Busi 320 Comprehensive Problem 1 Spring D 2016 Use The Follo

Busi 320 Comprehensive Problem 1 Spring D 2016 Use The Following Inform

Analyze and compute various financial ratios for the years 2014 and 2015 based on the provided income statement and balance sheet data. Evaluate whether each ratio improved or worsened from 2014 to 2015. Additionally, compare these ratios to industry averages for 2015 to determine if the company's performance is considered "good" or "bad" relative to industry standards.

Specifically, you are asked to calculate the following ratios for both years: profit margin, current ratio, quick ratio, return on assets, debt to assets ratio, receivables turnover, average collection period, inventory turnover, return on equity, and times interest earned. For inventory turnover, use the formula indicated in the textbook, which is generally:

Inventory Turnover = Cost of Goods Sold / Average Inventory

After calculating these ratios, record whether each ratio moved in a positive or negative direction ("getting better" or "getting worse"). Then assess whether each ratio is "good" or "bad" compared to the industry averages provided for 2015.

Paper For Above instruction

The evaluation of a company's financial health through ratios provides crucial insights into its operational efficiency, liquidity, profitability, and leverage. By analyzing the ratios for 2014 and 2015, and comparing them to industry averages, stakeholders can gauge whether the company is improving and whether its current performance aligns favorably with industry standards.

Profit Margin:

The profit margin indicates how much profit a company makes for each dollar of sales. It is calculated as net income divided by sales. For 2014, with sales of $1,100,000 and net income of $177,000, the profit margin is approximately (177,000 / 1,100,000) = 0.16 or 16%. For 2015, with sales of $1,188,000 and net income of $198,000, the profit margin is (198,000 / 1,188,000) ≈ 0.17 or 17%.

The increase from 16% to 17% signifies an improvement, indicating the company’s enhanced profitability per dollar of sales. When compared to the industry average of 0.11 (or 11%), both years are significantly above the industry average, reflecting a "good" performance. Hence, the profit margin has been getting better and is "good" compared to industry standards.

Current Ratio:

The current ratio measures liquidity by dividing current assets by current liabilities. In 2014, current assets were $250,000, and current liabilities were $130,000, giving a ratio of 250,000 / 130,000 ≈ 1.92. For 2015, current assets are $288,600, and current liabilities are $139,100, yielding a ratio of 288,600 / 139,100 ≈ 2.08.

The ratio increased slightly, indicating improved liquidity. The industry average is 1.90, and the company's ratios are above this number in both years, signifying "good" liquidity. The ratio improved from 1.92 to 2.08, thus it is "getting better," and both years' ratios are considered "good" relative to the industry.

Quick Ratio:

The quick ratio assesses liquidity excluding inventories. It is calculated as (Current Assets - Inventory) / Current Liabilities. For 2014, it is (250,000 - 110,000) / 130,000 ≈ 1.08. In 2015, it is (288,600 - 135,000) / 139,100 ≈ 1.17.

This indicates a slight improvement in liquidity excluding inventories. Both ratios surpass the industry average of 1.12, indicating the company's quick liquidity is "good." The increase suggests an improving liquidity position, "getting better."

Return on Assets (ROA):

ROA is net income divided by total assets. For 2014, it is 177,000 / 550,000 ≈ 0.32 or 32%. For 2015, it is 198,000 / 603,600 ≈ 0.33 or 33%.

The ROA improved slightly, reflecting increased efficiency in utilizing assets to generate profit. Both are well above the industry average of 0.28 (or 28%), signifying "good" performance. The company's ROA is "getting better."

Debt to Assets Ratio:

This ratio indicates leverage by dividing total liabilities by total assets. For 2014, it is 280,000 / 550,000 ≈ 0.51 or 51%. For 2015, 322,100 / 603,600 ≈ 0.53 or 53%.

An increase suggests higher leverage, which can imply more financial risk. Comparing to the industry average of 0.55 (or 55%), the company's ratios are slightly better than industry, so "good." The ratio has increased, indicating a "getting worse" trend, but still remains below the industry average, thus still "good."

Receivables Turnover:

Calculated as sales divided by average accounts receivable. For 2014, (1,100,000) / [(80,000 + 81,600) / 2] ≈ 13.4. For 2015, 1,188,000 / [(80,000 + 81,600) / 2] ≈ 14.5.

The company’s receivables turnover improved, indicating more efficient collection of receivables. Compared to the industry average of 18, the company's ratios are lower, implying room for improvement but are trending positively, "getting better."

Average Collection Period:

This measures the days it takes to collect receivables, calculated as (360 / receivables turnover). For 2014, 360 / 13.4 ≈ 26.87 days; for 2015, 360 / 14.5 ≈ 24.83 days.

The decrease signifies faster collection periods. Compared to the industry average of 21.20 days, the company is somewhat slower, indicating a "bad" comparison. However, the company is improving its collection efficiency, moving "getting better."

Inventory Turnover:

Calculated as COGS / average inventory. In 2014, 450,500 / [(110,000 + 135,000) / 2] ≈ 8.02. In 2015, 500,000 / [(110,000 + 135,000) / 2] ≈ 8.67.

Slight improvement shows better inventory management. The industry average of 8.25 indicates that in 2014, the company's turnover was just below, but in 2015, it is above, reflecting "getting better" and "good" performance.

Return on Equity (ROE):

ROE is net income divided by shareholder's equity. For 2014, 177,000 / 270,000 ≈ 0.66 or 66%. For 2015, 198,000 / 281,500 ≈ 0.70 or 70%.

These results are significantly above the industry average of 0.55 (or 55%), indicating "good" performance. The slight increase shows the company is "getting better."

Times Interest Earned (TIE):

Calculated as EBIT divided by interest expense. For 2014, 320,000 / 25,000 = 12.8. For 2015, 295,000 / 25,000 = 11.8.

A decrease indicates slightly reduced ability to cover interest, but both ratios remain above the industry average of 11.15, so "good." However, the trend shows a "getting worse" pattern.

In conclusion, the company's ratios generally improved from 2014 to 2015, indicating better operational performance, liquidity, and profitability. Most ratios outperform the industry averages, signaling a strong position, though some leverage and collection efficiency ratios suggest areas for ongoing improvement. Maintaining focus on debt management and receivables collection can further enhance financial health, aligning even more favorably with industry standards.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (14th ed.). Cengage Learning.
  • Gibson, C. H. (2017). Financial Reporting & Analysis (13th ed.). Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2018). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill Education.
  • Fraser, L. M., & Ormiston, A. (2016). Understanding Financial Statements (11th ed.). Pearson.
  • Anthony, R., & Govindarajan, V. (2018). Management Control Systems (14th ed.). McGraw-Hill Education.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
  • Lee, T. A. (2020). Modern Financial Management. Routledge.
  • Revsine, L., Collins, W. W., Johnson, W. B., & Mittelstaedt, F. H. (2018). Financial Reporting & Analysis (8th ed.). Pearson.
  • DeFond, M. L., & Zhang, J. (2014). The Reputational Penalty for Aggressive Accounting. The Accounting Review, 89(2), 423–453.

Related Assignments