FI 4020 Study Guide - Quiz Guide: Deferral, Balance Sheet, Net Income
Get access
Related Documents
Related Questions
Show ALL work
Ratio Analysis. The Williams Corporationâs forecasted 2010 financial statements follow, along with some industry average ratios.
| Forecasted Balance Sheet as of December 31, 2010 | ||||
| Cash | $ 72,000 | |||
| Accounts receivables | $ 439,000 | Accounts and notes payable | $ 432,000 | |
| Inventories | $ 894,000 | Accruals | $ 170,000 | |
| Total current assets | $1,405,000 | Total current liabilities | $ 602,000 | |
| Land and building | $ 238,000 | Long-term debt | $ 404,290 | |
| Machinery | $ 132,000 | Common stock | $ 575,000 | |
| Other fixed assets | $ 61,000 | Retained earnings | $ 254,710 | |
| Total assets | $1,836,000 | Total liabilities and equity | $1,836,000 | |
| Forecasted Income Statement for 2010 | ||||
| Sales | $4,290,000 | |||
| Cost of goods sold | $3,580,000 | Per-Share Data | ||
| Gross operating profit | $ 710,000 | EPS | $ 4.71 | |
| General admin & selling expenses | $ 236,320 | DPS | $ 0.95 | |
| Depreciation | $ 159,000 | P/E Ratio | 5.00 | |
| Misc. | $ 134,000 | Market price | $ 23.57 | |
| Earnings before Taxes | $ 180,680 | Number of shares outstanding | 23000 | |
| Taxes | $ 72,272 | |||
| Net Income | $ 108,408 | |||
| Industry Financial Ratios | Williamâs Financial Ratios | Ratio/Comment | ||
| Quick Ratio | 1x | Quick Ratio | ||
| Current Ratio | 2.7x | Current Ratio | ||
| Inventory Turnover | 7x | Inventory Turnover | ||
| Days Sales Outstanding | 40 days | Days Sales Outstanding | ||
| Fixed Asset Turnover | 13x | Fixed Asset Turnover | ||
| Total Asset Turnover | 2.6x | Total Asset Turnover | ||
| Return on Assets | 9.10% | Return on Assets | ||
| Return on Equity | 18.20% | Return on Equity | ||
| Debt Ratio | 55% | Debt Ratio | ||
| Profit Margin on Sales | 3.50% | Profit Margin on Sales | ||
| P/E Ratio | 6x | P/E Ratio |
Please show all work for the following questions.
a. Calculate the indicated ratios for Williamâs in the appropriate blanks.
b. Outline Williamâs strengths and weaknesses as compared to its industry. Be detailed in your ratio analysis.
c. Recommend at least three areas for correction. Be sure to support your recommendations.
d. Why is being trustworthy essential to success in the business world? Use at least two of the following scriptures to answer this question: Psalm 101:7, Proverbs 4:20-27, Proverbs 13:11, and Proverbs 28:12-13.
| Problem 4-23 Data for Barry Computer Co. and its industry averages follow.
Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
a)The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry. b)The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry. c)The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. d)The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. e)The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. 3) Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.) Select true statement a) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price. b) If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price. c) If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price. d) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price. e) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Data for Barry Computer Co. and its industry averages follow.
| Barry Computer Company: | ||||
| Balance Sheet as of December 31, 2014 (In Thousands) | ||||
| Cash | $139,080 | Accounts payable | $139,080 | |
| Receivables | 382,470 | Other current liabilities | 115,900 | |
| Inventories | 231,800 | Notes payable | 127,490 | |
| Total current assets | $753,350 | Total current liabilities | $382,470 | |
| Long-term debt | $266,570 | |||
| Net fixed assets | 405,650 | Common equity | 509,960 | |
| Total assets | $1,159,000 | Total liabilities and equity | $1,159,000 | |
| Barry Computer Company: Income Statement for Year Ended December 31, 2014 (In Thousands) | |||
| Sales | $1,900,000 | ||
| Cost of goods sold | |||
| Materials | $779,000 | ||
| Labor | 418,000 | ||
| Heat, light, and power | 95,000 | ||
| Indirect labor | 190,000 | ||
| Depreciation | 57,000 | $1,539,000 | |
| Gross profit | $361,000 | |
| Selling expenses | 228,000 | |
| General and administrative expenses | 19,000 | |
| Earnings before interest and taxes (EBIT) | $114,000 | |
| Interest expense | 26,657 | |
| Earnings before taxes (EBT) | 87,343 | |
| Federal and state income taxes (40%) | 34,937 | |
| Net income | $52,406 |
1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.
| Ratio | Barry | Industry Average |
| Current | x | 1.99x |
| Quick | x | 1.35x |
| Days sales outstandinga | days | 34.99days |
| Inventory turnover | x | 8.44x |
| Total assets turnover | x | 1.91x |
| Profit margin | % | 2.63% |
| ROA | % | 5.02% |
| ROE | % | 10.93% |
| ROIC | % | 7.90% |
| TIE | x | 3.20x |
| Debt/Total capital | % | 47.00% |
aCalculation is based on a 365-day year.
2. Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
| FIRM | INDUSTRY | |
| Profit margin | % | 2.63% |
| Total assets turnover | x | 1.91x |
| Equity multiplier |
3. Outline Barry's strengths and weaknesses as revealed by your analysis. Select One below
a. The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
b. The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.
c. The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
d. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
e. The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)
Select one below
a. If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price.
b. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price.
c. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price.
d. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price.
e. If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price.
