ACC 340 Ratio Module 6 Homework

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Southern New Hampshire University *

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340

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Finance

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Jan 9, 2024

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Module 6 Homework 1) a) b) i) ii) iii) 2) 3) 4)
5) 6) 7)
k Assignment Use the information given in the green tabs to solve the questions below (answers in yellow, and show formulas used when applicable.) Calcluate the following profitablility ratios: Percent return on net sales Percent return on assets employed What does the percent return on net sales indicate? What does the percent return on assets employed indicate? What does the change from 2009 to 2010 in the percent return on assets mean for the comp The CFO wants a projection for 2011 showing a net profit margin of 25%. What changes would have to happen for the net profit to increase? What was the long term debt to equity ratio in 2009. Ratio of Long Term Debt To Equity What does this mean? What is better a higher or lower ratio? What are liquidity measures? Choose two ratios that assist in the determination of these measures. (show the answers for both year as well as the formula) - (hint see page 360-361 of text)
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Ratio #1 Ratio #2 What are debt service (coverage) ratios What is the formula to use to determine debt service coverage The two purple tabs show the breakdown of each division in this company. What types of items might you decide to "trend" based on the information shown. (ie, if sales in one division declined from one year to the next, what kinds of trends might you start paying attention to. -- hint page 373 and 374) Describe at least two things that could happen within this company that would ma the controller to dig into the numbers and provide a write up to management. (for instance, the controller might notice that inventory has shrunk by over 50% w might he look for in the numbers and what ratios might he use to check things bef The trend of sales volume could be beneficial in revealing what areas are excelling and which areas need assistance. Trend of pricing would also be important to understand if prices are too high or too low, allowing for competition to easily enter the market. Evaluating prices against inflation and competitors keeps the price as low as possible for customers while generating the most profit. Based on the information shown, the sales for clothing and accessories decreased while the cost of revenues increased. This is something that should be investigated to better understand why. Is this due to locations or market changes? Should advertising be increased in the areas displaying low sales?
A controller may need to look into the company statements if there is a decrease in profit tha does not follow normal trends. The cause would need to be identified using the financial statements. The income statement for the current quarter compared to previous quarters can provide some insight on the significance of the decline. This would also help to identify exactly where the decline occurred. If there is a noteable difference in the areas of operating expenses or cost of goods sold, this concern would need to be addressed. Different profit margin ratios would be beneficial to understanding the comparison of current performance to the past. External factors could also impact the profitability of a company, such as market changes or inflation. This would be acknowledged in the write up if applicable. The write up would also include suggestions to remedy the concern, as well as what caused it. Another concern that may need to be investigated by a controller would be an increase in the amount of time taken to pay suppliers and vendors. This is a concern because untimely payment could lead to a loss of business and a potential increase in cost. It harms the reputation of the company and reflects negatively on the trustworthiness. In this situation, th controller would begin with the balance sheet to identify the accounts payable, which could be significantly higher than usual. The accounts payable turnover ratio would reveal the average time a suppier goes unpaid. A review of the contracts with suppliers/vendors to confirm the company is meeting the terms of the agreement would be crucial. If the analysis reveals a breach in the contract, it would be imperative to inform management to resolve this issue. It would be important to reach out to the departments handling vendor/supplier payments to strategize and create a plan to decrease the time taken to issue payments. The write up to management would include the results of the investigation into the cause, the potential risks involved, and suggestions for resolving the concern. It would explain the importance of maintaining the current relationships with the suppliers and vendors and what could occur if they decide to cease working with us.
