Question

RATIO ANALYSIS Question: The balance sheet and income statement for the JP Robard mfg company areas follows: Particulars Amounts Cash Account receivable Inventories Current Assets Net Fixed Assets Total Assets Account payables Accrued Expenses Short Term Notes Payables Current Liabilities Long term Debt Owners' Equity 500 2000 1000 3500 4500 8000 1000 600 300 2000 2000 4000 8000 8000 (3300) 4700 (3000) 1700 (367) 1333 (533) 800 Total Liabilities and Owners Equity Net Sales (All Credit) Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Expense Earnings Before taxes Income taxes (40%) Net Income Calculate the following ratios: Current ratio Debt Ratio Average collection period Inventory turnover Total Assets Turnover Gross profit margin Return on equity Operating income return on investment Times interest ratio Fixed asset turnover Operating profit margin

Answer 1

Solution :-

1. Current Ratio = Current assets / Current Liabilities

Current Assets = $ 3500

Current Liabilities = $ 2000

Current Ratio =$ 3500 / $ 2000 = 1.75

2. Average Collection Period = 360 Days / Account Receivable Turnover Ratio

Where, Account Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Net Credit Sales = $ 8000

Average Accounts Receivable = $ 2000

Account Receivable Turnover Ratio = $ 8000/ $ 2000 = 4 Times

Average Collection Period = 360 Days / 4 = 90 Days

Assume Days in a Year = 360 Days

3. Total asset turnover ratio = Net Sales / Total assets

Net sales = $ 8000

Total assets = $ 8000

Total asset turnover Ratio= $ 8000 / $ 8000 = 1 Time

4. Return on Equity = Net Income / Equity * 100

Net Income = $ 800

Total Equity = $ 4000

Return on Equity = $ 800 / $ 4000 *100 = 20%

5. Debt ratio = Total Liabilities / Total Assets

Total Liabilities = Current Liabilities + Long term Debt = $ 2000 + $ 2000 = $ 4000

Total Assets = $ 8000

Debt ratio = $ 4000 / $ 8000 *100 = 50%

6. Inventory turnover Ratio = Cost of goods sold / Inventory

Cost of goods sold= $ 3300

Inventory = $ 1000

Inventory turnover Ratio = $ 3300 / $ 1000 = 3.3 Times

7. Gross Profit Margin Ratio = Gross Profit / Net Sales * 100

Net sales = $ 8000

Gross Profit = $ 4700

Gross Profit Margin Ratio = $ 4700 / $ 8000 * 100 = 58.75 %

8.Operating Income Return on Investment = Operating Income / Net Operating Assets

Operating Income = $ 1700

Net Operating Assets = Operating Assets - Operating Liabilities

Net Operating Assets = $ 8000 - $ 4000 = $ 4000

Operating Income Return on Investment = $ 1700 / $ 4000 = 42.5 %

9. Times Interest Ratio = Income before interest and tax / Interest Expense

Income before interest and tax ( Operating Income ) = $ 1700

Interest Expense = $ 367

Times Interest Ratio = $ 1700 / $ 367 = 4.63 Times

10. Fixed asset turnover ratio = Net Sales / Fixed assets

Net sales = $ 8000

Fixed assets = $ 4500

Fixed asset turnover Ratio= $ 8000 / $ 4500 = 1.78 Times

11. Operating Profit Margin Ratio = Operating Profit / Net Sales * 100

Net sales = $ 8000

Operating Profit = $ 1700

Operating Profit Margin Ratio = $ 1700 / $ 8000 * 100 = 21.25 %