Financial & Managerial Accounting Practice with Ratios and Analysis

Transcription

1 Financial & Managerial Accounting Practice with Ratios and Analysis A company had the following income statement for the year and the balance sheet accounts at the end of the year. Use the information to calculate the financial ratios. Income Statement Balance Sheet Accounts Sales $200 Cash $100 A/P $100 COGS 160 A/R 50 Notes Payable 200 EBIT 40 Inventory 50 Capital Stock 50 Interest 10 Fixed Assets 200 Retained Earnings 50 EBT 30 Taxes 10 Net Income Current Ratio = 2. Return on Equity = 3. Asset Turnover = 4. Debt-Equity ratio = 5. Inventory Turnover = 6. Return on Assets = 7. Total Debt ratio = 8. Quick Ratio = 9. Times Interest Earned = 10. Days in Inventory =

2 12. Assume sales are expected to be $100,000 next year with a gross profit margin of 60% and net profit margin of 10%. If the firm is expected to have $50,000 in total assets and $30,000 in total liabilities, then calculate: gross profits, net income and ROE? 13. The manager of an office supply store has noticed that the accounts receivable turnover ratio has been increasing during the past few years. Is this a good or bad trend? What might be driving this trend? 14. A business is projecting sales to be $100 next year. In the current year, cost of goods sold were 70% of sales and selling & administrative expenses 10% of sales. In addition, you know that the tax rate will be a 10%. The times interest earned ratio next year should be 5. Construct the forecasted income statement and the common-size income statement for this business. 15. You are projecting sales to be $1,000 next year with a net profit margin of 10%. This year retained earnings were $200. The corporation has a dividend pay-out rate of 40%. What is your forecast for next year s retained earnings? 16. You are so proud of yourself. You have just finished your first financial forecast for your new job. The forecasted income statement looks like a work of art. Yet, you notice that something appears to be wrong with the forecasted balance sheet ---- it doesn t balance! In fact, your forecast for total assets is $1 million more than the projected liabilities plus owners equity. Have you just made a mistake (if so, what type)? Or, how might you interpret the discrepancy? 17. What sort of financial ratios might a bank loan officer look for when evaluating a business loan application?

3 18. What sort of financial ratios might a person look for when deciding whether or not to buy stock in a corporation? An analyst has forecasted next year s sales to be $1,000 with cost of goods sold at $600. The analyst plans to use the following information to forecast next year s balance sheet. Inventory Turnover =5 Current Ratio = 3 Asset Turnover = 2 Debt Ratio = 60% Cash = $80 Accounts Receivable Turnover = What is the forecast for total assets? 20. What is the forecast for fixed assets? 21. What is the forecast for current liabilities? 22. What is the forecast for total shareholder equity?

4 23. A small manufacturing business has the following accounts at the end of the year, except for Retained Earnings stated at the beginning of the year. Remember that you must show all of your work simply writing down a number will result in zero points earned. Cash $270 Property, Plant & Equipment $500 Notes Payable $150 Selling & Admin. Expenses $ 10 Capital Stock $170 Accounts Receivable $200 Taxes $ 5 Beginning Retained Earnings $415 Sales Revenue $100 Interest Expense $ 5 Accounts Payable $250 Cost of Goods Sold $ 60 Inventory $ 30 Dividends $ 5 a. Calculate and briefly interpret the current ratio for this business. In general, would the b. Calculate and briefly interpret the gross profit margin for this business. In general, would the c. Calculate and briefly interpret the asset turnover for this business. In general, would the d. Calculate and briefly interpret the return on equity for this business. In general, would the

5 e. Calculate and briefly interpret the Days in Inventory for this business. In general, would the f. Calculate and briefly interpret the debt ratio for this business. In general, would the business like to see this ratio higher or lower? g. Calculate and briefly interpret the quick ratio for this business. In general, would the business like to see this ratio higher or lower? h. Calculate and briefly interpret the account receivable turnover for this business. In general, would the

6 24. An analyst has forecasted next year s sales to be $1,000 with cost of goods sold at $600. The analyst plans to use the following information to forecast next year s balance sheet. Inventory Turnover =5 Current Ratio = 3 Asset Turnover = 2 Debt Ratio = 60% Cash = $80 Accounts Receivable Turnover = 10 (a) Based on the information provided, what is the forecasted amount of current assets? (b) Based on the information provided, what is the forecasted amount of owners equity? 25. You are a commercial lending officer at a large bank. You have two requests from small corporations for the same size loan. However, you can grant the loan to only one of the corporations. Unfortunately, you only have the following data available to make your decision. Corporation 1 Corporation 2 Net Profit Margin 12% 4% EBIT $10,000,000 $1,000,000 Quick Ratio Return on Equity 5% 30% Interest Expense $2,000,000 $200,000 Asset Turnover Based upon the available information, make a case for making the loan to one corporation over the other corporation. 26. A business is projecting sales to be $100 next year. The gross profit margin is expected to remain steady at 60%. In addition, the business knows the tax rate will be 40%, times interest earned ratio will be 4, and SGA expenses will be $20. Construct the forecasted income statement.