Question

the financial statements and industry norms for Pamplin Inc are shown in photo's

a. Compute the ratios for 2017 and 2018 to compare both against the industry norms.

b. How liquid is the firm

c.Are it's managers generating an adequate operating profit

d. How is the firm financing it's assets

e. Are it's mansgers generating a good return on equity.

NOTE: 15% of sales are cash, with the remaining 85% being credit sales.

f. Current ratio

industry norm = 5.00X

2017 ? X

2018 ? X

Evaluation is

Poor or Satisfactory?

ASSETS 2017 $ 197 449 549 $ 1.195 2018 150 423 622 $ 1,195 Cash Accounts receivable Inventory Current assets Plant and equipment Less accumulated depreciation Net plant and equipment Total assets $ 2.203 (1.009) $ 2,601 (1,202) $ 1.194 $ 2.389 $ 1,399 $ 2,594

Answer 1

Answer with working notes is given below

Ratio 2017 2018 Evaluation 4.0 1.9 Current Ratio Quick Ratio Inventory turnover AR Collection period (Days) Debt Ratio Times Interest earned Total Assets turnover Fixed Asset turnover Operating profit margin Return on common equity Industry Norm 5.0 3.0 2.2 90.0 33% 7.0 0.75 1.00 20.0% 9.0% 160.9 50% 5.3 0.50 1.00 19.9% 9.6% 125.3 53% 5.9 0.56 1.04 25.1% 14.1% Poor Poor Poor Poor Poor Poor Poor Satisfactory Satisfactory Satisfactory b) Current Ratio of the firm is below standard in 2018 Quick ratio is also below industry standard in 2018 Liquidity is lower compared to industry standard Operating margin has improved in 2018 Also Fixed assets turnover is higher than industry standard Hence firm is able to generate adequate operating profit on the firm's assets d) Firm is using more than 50% Debt to finance its fixed assets Yes Return on Equity has improved in 2018. Working note A) 2017 2018 Current Ratio Current Assets Current Liabilities $1,195 $199 6.01 $1,195 $297 4.02 2017 2018 Quick Ratio Quick Current Assets* Current Liabilities *Excludes Inventory $646 $199 3.25 $573 $297 1.93 2017 2018 Inventory Turnover Cost of Goods Sold Inventory $705 $549 1.28 $853 $622 1.37 Average collection period Accounts receivables Credit Sales 2017 $449 $1,018 2018 $423 $1,233 X 365 160.94 125.27 Credit Sales = Total Sales * 85% Debt Ratio 2017 2018 Total Debt Equity $801 $1,588 50% $899 $1,695 53% 2017 2018 Times Interest earned ratio Earnings Before interest and tax Interest d tax $238 $45 5.29 $364 $62 5.87 2017 2018 Total Asset Turnover Sales Total Assets $1,198 $2,389 0.50 $1,450 $2,594 0.56 2017 2018 Fixed Assets turnover Sales Fixed Assets $1,198 $1,194 1.00 $1,450 $1,399 1.04 2017 2018 Operating Profit Margin Operating Profit Sales $238 $1,198 20% $364 $1,450 25% 2017 2018 Return on Common Equity Net Profit Common Equity $239 $152 $1,588 10% 14% $1,695