Question

(Ratio analysis over time)
The following information comes from the accounting records of Hercep Ltd. for the first three years of its existence:

		2018		2019		2020
Statement of Financial Position
Assets
Cash		$22,300		$19,200		$25,100
Accounts receivable		67,400		58,500		149,500
Inventory		113,000		139,000		224,000
Capital assets (net)		425,000		455,000		468,000
Other assets		235,000		205,000		265,200
		$862,700		$876,700		$1,131,800
Liabilities and equity
Accounts payable		$117,000		$58,500		$117,000
Long-term debt		184,000		234,000		468,000
Common shares		517,000		517,000		517,000
Retained earnings		44,700		67,200		29,800
		$862,700		$876,700		$1,131,800
Statement of Earnings
Sales		$700,000		$815,000		$915,000
Cost of goods sold		(434,000)		(554,200)		(640,500)
Other expenses		(160,000)		(235,000)		(233,000)
		106,000		25,800		41,500
Income tax		(31,800)		(7,740)		(12,450)
Net income		$74,200		$18,060		$29,050

Based on above information, analyze the changes in the company’s profitability and liquidity, in addition to the management of accounts receivable and inventory from 2018 to 2020. (Round answers to 1 decimal place, e.g. 13.5% or 13.5.)

		2018		2019		2020
Sales		%		%		%
Cost of goods sold		%		%		%
Gross margin		%		%		%
Other expenses		%		%		%
Income taxes		%		%		%
Net income		%		%		%

		2018			2019			2020
Current Ratio			: 1			: 1			: 1
Quick Ratio			: 1			: 1			: 1
A/R Turnover			times			times			times
Average Collection Period			days			days			days
Inventory Turnover			times			times			times
Days to Sell Inventory			days			days			days

    

Based on the above information, analyze the company’s use of leverage from 2018 to 2020. (Round answers to 1 decimal place, e.g. 15.1%.)

		2018		2019		2020
Debt to Equity		%		%		%
Return on Assets		%		%		%
Return on Equity		%		%		%

Answer 1

SOLUTIONS

	2018		2019		2020
Sales	100	%	100	%	100	%
Cost of goods sold	62	%	68	%	70	%
Gross margin	38	%	32	%	30	%
Other expenses	23	%	29	%	25	%
Income taxes	4.5	%	0.94	%	1.36	%
Net income	10.6	%	2.21	%	3.17	%

COST OF GOODS SOLD % = COST OF GOODS SOLD / SALES

2018 = $434000/$700000 =62%

2019 = $554200/$815000 = 68%

2020 = $640500/$915000 = 70%

INCOME TAX %

INCOME TAX / SALES = INCOME TAX %

2018 = $31800/$700000 =4.5%

2019 = $7740/$815000=0.94%

2020 = $12450/$915000= 1.36%

GROSS MARGIN

REVENUE - COST OF GOODS SOLD/ REVENUE

2018 = $700000-$434000/$700000 = 38%

2019 = $815000-$554200/$815000 = 32%

2020 = $915000-640500/915000 = 30%

A company's gross profit margin percentage is calculated by first subtracting the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts). This figure is then divided by net sales, to calculate the gross profit margin in percentage terms

OTHER EXPENSES %

OTHER EXPENSES / SALES = OTHER EXPENSES %

2018 = $160000/$700000 =23%

2019 = $235000/$815000= 29%

2020 = $233000/$915000= 25%

NET INCOME%

NET INCOME / SALES = NET INCOME %

2018 = 74200/700000= 10.6

2019 = 18060/815000= 2.21%

2020 = 29050/915000= 3.17%

2018 2019 2020

1) Current Ratio 1.73 3.70 3.40   

2) Quick Ratio 0.762 1.328 1.49

3) A/R Turnover 10.38 12.94 8.79

4) AVERAGE COLLECTION PERIOD 35.16 28.20 41.52

5) INVENTORY TURN OVER 3.840 4.39 3.528

6) DAYS TO SELL INVENTORY 95.05 83.14 103.45

1) CURRENT RATIO = CURRENT ASSET/ CURRENT LIABILITY

CURRENT ASSET = CASH +A/R +INVENTORY

CURRENT LIABILITY= A/P

2) QUICK RATIO =CURRENT ASSET-INVENTORY/CURRENT LIABLITY

3) A/R Turnover= Net Annual Credit Sales ÷ ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)

2018 = 700000/67400 =10.38 TIMES

2019=815000/58500+67400/2 =12.94TIMES

2020= 915000/149500+58500/2 = 8.79 TIMES

4) AVERAGE COLLECTION PERIOD

365DAYS/A/R TURNOVER

2018 =365/10.38TIMES =35.16

2019= 365/ 12.94 TIMES= 28.20

2020= 365/ 8.79 TIMES= 41.52

5) INVENTORY TURN OVER

COST OF GOODS SOLD / AVERAGE INVENTORY

6) DAYS TO SELL INVENTORY

DSI= 1 / inventory turnover​×365 days

Debt to equity ratio   =   Total liabilities / Total stockholder's equity * 100
	2018	$ 301000/ $561700 * 100	53.58%
	2019	$ 292500/ $584200 * 100	50.06%
	2020	$585000 / $ 546800* 100	106.98%
	*Calculations for Total liabilities:
		2018	2019	2020
	Accounts payable	$117000	$58,500	$117,000
	Long term debt	$184,000	$234,000	$468000
	Total liabilities	$301000	$292500	$585000
	*Calculation of Total stockholder's equity:
		2018	2019	2020
	Common shares	$517000	$517000	$517000
	Retained earnings	$44700	$67200	$29800
	Total stockholder's equity	$561700	$584200	$546800
Ans.	Return on assets =   Net income / Total assets * 100
	2018	$74200 / $862700 * 100	8.60%
	2019	$18060 / $876700 * 100	2.06%
	2020	$29050/ $1131800 * 100	2.566%
Ans.	Return on equity =   Net income / Total stockholder's equity * 100
	2018	$ 74200/ $561700 * 100	13.2%
	2019	$18060 / $584200 * 100	3.09%
	2020	$29050 / $546800 * 100	5.312%