Financial Ratios (Coursework Sample)

Week Five Exercise
Name
Instructor
Course Name and Code
Date
Question one: Liquidity ratios
* Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places) Which firm is the most liquid? Why?
Item

Edison

Stagg

Thornton

Cash

$6000

$5,000

$4,000

Accounts receivable

$2,000

$2,500

$3,000

Short-term investments

$3,000

$2,500

$2,000

Inventory

$1,000

$2,500

$4,000

Prepaid expenses

$800

$8,00

$800

Total Current Assets

$12,800

$13,300

$13,800

Item

Edison

Stagg

Thornton

Notes Payable: short term

$200

$200

$200

Accrued payables

$3,100

$3,100

$3,100

Accounts payable

$300

$300

$300

Total Current Liabilities

$3,600

$3,600

$3,600

Edison

Current Ratio

$12,600/$3,600

3.50

Quick Ratio

($6,000+$3,000+$2,000)/$3,600

3.06

Thornton

Current Ratio

$13,800/$3,600

3.83

Quick Ratio

($4,000 + $2,000+$3000)/$3,600

2.50

Stagg

Current Ratio

$13,300/$3,600

3.69

Quick Ratio

($5,000+$2,500+$2,500)/$3,600

2.78

Comment: Thornton is the most-liquid company because it has the largest inventory, and it can move its inventory quickly.
Question Two: Computation and evaluation of activity ratios
Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable
= $832,000/[($205,000 + $156,000)/2]
= 4.61
Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory
= $530,000/[($70,000+$50,000)/2]
=8.83
Question Three: Profitability ratios, trading on the equity
* Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
Profit margin on Sales Ratio = Net Income/Net Sales
= $130,000/$1,750,000
=7.43%
Profit margin on the return on equity = Net Income/Average common stockholder’s equity
= $130,000/$500,000
= 26%
Profit margin on the return on assets = Net income/Average Assets
= $130,000/$1,200,000
= 10.83%
* Does the firm have positive or negative financial leverage? Briefly explain.
The company has a negative financial leverage because of the $120,000 interest rate, which shows that the company has a huge debt. The debt capital ratio is too high. Indeed, it appears that the company is operating mainly with borrowed funds.
Question four: Horizontal analysis.
* Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.
Mary Lynn Corporation Horizontal Analysis

Item



Increase/Decrease


20X2

20X1

Amount

Percentage

Current Assets

$86,000

$80,000

86,000-80,000= $6,000

6,000/80000x100
= 7.50%

Net Property, Plant, and Equipment

$99,000

$90,000

99,000-90,000= $9,000

9,000/90,000x100
= 10.00%

Intangibles

$25,000

$50,000

25,000-50,000= -$25,000

25,000/50,000x100
= -50.00%

Current Liabilities

$40,800

$48,000

40,800-48,000= -$7,200

7,200/48,000x100
= -15.00%

Long-term Liabilities

$153,000

$160,000

153,000-160,000= -$7,000

7,000/160,000x100
= -4.38%

Stockholder’s Equity

$16,200

$12,000

16,200-12,000= $4,200

4,200/12,000x100
= 35.00%

Net Sales

$500,000

$500,000

500,000-500,000

0.00%

Cost of Goods Sold

$322,500

$350,000

322,500-350,000= -$27,500

27,500/350,000x100
= -7.85%

Operating Expenses

$93,500

$85,000

93,500-85,000= $8,500

8,500/85,000 x 100
= 10.00%

Comment: Decrease in long term liabilities show that the company has been repaying its debts. There is no change in net sales, but cost of goods sold has decreased. Furthermore, there is a increases in current assets, and a decrease in current liabilities, showing that the company’s working capital has increased.
Question five: Vertical Analysis
Mary Lynn Corporation Vertical Analysis

Item

20X2

20X1


Amount

Percentage

Amount

Percentage

Current Assets

$86,000

40.95%

$80,000

36.36%

Net Property, Plant, and Equipment

$99,000

47.14%

$90,000

40.91%

Intangibles

$25,000

11.90%

$50,000

22.73%

Total Assets

$210,000

100.00%