Question

Show all of your work.

Assets                                                             Liabilities and Owner’s Equity                  

A/P	$60,000
LT Debt	100,000
Total Debt	160,000
CS, par	2,000
PIC	50,000
R/E	50,000
Total Equity	$102,000
Total Liabilities and Owners Equity	$262,000

Cash	$1,000
A/R	6,500
Inventory	62,500
Prepaids	12,000
Fixed Assets	250,000
Accum Depreciation	(70,000)
Total Assets	$262,000

Sales	$800,000
COGS	370.000
Gross Profit	430,000
Operating Exp.	-170,000
Depreciation	-10,000
EBIT	250,000
Interest	-10,000
EBT	240,000
Taxes	-80,000
Net Income	$160,000

Prepare a financial analysis of this company (using ratios and your rationale) and comment on its status and performance in the space below. Use another page if you need more room. Explain what the ratios depict about the financial status of the company.

Answer 1

Liquidity Ratios :

Current Ratio = Current Rtaio / Current Liabilities = (1000 + 6500 + 62500 + 12000 ) / 60000 = 1.37

Acid Test ratio = Quick Assets / Current Liabilities = (1000 + 6500 ) / 60000 = 0.125

Cash Ratio = Cash / Total Liabilities = 1000 / 160000 = 0.00625

Working Capital = Current Ratio - Current Liabilities = 82000 - 60000 = 22000

Liquidity is average as current assets are able to meet current liabilities

Activity Ratio

Inventory Turnover Ratio = Cost of goods sold / Inventory = 370000 / 62500 = 5.92

Receivables Turnover ratio = Sales / Accounts Receiavbles = 800000 / 6500 = 123.07

Total asset turnover = Sales / Total Assets = 800000 / 262000 = 3.05

Receivables collection is very fast with good credit period for purchases

Leverage Ratios

Debt Ratio = Total debt / Total assets = 160000 / 262000 = 0.61

Debt to Equity ratio = Total debt / Total Equity = 160000 / 102000 = 1.57

Times interest earned = EBIT / Interest expense = 250000 / 10000 = 25 times

Heavy debt ratio making the company risky but profits able to pay the interest obligations smoothly

Profitability ratios

Gross profit ratio = Gross Profit / sales = 430000 / 800000 = 53.75%

Profit Margin = Net Income / Sales = 160000 / 800000 = 20%

Return on assets = Net Income / Total Assets = 160000 / 262000 = 61.07%

Profitabiity very good