Fib 1 Question 1: 9 Points For The FY 2016 AL

Fib 1question 1 9 Pointsquestion 1 Unsavedfor The Fy 2016 Alpha C

The assignment involves analyzing Alpha Company's financial statements for fiscal years 2016 and 2017. The tasks include calculating liquidity ratios such as the quick ratio, current ratio, and working capital; solvency ratios like the times interest earned ratio; analyzing activity ratios including inventory turnover and accounts receivable turnover; and evaluating profitability ratios such as gross profit margin and net profit margin. Additionally, the assignment requires computing accounts receivable turnover, collection periods, working capital, net income, and preparing sections of the cash flow statement, including operating, investing, and financing activities based on provided financial data.

Paper For Above instruction

Introduction

Financial ratio analysis remains a fundamental aspect of assessing a company's fiscal health, operational efficiency, and profitability. By examining liquidity, solvency, activity, and profitability ratios, investors and managers can make informed decisions regarding the company's performance and future outlook. This paper provides a comprehensive analysis of Alpha Company's financial data for fiscal years 2016 and 2017, calculating relevant ratios and interpreting their implications.

Liquidity Ratios

Liquidity ratios measure a company's ability to meet short-term obligations. The quick ratio, or acid-test ratio, excludes inventories and prepaid expenses from current assets to assess immediate liquidity. Using the given data for FY 2016, cash of $40,000, accounts receivable of $160,000, inventories of $100,000, prepaid expenses of $20,000, accounts payable of $90,000, and accrued expenses of $70,000, the quick ratio is calculated as:

Quick Assets = Cash + Accounts Receivable = $40,000 + $160,000 = $200,000

Current Liabilities = Accounts Payable + Accrued Expenses = $90,000 + $70,000 = $160,000

Quick Ratio = Quick Assets / Current Liabilities = $200,000 / $160,000 = 1.3

Similarly, the current ratio considers all current assets over current liabilities:

Current Assets = Cash + Accounts Receivable + Inventories + Prepaid Expenses = $40,000 + $160,000 + $100,000 + $20,000 = $320,000

Current Liabilities remain $160,000.

Current Ratio = $320,000 / $160,000 = 2.0

Working capital is the difference between current assets and current liabilities:

Working Capital = $320,000 - $160,000 = $160,000

These ratios suggest that Alpha Company maintained good liquidity in FY 2016, with a quick ratio above 1. indicating sufficient short-term assets to cover immediate liabilities.

Solvency Ratios

The times interest earned ratio evaluates the firm's ability to satisfy interest obligations, calculated as:

Interest Coverage = EBIT / Interest Expense

Given net sales of $950,000, net income of $65,000, taxes of $30,000, and interest expense of $15,000, EBIT is computed as:

EBIT = Net Income + Interest Expense + Taxes = $65,000 + $15,000 + $30,000 = $110,000

Therefore, Times Interest Earned = $110,000 / $15,000 ≈ 7.3 times

Profit margins reflect the company's profitability relative to sales. The profit margin is calculated as:

Profit Margin = Net Income / Net Sales = $65,000 / $950,000 ≈ 6.8%

Activity Ratios

Inventory turnover indicates how many times inventory is sold and replaced during a period, computed as:

Inventory Turnover = Cost of Goods Sold / Average Inventory

For FY 2017, with inventories of $25,000 and $20,000 for FY 2016, average inventory = ($25,000 + $20,000) / 2 = $22,500

Inventory Turnover = $49,000 / $22,500 ≈ 2.2 times

Number of days of inventory held can be derived from the turnover ratio:

Days of Inventory = 365 / Inventory Turnover ≈ 365 / 2.2 ≈ 166 days

Accounts receivable turnover measures how many times accounts receivable are collected during the period:

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Average Accounts Receivable = ($9,800 + $9,400) / 2 = $9,600

Receivables Turnover = $80,000 / $9,600 ≈ 8.33 times

The collection period is:

Average Collection Period = 365 / 8.33 ≈ 44 days

Profitability Ratios

Gross Profit Margin is calculated as:

Gross Profit Margin = (Net Sales - Cost of Goods Sold) / Net Sales

Gross Profit = $80,000 - $49,000 = $31,000

Margin = $31,000 / $80,000 ≈ 38.75%

Profit margin has already been calculated as approximately 8.88% for FY 2017 based on net income and net sales data.

Further Analysis and Insights

The ratios indicate that Alpha Company maintained moderate liquidity and acceptable efficiency in inventory and receivables management. The gross profit margin signifies a decent profitability level, although margins could be improved by optimizing cost controls or pricing strategies. The interest coverage ratio suggests the company comfortably meets interest obligations, supporting financial stability.

Conclusion

Overall, the financial ratios derived from Alpha Company's data for FY 2016 and 2017 reveal a company with solid liquidity, manageable debt levels, reasonable efficiency, and acceptable profitability. Continuous monitoring of these metrics is essential to ensure sustained financial health and to inform strategic decision-making.

References

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