Question

Complete the following questions using Microsoft Word or Excel, as appropriate. Review the grading rubric to confirm you are meeting the assignment requirements.

Below are the balance sheet and income statement for Happy Hamburger Company.

Happy Hamburger Company
Balance Sheet as of December 31, 20XX
Assets		Liabilities and Shareholder Equity
Cash	85,000	Accounts payable	145,000
Accounts Receivable	340,000	Current portion of debt	90,000
Inventories	250,000	Other current liabilities	114,000
Total current assets	675,000	Total current liabilities	349,000
Net fixed assets	360,000	Long-term debt	265,000
Total assets	1,035,000	Total liabilities	614,000
		Common equity	421,000
		Total liabilities & equity	1,035,000

Happy Hamburger Company
Income Statement for the year ending December 31, 20XX
Sales	1,810,000
Costs of goods sold	1,510,000
Selling, general and administrative expenses	152,000
Earning before interest and taxes (EBIT)	148,000
Interest expense	26,200
Earning before taxes (EBT)	121,800
Federal and state income taxes (40%)	48,720
Net Income	73,080

Required:

Calculate the following ratios for the company.

Explain whether the company is doing better or worse than the industry average for each ratio.

	Happy Hamburger	Industry Average
Current ratio		1.7
Days sales outstanding (based on 365 day year)		36 days
Inventory turnover		7.3
Fixed asset turnover		12.1
Total asset turnover		3.00
Return on sales		3.20%
Return on assets		3.60%
Return on equity		9.00%
Debt ratio		71%

Answer 1

Calculation of given Ratios

Current Ratio = Total Current Assets ÷ Total Current Laibilities

CR Ratio = $675,000 ÷ $349,000 = 1.9 times

Days Sales Outstanding Ratio = (Account Receivable ÷ Total Credit sales) × No. of Days

DSO Ratio = ($340,000 ÷ $1,810,000)× 365 = 68.6 or 69 Days

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory

IT Ratio = $1,510,000 ÷ $210,000 = 7.2 times

Fixed Assets Turnover Ratio = Net Sales ÷ Net Fixed Assets

FAT Ratio = $1,810,000 ÷ $360,000 = 5.0 times

Total Assets Turnover Ratio = Net Sales ÷ Total Assets

TAT Ratio = $1,810,000 ÷ $1,035,000 = 1.7 times

Return on Sales = Net operating Income ÷ Net Sales

ROS = $73,080 ÷ $1,810,000 = 0.0404 × 100 = 4.04%

Return on Assets = Net Operating Income ÷ Total Assets

ROA = $73,080 ÷ $1,035,000 = 0.07061 × 100 = 7.1%

Return on Equity = Net operating Income ÷ Stockholders' Equity

ROE = $73,080 ÷ $421,000 = 0.17358 × 100 = 17.36%

Debt Ratio = Total Liabilities ÷ Total Assets

Debt Ratio = 614,000 ÷ $1,035,000 = 0.5932 × 100 = 59.32%

Summary of Ratios

Ratios	Happy Hamburger	Industry Average
Current ratio	1.9	1.7
Days sales outstanding (based on 365 day year)	69 days	36 days
Inventory turnover	7.2	7.3
Fixed asset turnover	5.0	12.1
Total asset turnover	1.7	3.00
Return on sales	4.04%	3.20%
Return on assets	7.1%	3.60%
Return on equity	17.36	9.00%
Debt ratio	59.32%	71%

Explanation

1. Current Ratio of Happy is better than industry as its liquidity is better than industry.

2. Days sale outstanding for Happy is worse than industry avarage. Happy is not

effiecent as industry is in respect of DSO.

3. Inventory turnover ratio of of industry is slighghtly better than Happy's ITR.

4. Fixed Assets Turnover Ratio of Happy is worse than industry's average FAT. Happy

not efficiently utilizing its fixed assest to generate revenue as industry.

5. Total Assets turnover ratio of of Happy is 1.7 and industry it is 3.00. Industry average

total assets trunover ratio is better than Happy Humbeger.

6. Return on sales for Happy Humberger (4.04%) is better than industry (3.20%). Happy

is performing better than industry's average return on sales

7. Return on Assets for Happy Humberger (7.1%) is better than industry (3.60%).

8. Retunr on Stockholers' Equity for Happy Humberger is 17.36% as compared to

industry 9.00%. HH is providing better return to its stockholder than industry.

9. The Debt Ratio of Happy Humberger is 59.32% which is fianacially more secured than

the industry debt ratio of 71.0% for creditors and lenders.