accounting to managers 2
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:
|Year 1||Year 2||Year 3|
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.
- 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|
|Cost of goods sold||500,000||455,000|
|Payroll expense||$ 50,000||$ 42,250|
|Operating income||$ 67,000||$ 90,750|
|Gain on vehicle sale||25,000||—|
|Loss on sale of securities||(25,000)||—|
|Net income before interest and taxes||$135,000||$135,750|
|Net income||$ 95,000||$ 95,500|
|Total retained earnings||$ 57,000||$ 57,500|
|Retained earnings, 1/1||193,500||136,000|
|Retained earnings, 12/31||$250,500||$193,500|
- Complete the comparative income statement by computing dollar change ($ change) and percentage change (% change).
Comprehensive Ratio AnalysisLO4, 5, 6
The 2012 financial statements for the Griffin Company are as follows:
|Griffin Company Statement of Financial Position|
|Cash||$ 40,000||$ 10,000|
|Property, plant, and equipment||250,000||257,000|
|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|
|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|
|Cost of goods sold||$214,000|
|Income before taxes||$140,000|
|Income tax expense (50%)||70,000|
|Net income||$ 70,000|
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
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.
|Accounts receivable||$ 4,000||$ 6,000|
|Salaries and wages payable||2,500||4,000|
|Income taxes payable||5,500||2,500|
In addition, the income statement for 2012 is as follows:
|Cost of goods sold||85,000|
|Gross profit||$ 25,000|
|General and administrative expense||$ 9,000|
|Income before interest and taxes||$ 14,000|
|Income before tax||$ 12,000|
|Income tax expense||4,800|
|Net income||$ 7,200|
- 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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