Using the Income Statement and Balance Sheet Constructed in (1)

question 68

Essay

Using the income statement and balance sheet constructed in (1) and (2), compute the following ratios. Compare the results with the industry averages. What strengths and weaknesses are apparent?
​ $\begin{array}{l}\text { RATIO INDUSTRY AVERAGE } \\\text { Current ratio } \quad 2: 1 \\\text { Acid test (quick ratio) } \quad 1: 1 \\\text { Inventory turnover } \\\text { a. annual sales } \quad 2.5 \\\text { b. cost of goods sold } \quad 1.2 \\\text { Receivables turnover } \\\text { a. annual credit sales } \quad 5.0 \mathrm{x} \\\text { b. annual sales } \quad 6.0 \mathrm{x} \\\text { Average collection period } \quad 75 \text { days } \\\text { (days sales outstanding) } \\\text { Operating profit margin } \quad 26 \% \\\text { Net profit margin } \quad 19 \% \\\text { Return on assets } \quad 10 \% \\\text { Return on equity } \quad 15 \% \\\text { Debt/equity } \quad 33 \% \\\text { Debt ratio (debt/total assets) } \quad 25 \% \\\text { limes-interest-earned } \quad 7.1 \mathrm{x} \\\text { ADDITIONAL INFORMATION: } \\\text { last year's inventory } \quad \$ 40,000 \\\text { credit sales } \quad \$ 90,000\end{array}$