Question

Assets Current assets Cash Accounts receivable Inventory FUT VUUS) 2018 2019 2018 2019 Liabilities and Owners' Equity Current liabilities $ 100 $ 115 Accounts payable $ 75 $ 105 170 150 Notes payable 100 120 120 120 Total $ 390 $ 385 Total $ 175 $ 225 $ 250 $ 290 Long-term debt Owners' equity Common stock Accumulated retained earnings 122 $ 190 $ 275 Fixed assets 348 Net plant and equipment $ 500 $ 600 Total Equity $ 465 $ 470 Total assets $ 890 $ 985 Total liabilities and owners equity $ 890 $ 985 GATA, INC. 2019 Income Statement (in 000s) Sales $ Cost of goods sold Depreciation 900 500 18 EBIT Interest paid $ 382 12 Taxable income Taxes $ 370 78 Net income $ 292 $ 219 Dividends Retained earnings 73

Answer 1

Requirement 1

Calculation of Ratios for 2019 only

A. Current Ratio = Current Assets / Current Liabilities

Current Assets = $ 385

Current Liabilities = $ 225

Current Ratio = 385 / 225

Current Ratio = 1.7111 Times

B. Quick Ratio = Quick Assets / Current Liabilities

Current Liabilities = $ 225

Quick Assets = Current Assets - Inventory

Quick Assets = 385 - 120

Quick Assets = $ 265

Quick Ratio = 265 / 225

Quick Ratio = 1.1778 Times

C. Total Assets Turnover = Sales / Average Total Assets

Sales = $ 900,000

Average Total Asset = (Opening Balance of Total Assets + Closing Balance of Total Assets)

Average Total Assets = (890,000+985,000)/2 $ 937,500

Total Assets Turnover Ratio = 900,000 / 937,500

Total Assets Turnover Ratio = 0.96 Times

D. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Average Inventory = (Opening Balance + Closing Balance) /2

Average Inventory = (120,000+120,000) = $ 120,000

Cost of Goods Sold = $ 500,000

Inventory Turnover Ratio = 500,000/120,000

Inventory Turnover Ratio = 4.1667 Times

E. Total Debt Ratio = Total Liabilities / Total Assets

Total Assets = $ 985,000

Total Liabilities = $ 515,000

Total Debt Ratio = 515,000 / 985,000

Total Debt Ratio= 0.5228 Times

F. Equity Multiplier = Total Assets / Total Shareholders Fund

Total Assets = $ 985,000

Total Shareholders Fund = $ 470,000

Equity Multiplier = 985,000 / 470,000

Equity Multiplier = 2.0957

G. Times Interest Earned = EBIT/ Interest Expense

EBIT = 382,000

Interest Expense = $ 12,000

Times Interest Earned = 382,000 / 12,000

Times Interest Earned = 31.8333 Times

H. Profit Margin = Net Income / Sales * 100

Sales = $ 900,000

Net Income = $ 292,000

Profit Margin = 292,000 / 900,000 * 100

Profit Margin = 32.44%

I. Return on Assets = Net Income / Average Total Assets

Net Income = $ 292,000

Average Total Assets = $ 937,500

Return on Assets = 292,000 / 937,500 * 100

Return on Assets = 31.15%

J. Return on Equity = Net Income / Average Shareholders Equity

Net Income = $ 292,000

Average Shareholders Equity =(Opening Shareholders Equity + Closing Shareholders Equity)/2

Average Shareholders Equity = (465,000+470,000)/2 = $ 467,500

Return on Equity = 292,000 / 467,500 * 100

Return on Equity = 62.46%

Requirement 2

1. Operating Efficiency - Above Average

2. Liquidity - Below Average

3. Shareholder Return - Below Average

4. Financial Leverage - Above Average

5. Asset Use Efficiency - Above Average

Requirement 3

Formula fo ROE Calculation as per Du Point Analysis = Equity Multiplier * Profit Margin Ratio * Assets Turnover Ratio

As per Dupoint Analysis Return on Equity is calculated as per the above formula.

The Return of Equipment for GATA Inc. is lower than Industry Average becuase of the difference in Equity Multiplier Ratio of company lower than that of Industry Average. GATA is having Equity Multiplier of 2.10 whereas the industry is having the average Equity Multiplier being 2.9 which is a significant difference due to which the return on equity is less than industrial averages.