Following are the auditor’s calculations of several key ratios for Cragston Star Products. The primary purpose of this information is to understand the client’s business and assess the risk of financial failure, but any other relevant conclusions are also desirable.
| Ratio | 2011 | 2010 | 2009 | 2008 | 2007 |
1. | Current ratio | 2.08 | 2.26 | 2.51 | 2.43 | 2.50 |
2. | Quick ratio | .97 | 1.34 | 1.82 | 1.76 | 1.64 |
3. | Times interest earned | 3.50 | 3.20 | 4.10 | 5.30 | 7.10 |
4. | Accounts receivable turnover | 4.20 | 5.50 | 4.10 | 5.40 | 5.60 |
5. | Days to collect receivables | 86.90 | 66.36 | 89.02 | 67.59 | 65.18 |
6. | Inventory turnover | 2.03 | 1.84 | 2.68 | 3.34 | 3.36 |
7. | Days to sell inventory | 179.80 | 198.37 | 136.19 | 109.28 | 108.63 |
8. | Net sales divided by tangible assets | .68 | .64 | .73 | .69 | .67 |
9. | Profit margin | .13 | .14 | .16 | .15 | .14 |
10. | Return on assets | .09 | .09 | .12 | .10 | .09 |
11. | Return on equity | .05 | .06 | .10 | .10 | .11 |
12. | Earnings per share | $4.30 | $4.26 | $4.49 | $4.26 | $4.14 |
Required
a. What major conclusions can be drawn from this information about the company’s future?
b. What additional information would be helpful in your assessment of this company’s financial condition?
c. Based on the preceding ratios, which aspects of the company do you believe should receive special emphasis in the audit?
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