Tutorial 5 - Ratio Analysis - Answer

Learning Management System
Subject Name Introduction to Finance and Technology

Topic Ratio Analysis
Week 5
Name : Kesiga A/P Ramesh Lecturer : .................................

Intake : …………………..………….…..………...…. Date : .………..…………......
1. What are some common reasons for analyzing a firm’s financial statements?
Financial statement analysis is the process of analyzing a company's financial statements
for decision-making purposes. External stakeholders use it to understand the overall
health of an organization and to evaluate financial performance and business value.
2. Why are ratios helpful in financial statement analysis?

Analyzing your company's financial ratios can provide you with valuable insights into
profitability, liquidity, efficiency and more. These ratios can help you visualize how your
company has performed over a given period of time.
3. What are the five basic questions that we address with financial statement analysis?
 Trend analysis
 Common-size financial analysis
 Financial ratio analysis
 Cost volume profit analysis
 Benchmarking (industry) analysis
4. What does the term liquidity mean in the context of a firm’s financial condition, and what
financial ratios can the analyst use to access liquidity?
Liquidity is a measure of your company's ability to meet short-term financial obligations
that come due in less than a year. Solvency is a measure of its ability to meet long-term
Page 1 of 6
This material is only for viewing purposes. Do not print and distribute.
obligations, such as bank loans, pensions and credit lines. Liquidity is measured through
current, quick and cash ratios.
5. Apex Fabricating has $3,000,000 in cash and a total of $12,000,000 in current assets. The
firm’s current liabilities equal $6,000,000, so the firm’s current ratio equals to 2. The
company managers want to reduce the firm’s cash holdings down to $1,000,000 by
paying $500,000 in cash to expand the firm’s truck fleet and using $1,500,000 in cash to
retire a short note. If they carry this plan through, what will happen to the firm’s current
ratio?
Cash - $1,000,000 / 5.5%

Current assets - $12,500,000 / 69.5%
Current liabilities - $4,500,000 / 25%
6. Bauman Company’s total current assets, total current liabilities, and inventory for each of
the past 4 years follow:
a. Calculate the firm’s current and quick ratios for each year. Compare the resulting time
series for these measures of liquidity.
19.20 / 24.80 / 25.50 / 30.50
b. Comment on the firm’s liquidity over the 2012–2013 period.
Page 2 of 6
Looking at the time series, we can see that the firm's liquidity has weakened over the
2012-2013 period.
7. Joyce Cheung has compiled some of her personal financial data to determine her liquidity
position. The data are as follows.
a) Calculate Joyce’s liquidity ratio.
2.83
b) Several of Joyce’s friends have told her that they have liquidity ratios of about 1.9. How
would you analyze Joyce’s liquidity relative to her friends?
Joyce's liquidity ratio of 2.83 is higher than her friends' liquidity ratio of 1.9.
8. Efficient Production Incorporation has annual sales of $5.8 million and a gross profit
margin of 30%. Its end-of-quarter inventories are:
a. Find the average quarterly inventory, and use it to calculate the firm’s inventory turnover
and the average age of inventory.
Page 3 of 6
Average quarterly inventory = $570,000

Inventory turnover = $5,800,000
Average age of inventory = 2 years
b. Assuming that the company is in an industry with an average inventory turnover of 4.8,
how would you evaluate the activity of Efficient Production’s inventory?
= $300,000 + $570,000 + $890,000 + $430,000

= $2,190,000
9. Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft
papers. Some financial statement values for each company follow. Use them in a ratio
analysis that compares the firms’ financial leverage and profitability.
a. Calculate the following debt and coverage ratios for the two companies. Discuss their
financial risk and ability to cover the costs in relation to each other.
1. Debt ratio
40% / 60%
2. Times interest earned ratio

50% / 50%
To analyze the financial leverage and profitability of Pelican Paper, Inc and
Timberland Forest Inc. need to manage their debts.
Page 4 of 6
b. Calculate the following profitability ratios for the two companies. Discuss their
profitability relative to one another.
1. Operating profit margin
90% / 10%
2. Net profit margin

70 / 30%
3. Return on total assets

50% / 50%
4. Return on common equity

30% / 70%
c. In what way has the larger debt of Timberland Forest made it more profitable than
Pelican Paper? What are the risks that Timberland’s investors undertake when they
choose to purchase its stock instead of Pelican’s?
Since Timberland has a higher relative amount of debt, the stockholders' equity is
proportionally reduced resulting in the higher return on equity than that obtained by
Pelican. The higher return on equity brings with it higher levels of financial risk for
Timberland equity holders.
10. McDougal Printing, Inc., had sales totaling $40,000,000 in fiscal year 2015. Some ratios
for the company are listed below. Use this information to determine the dollar values of
various income statement and balance sheet accounts as requested.
Page 5 of 6
Calculate values for the following:

a. Gross profits = $32,000,000
b. Cost of goods sold = $8,000,000
c. Operating profits = $11,200,000
d. Operating expenses = $20,800,000
e. Earnings available for common stockholders = $2,000,000
f. Total assets = $80,000,000
g. Total common stock equity = 100%
h. Accounts receivable = $6,816,438
Page 6 of 6

Tutorial 5 - Ratio Analysis - Answer

Uploaded by

Copyright:

Available Formats

Tutorial 5 - Ratio Analysis - Answer

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tutorial 5 - Ratio Analysis - Answer

Uploaded by

Copyright:

Available Formats

Learning Management System

Subject Name Introduction to Finance and Technology

Name : Kesiga A/P Ramesh Lecturer : .................................

2. Why are ratios helpful in financial statement analysis?

Cash - $1,000,000 / 5.5%

19.20 / 24.80 / 25.50 / 30.50

b. Comment on the firm’s liquidity over the 2012–2013 period.

a) Calculate Joyce’s liquidity ratio.

Average quarterly inventory = $570,000

= $300,000 + $570,000 + $890,000 + $430,000

2. Times interest earned ratio

2. Net profit margin

3. Return on total assets

4. Return on common equity

Calculate values for the following:

You might also like