Question

ANNE GIBSON CORPORATION
Balance Sheet
December 31, 2016 through December 31, 2018 (Dollars in thousands)
2018 2017 2016
Assets:
Current assets
Cash $47,200 $46,000 $45,000
Marketable securities 2,000 2,500 3,000
Accounts receivable (net) 131,000 128,000 127,000
Inventories 122,000 124,000 126,000
Prepaid expenses 3,000 2,500 2,000
Total current assets $305,200 $303,000 $303,000
Property, plant and equipment, net 240,000 239,000 238,000
Other assets 10,000 8,000 7,000
Total assets $555,200 $550,000 $548,000

Liabilities and stockholders' equity:
Current liabilities
Accounts payable $72,000 $73,000 $75,000
Accrued compensation 26,000 25,000 25,500
Income taxes 11,500 12,000 13,000
Total current liabilities $109,500 $110,000 $113,500
Long-term debt 68,000 60,000 58,000
Deferred income taxes 25,000 24,000 23,000
Stockholders' equity 352,700 356,000 353,500
Total liabilities &

stockholders' equity $555,200 $550,000 $548,000

ANNE GIBSON CORPORATION
Statement of Earnings
For Years Ended December 31, 2016-2018
(In thousands)
2018 2017 2016
Net sales $880,000 $910,000 $840,000
Cost of goods sold 740,000 760,000 704,000
Gross profit $140,000 $150,000 $136,000

Selling and administrative expense 53,000 52,000 50,000
Interest expense 6,700 5,900 5,800
Earnings from continuing
operations before income taxes $80,300 $92,100 $80,200
Income taxes 26,000 27,500 28,000
Net earnings $54,300 $64,600 $52,200

Anne Gibson Corp.
Industry Ratios
Ratios Unit 2018 2017 2016
Liquidity:
Current ratio times 2.79 2.75 2.67 2.5
Acid-test ratio times 1.65 1.60 1.54 1.5
Asset Management:
Accounts receivable turnover Times per year 6.80 7.14 6.64 10.42
Accounts receivable turnover in days Days 53.71 51.14 54.97 35.03
Inventory turnover Times per year 6.02 6.08 5.57 5.5
Inventory turnover in days Days 60.67 60.03 65.59 66.37
Total asset turnover Times per year 1.59 1.66 1.54 1.65
Long-term debt-paying ability:
Times interest earned Times per year 12.99 16.61 14.83 10.55
Debt ratio % 36.47 35.27 35.49 52.6
Profitability:
Profit Margin % 6.17 7.10 6.21 7.05
Returns on assets % 9.83 11.77 9.55 10.5
Returns on equity % 15.32 18.21 14.87 16.5

Analyze each ratio in liquidity and assess Anne Gibson’s liquidity position and explain how it compares with industry average.

Analyze each ratio in assets management and assess Anne Gibson’s assets management position and explain how it compares with industry average.

Analyze each ratio insolvency and assess Anne Gibson’s debt management position and explain how it compares with the industry average..

The Anne Gibson Corporation's 2018, 2017, and 2016 financial statements, financial ratios and industry average are given below. Assume that the industry average ratios have been constant for the past 2 years. 2016 ANNE GIBSON CORPORATION Balance Sheet December 31, 2016 through December 31, 2018 (Dollars in thousands) 2018 2017 Assets: Current assets Cash $47,200 $46,000 Marketable securities 2,000 2,500 Accounts receivable (net) 131,000 128,000 Inventories 122,000 124,000 Prepaid expenses 3,000 2,500 Total current assets $305,200 $303,000 Property, plant and equipment, net 240,000 239,000 Other assets 10,000 8,000 Total assets $555,200 $550,000 $45,000 3,000 127,000 126.000 2,000 $303,000 238,000 7,000 $548,000 Liabilities and stockholders' equity: Current liabilities Accounts payable Accrued compensation Income taxes Total current liabilities Long-term debt Deferred income taxes Stockholders' equity Total liabilities and stockholders' equity $72,000 26,000 11,500 $109,500 68,000 25,000 352,700 25,000 12.000 $110,000 60,000 24,000 356,000 $75,000 25,500 13,000 $113,500 58,000 23,000 353,500 $555,200 $550,000 $548,000

Answer 1

Solution:

Part A )

Liquidity ratio

Current ratio: Current ratio = Current assets / Current liability.

The current ratio of the firm (2.67 to 2.79) is better than the industry average (2.5) and it means that the firm is more liquid than the industry

Acid test ratio = (Current assets - Inventory) / Current liability

The acid test ratio of the firm (1.54 to 1.65) is better than the industry average (1.5) and it means that the firm is more liquid than the industry as the firm has more liquid assets.

Part B )

Asset management ratio

AR turnover and AR turnover days

AR turnover = Credit sales / AR receivable , AR turnover days = 365 / AR turnover

It is evident that the AR turnover is lower than the industry average and AR days are higher than industry average. It means that the firm is less efficient than the industry as they collect cash in 51-54 days for the sales that were made in credit as compared to the industry average of 35 days

Inventory turnover and inventory turnover days

Inventory turnover = COGS / Inventory , Inventory turnover days = 365 / Inventory turnover

It is evident that the invenory turnover is slighttly higher than the industry average and Inventory turnover days are slightly lower than industry average. It means that the firm is slightly more efficient than the industry as they keep inventory for 60-65 days as compared to industry average of 66 days.

Total Asset turnover = Sales / Total assets

This ratio is almost similar to the industry average means that the firm is generating sales per total assets in similar way as the industry.

Part C )

Solvency ratio:

Times interest earned = EBIT / Interest

This ratio is higher than the industry average that means that the firm is generating higher operating profits as compared to the interest payment.

Debt ratio = Debt / Total Assets

This ratio is lower than the industry average and it means that the firm has lower debt and solvency is better.

Part D )

Profitability ratio:

Profit margin = Net Income / Sales

Return on assets = Net income / Assets

Return on Equity = Net Income / Equity

These all three ratio is similar than the industry average hence it means that the firm is generating similar profit as compared to the industry.