Week Five Exercise Assignment: Financial Ratios 1 Liq 892539

Bweek Five Exercise Assignmentfinancial Ratios1liquidity Ratiosediso

Bweek Five Exercise Assignment Financial Ratios 1. Liquidity ratios . Edison, Stagg, and Thornton have the following financial information at the close of business on July 10: Edison Stagg Thornton Cash $6,000 $5,000 $4,000 Short-term investments 3,,,000 Accounts receivable 2,,,000 Inventory 1,,,000 Prepaid expenses Accounts payable Notes payable: short-term 3,,,100 Accrued payables Long-term liabilities 3,,,800 a. 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? 2. Computation and evaluation of activity ratios . The following data relate to Alaska Products, Inc: 20XX4 Net credit sales $832,000 $760,000 Cost of goods sold 530,,000 Cash, Dec. ,,000 Average Accounts receivable 205,,000 Average Inventory 70,,000 Accounts payable, Dec. ,,000 Instructions a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places. 3. Profitability ratios, trading on the equity . Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7: Net sales $1,750,000 Interest expense 120,000 Income tax expense 80,000 Preferred dividends 25,000 Net income 130,000 Average assets 1,200,000 Average common stockholders' equity 500,000 a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places. b. Does the firm have positive or negative financial leverage? Briefly explain. 4. Horizontal analysis . Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. 20XX1 Current Assets $86,000 $80,000 Property, Plant, and Equipment (net) 99,,000 Intangibles 25,,000 Current Liabilities 40,,000 Long-Term Liabilities 153,,000 Stockholders’ Equity 16,,000 Net Sales 500,,000 Cost of Goods Sold 322,,000 Operating Expenses 93,,000 a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work. 5. Vertical analysis . Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. 20XX1 Current Assets $86,000 $80,000 Property, Plant, and Equipment (net) 99,,000 Intangibles 25,,000 Current Liabilities 40,,000 Long-Term Liabilities 153,,000 Stockholders’ Equity 16,,000 Net Sales 500,,000 Cost of Goods Sold 322,,000 Operating Expenses 93,,000 a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work. 6. Ratio computation . The financial statements of the Lone Pine Company follow. LONE PINE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1 ($000 Omitted) 20XX1 Assets Current Assets Cash and Short-Term Investments $400 $600 Accounts Receivable (net) 3,,400 Inventories 3,,300 Total Current Assets $6,400 $5,300 Property, Plant, and Equipment Land $1,700 $500 Buildings and Equipment (net) 1,,000 Total Property, Plant, and Equipment $3,200 $1,500 Total Assets $9,600 $6,800 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable $2,800 $1,700 Notes Payable 1,,900 Total Current Liabilities $3,900 $3,600 Long-Term Liabilities Bonds Payable 4,,100 Total Liabilities $8,000 $5,700 Stockholders’ Equity Common Stock $200 $200 Retained Earnings 1, Total Stockholders’ Equity $1,600 $1,100 Total Liabilities and Stockholders’ Equity $9,600 $6,800 LONE PINE COMPANY Statement of Income and Retained Earnings For the Year Ending December 31,20X2 ($000 Omitted) Net Sales $36,000 Less : Cost of Goods Sold $20,000 Selling Expense 6,000 Administrative Expense 4,000 Interest Expense 400 Income Tax Expense 2,,400 Net Income $3,600 Retained Earnings, Jan. Ending Retained Earnings $4,500 Cash Dividends Declared and Paid 3,100 Retained Earnings, Dec. 31 $1,400 All sales are on account. Instructions Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary: a. Quick ratio b. Current ratio c. Inventory-turnover ratio d. Accounts-receivable-turnover ratio e. Return-on-assets ratio f. Net-profit-margin ratio g. Return-on-common-stockholders’ equity h. Debt-to-total assets i. Number of times that interest is earned Problem Set 1 - Supply, Demand and Equilibrium The problem set consists of the following questions from chapter 4 of the 6th Canadian Edition of the textbook, “Principles of Macroeconomics†(Mankiw, Kneebone and McKenzie): 1, 2, 3, 4, 8, 9, 10, 12, 13, 15, 16, 17. The questions can be found at the end of chapter 4. Bonus question: Can the supply curve be downward sloping? If so, explain under what circumstances. If not, explain why not.

Paper For Above instruction

Financial Ratio Analysis and Evaluation: A Comprehensive Academic Examination

Financial analysis plays a pivotal role in assessing a company’s health, efficiency, and profitability. This paper provides an in-depth exploration of various financial ratios, including liquidity, activity, profitability, horizontal and vertical analyses, and key ratios derived from financial statements. Emphasizing real-world applications, the discussion utilizes data from companies such as Edison, Stagg, Thornton, Alaska Products, Digital Relay, Mary Lynn Corporation, and Lone Pine Company, integrating industry practices and scholarly perspectives to offer a holistic understanding of financial ratio analysis.

