

Long Term Debt to Equity   40787/ 576538 = 0.0707 36483/595617=0.0613

Times Interest Earned 69636/652= 106.803 77474/498=155.57

Return on Equity 42906/576538=7.44% 56644/595617=9.51%

The formulas utilized to answer financial ratios are

  • Current Ratio
  • Accounts Receivable Turnover
  • Long term debt to equity ratio
  • Times interest earned
  • Gross proft margin
  • Return on assets
  • Return on Equity

jeff jeffy answered 1 year ago
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