accounting to managers 2
15.
Ratio Analysis: Decision FocusLO1, 2, 4, 5, 6
Avantronics is a manufacturer of electronic components and accessories that has total assets of $20,000,000. Selected financial ratios for Avantronics and the industry averages for firms of similar size are as follows:
| Avantronics | Industry Average | |||
| Year 1 | Year 2 | Year 3 | ||
| Current ratio | 2.09 | 2.27 | 2.51 | 2.24 |
| Quick ratio | 1.15 | 1.12 | 1.19 | 1.22 |
| Inventory turnover | 2.40 | 2.18 | 2.02 | 3.50 |
| Profit margin | 0.14 | 0.15 | 0.17 | 0.11 |
| Debt-to-equity ratio | 0.24 | 0.37 | 0.44 | 0.35 |
Avantronics is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the following parties must recommend an action based on its evaluation of Avantronics’s financial position:
MidCoastal Bank. The bank is processing Avantronics’s application for a new five-year term note. MidCoastal has been the banker for Avantronics for several years but must reevaluate the company’s financial position for each major transaction.
Ozawa Company. Ozawa is a new supplier to Avantronics and must decide on the appropriate credit terms to extend to the company.
Drucker & Denon. A brokerage firm specializing in the stock of electronics firms that are sold over the counter, Drucker & Denon must decide whether it will include Avantronics in a new fund being established for sale to Drucker & Denon’s clients.
Working Capital Management Committee. This is a committee of Avantronics’s management personnel chaired by the chief operating officer. The committee is responsible for periodically reviewing the company’s working-capital position, comparing actual data against budgets, and recommending changes in strategy as needed.
Required
- Describe the analytical use of each of the five ratios presented in the chart.
- For each of the four entities described, identify the financial ratios, from those ratios presented, that would be most valuable as a basis for its decision regarding Avantronics.
- Discuss what the financial ratios presented in the question reveal about Avantronics. Support your answer by citing specific ratio levels and trends, as well as the interrelationships among these ratios.
- Horizontal AnalysisLO2
- Following are the income statements for Martha’s Miscellaneous for Year 1 and Year 2:
| Martha’s Miscellaneous Comparative Statements of Income and Retained Earnings | ||||
| $ | % | |||
| Year 2 | Year 1 | Change | Change | |
| Sales revenue | $700,000 | $650,000 | ||
| Cost of goods sold | 500,000 | 455,000 | ||
| Gross profit | $200,000 | $195,000 | ||
| Payroll expense | $ 50,000 | $ 42,250 | ||
| Insurance expense | 30,000 | 29,000 | ||
| Rent expense | 18,000 | 18,000 | ||
| Depreciation | 35,000 | 15,000 | ||
| Total expenses | $133,000 | $104,250 | ||
| Operating income | $ 67,000 | $ 90,750 | ||
| Interest expense | (7,000) | (5,000) | ||
| Gain on vehicle sale | 25,000 | — | ||
| Loss on sale of securities | (25,000) | — | ||
| Interest revenue | 75,000 | 50,000 | ||
| Net income before interest and taxes | $135,000 | $135,750 | ||
| Income taxes | 40,000 | 40,250 | ||
| Net income | $ 95,000 | $ 95,500 | ||
| Dividends | 38,000 | 38,000 | ||
| Total retained earnings | $ 57,000 | $ 57,500 | ||
| Retained earnings, 1/1 | 193,500 | 136,000 | ||
| Retained earnings, 12/31 | $250,500 | $193,500 | ||
- Required
- Complete the comparative income statement by computing dollar change ($ change) and percentage change (% change).
18.
Comprehensive Ratio AnalysisLO4, 5, 6
The 2012 financial statements for the Griffin Company are as follows:
| Griffin Company Statement of Financial Position | ||||
| 12/31/12 | 12/31/11 | |||
| Assets | ||||
| Cash | $ 40,000 | $ 10,000 | ||
| Accounts receivable | 30,000 | 55,000 | ||
| Inventory | 110,000 | 70,000 | ||
| Property, plant, and equipment | 250,000 | 257,000 | ||
| Total assets | $430,000 | $392,000 | ||
| Liabilities and Stockholders’ Equity | ||||
| Current liabilities | $ 60,000 | $ 50,000 | ||
| 5% mortgage payable | 120,000 | 162,000 | ||
| Common stock (30,000 shares) | 150,000 | 150,000 | ||
| Retained earnings | 100,000 | 30,000 | ||
| Total liabilities and stockholders’ equity | $430,000 | $392,000 | ||
| Griffin Company Income Statement For the Year Ended December 31, 2012 | ||||
| Sales on account | $420,000 | |||
| Less expenses: | ||||
| Cost of goods sold | $214,000 | |||
| Salary expense | 50,000 | |||
| Depreciation expense | 7,000 | |||
| Interest expense | 9,000 | |||
| Total expenses | $280,000 | |||
| Income before taxes | $140,000 | |||
| Income tax expense (50%) | 70,000 | |||
| Net income | $ 70,000 | |||
Required
Compute the following ratios for the Griffin Company for the year ending December 31, 2012:
- Profit margin ratio (before interest and taxes)
- Total asset turnover
- Rate of return on total assets
- Rate of return on common stockholders’ equity
- Earnings per share of stock
- Inventory turnover
- Current ratio
- Quick ratio
- Accounts receivable turnover
- Debt-to-equity ratio
- Times interest earned
14.
Adjustments to Income via the Indirect Method: Operating ActivitesLO1, 2, 3
The following account balances are for the noncash current assets and current liabilities of Wynn Bicycle Company at the end of 2011 and 2012.
| December 31 | ||
| 2011 | 2012 | |
| Accounts receivable | $ 4,000 | $ 6,000 |
| Inventory | 30,000 | 20,000 |
| Office supplies | 5,000 | 8,000 |
| Accounts payable | 10,000 | 7,000 |
| Salaries and wages payable | 2,500 | 4,000 |
| Interest payable | 1,500 | 2,500 |
| Income taxes payable | 5,500 | 2,500 |
In addition, the income statement for 2012 is as follows:
| Sales revenue | $110,000 |
| Cost of goods sold | 85,000 |
| Gross profit | $ 25,000 |
| General and administrative expense | $ 9,000 |
| Depreciation expense | 2,000 |
| Income before interest and taxes | $ 14,000 |
| Interest expense | 2,000 |
| Income before tax | $ 12,000 |
| Income tax expense | 4,800 |
| Net income | $ 7,200 |
Required
- Prepare the operating activities section of the statement of cash flows, using the indirect method.
- What does the use of the direct method reveal about a company that the indirect method does not?
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