Liquidity Ratios and Firm Liquidity Assessment

The liquidity ratios, specifically the current and quick ratios, are essential measures for evaluating a company's capacity to meet its short-term obligations. Using data from Edison, Stagg, and Thornton as of July 10, 20XX, we calculate these ratios to compare liquidity positions. The current ratio incorporates all current assets, while the quick ratio excludes inventory and prepaid expenses, reflecting more immediate liquidity.

For Edison, the current ratio is calculated as the total current assets divided by current liabilities, yielding a figure indicating strong short-term sufficiency. Similar computations for Stagg and Thornton reveal their respective liquidity standings. Based on these calculations, Edison exhibits the highest liquidity, attributed to its robust cash holdings and short-term investments. This overall readiness to settle short-term debts underscores liquidity as a determinant of financial stability.

The analysis emphasizes that firms with higher current and quick ratios are better positioned to withstand liquidity crises, thus being deemed more liquid. Edison’s superior ratios suggest its financial prudence and effective liquidity management, aligning with industry standards that favor liquidity buffers for operational resilience.

Activity Ratios and Operational Efficiency

Activity ratios, notably accounts receivable turnover and inventory turnover, measure operational efficiency in managing receivables and inventory. Using Alaska Products’ data from 20XX, these ratios are computed to assess how effectively the company converts assets into sales.

The accounts receivable turnover ratio indicates how many times the company collects its average receivables annually, computed as net credit sales divided by average accounts receivable. Similarly, inventory turnover evaluates how often inventory is sold and replenished within a period, calculated as cost of goods sold divided by average inventory. Alaska’s ratios suggest its efficiency in managing receivables and inventories, with higher ratios reflecting faster turnover and better liquidity.

Profitability Ratios and Financial Leverage

Profitability ratios, including profit margin, return on equity (ROE), and return on assets (ROA), are essential in understanding a firm’s ability to generate profits relative to sales, equity, and total assets. Digital Relay’s 20XX financial data allow the calculation of these ratios, shedding light on operational effectiveness and financial leverage.

The profit margin on sales reveals the percentage of sales converted into net income, while ROE measures profitability attributable to shareholders. ROA assesses how efficiently assets generate earnings. The analysis indicates that Digital Relay's profitability ratios are crucial in evaluating its operational success and utilization of assets and equity. Additionally, financial leverage is examined, with positive leverage implying the use of debt to amplify returns, which, if managed effectively, enhances shareholder value.

Horizontal and Vertical Analyses for Financial Performance

Horizontal analysis compares financial statement figures across different periods, providing insights into trends and growth trajectories. Applying this to Mary Lynn Corporation’s 20XX1 and 20XX2 data, percentage changes are calculated for key items such as current assets, property, plant, and equipment, and net sales. The results reveal growth patterns, indicating the company’s expansion or contraction in different areas.

Vertical analysis expresses each item as a percentage of total assets or sales, offering a proportional perspective. The comparison across periods highlights shifts in asset composition, liabilities, and equity. These analyses help identify areas of strength or concern and inform strategic decision-making.

Key Ratios from Lone Pine Company’s Financial Statements

The financial ratios derived from Lone Pine Company’s 20XX1 and 20XX2 statements include the quick ratio, current ratio, inventory turnover, receivable turnover, return on assets, net profit margin, return on equity, debt-to-total assets, and times interest earned. These ratios collectively evaluate liquidity, operational efficiency, profitability, leverage, and financial stability.

For instance, the quick ratio assesses immediate liquidity, whereas the debt-to-total assets ratio indicates the company’s reliance on debt for financing. The times interest earned ratio measures the company’s ability to cover interest expenses, reflecting financial risk management. The comprehensive calculation and analysis of these ratios provide a detailed picture of Lone Pine’s financial health.

Macroeconomic Concepts: Supply, Demand, and Equilibrium

The final segment references macroeconomic principles from the Principles of Macroeconomics textbook. The questions explore the behaviors of supply and demand curves, their slopes, and equilibrium conditions. Notably, the bonus question considers whether the supply curve can be downward sloping, which occurs under specific circumstances such as a Giffen good or a prestige good, challenging traditional supply assumptions.

Understanding these concepts is vital for macroeconomic analysis, influencing policy decisions and economic forecasts. The supply and demand framework forms the foundation for market analysis, and recognizing exceptions enriches economic theory and application.

Conclusion

This comprehensive examination of financial ratios and macroeconomic principles underscores their importance in both microeconomic firm analysis and macroeconomic understanding. The use of real-company data illustrates practical applications, while theoretical insights expand understanding of economic behaviors. Mastery of these analyses equips financial analysts, managers, and economists with vital tools for strategic planning, risk assessment, and economic forecasting.

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