2010 2009 Formulas 22.31 23.50 Income fro 83.60 122.25 Net Income This percentage shows what port This shows how effectively manag ny? The company was less effective i 16.82 The company would have to increase revenues and lowe 2009 Formulas 1.05 long-term liabilities / Total stockh This means that the company is too dependent on inves A lower ratio is better because it shows the security of t current investments. More than 80% is considered unsta These measures are meant to understand the company
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2010 2009 Formulas 2.06 1.62 current ratio: total current assets 9.63 10.34 Days of working capital: (Account This ratio calculates earnings against potential monthly EBIT / (interest + (scheduled principal payments / (1 - ta want to ke it necessary for hat ore alerting management)
om operations/ revenues*100 e / Total Assets * 100 tion of the sales is profit gement used assets to generate a profit in 2010 and should implement a plan to increase the efficiency of assets used. er the cost of goods sold in order to reach the goal of 25% profit margin. olders equity stors money rather than being self-sufficient and financing using the profits mad the company that they are generating enough profit to cover the costs associate able and will often lead to difficulty finding lenders. y's ability to repay short-term obligations.
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s / total current liabilities ts Receivable+inventory-accounts payable)/(Net revenue/365) payments to ensure the company can afford the payments. ax rate)
de. ed with
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Newton Inc Statement of Income Revenues Rental Income Total Revenues Cost of Revenues Gross Profit Selling, General and Administrative Expenses Income from Operations Other Income (Expense): Interest Expense Interest Income Gain (Loss) from Foreign Currency Exchange Total Other Income (Expense) Total Income (loss) before Provision for Income Taxes Provision for Income Taxes Net Income
12/31/2010 12/31/2009 $ 18,000,000 $ 17,650,000 - - 18,000,000 17,650,000 10,983,333 10,502,000 7,016,667 7,148,000 3,000,000 3,000,000 4,016,667 4,148,000 (16,000) (17,000) 36,000 36,000 - - 20,000 19,000 4,036,667 4,167,000 (1,009,167) (1,041,750) $ 3,027,500 $ 3,125,250
Newton Inc Balance Sheet 12/31/2010 12/31/2010 12/31/2009 Assets Current Assets: Cash and Equivalents $ 1,389,781 $ 500,000 Accounts Receivable, Net 350,000 350,000 Inventory 475,000 400,000 Prepaid Expenses and Other Current Assets 27,500 27,500 Total Current Assets 2,242,281 1,277,500 Property and Equipment, Net 1,279,000 1,179,000 Other Assets 100,000 100,000 - - Total Assets $ 3,621,281 $ 2,556,500 Liabilities and Stockholders' Equity Current Liabilities: $ 0 Current Maturities of Long-Term Debt $ 686,211 $ 485,000 Accrued Other 26,842 27,842 Accounts Payable 350,000 250,000 Accrued Expenses 27,500 27,500 Total Current Liabilities 1,090,553 790,342 Long-Term Debt, Net of Current Maturities 475,000 Accrued Other Long Term 45,000 45,000 - - Total Liabilities 1,135,554 1,310,343 - - Shareholders' Equity: Common Stock ( .50 par) 885,000 885,000 1,770,000 shares outstanding Retained Earnings 1,744,728 505,158 - - 2,629,727 1,390,157 Less: Treasury Stock 144,000 144,000 Total Stockholders' Equity 2,485,727 1,246,157 Total Liabilities and Stockholders' Equity $ 3,621,281 $ 2,556,500 - Statement of Retained Earnings for the Year Ended 2009 Beginning Retained Earnings, January 1 (2,000,000) Plus Net Income 3,125,250 1,125,250 Less Dividends (620,092) Ending Retained Earnings 12/31/09 505,158 - Statement of Retained Earnings for the Year Ended 2010 Beginning Retained Earnings, January 1 505,158 Plus Net Income 3,027,500 3,532,658 Less Dividends (1,787,930) Ending Retained Earnings 12/31/10 1,744,728
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Newton Inc Statements of Income Per Division YTD 12/31/10 Revenues Total Revenues Cost of Revenues Gross Profit Selling, General and Administrative Expenses Income from Operations Other Income (Expense): Interest Expense Interest Income Total Other Income (Expense) Income Before Provision for Income Taxes Provision for Income Taxes Income Net Income
Shoes Clothing Accessories Total $ 10,500,000 $ 5,000,000 $ 2,500,000 $ 18,000,000 - - - 10,500,000 5,000,000 2,500,000 18,000,000 8,050,000 1,933,333 1,000,000 10,983,333 2,450,000 3,066,667 1,500,000 7,016,667 1,000,000 1,000,000 1,000,000 3,000,000 1,450,000 2,066,667 500,000 4,016,667 (16,000) - - (16,000) 12,000 12,000 12,000 36,000 - - - (4,000) 12,000 12,000 20,000 1,446,000 2,078,667 512,000 ## 4,036,667 361,500 519,667 128,000 ## 1,009,167 1,084,500 1,559,000 384,000 3,027,500 - - - - $ 1,084,500 $ 1,559,000 $ 384,000 $ 3,027,500 $ 1,084,500 $ 1,559,000 $ 384,000 $ 3,027,500
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Newton Inc Statements of Income Per Division YTD 12/31/09 Revenues Total Revenues Cost of Revenues Gross Profit Selling, General and Administrative Expenses Income from Operations Other Income (Expense): Interest Expense Interest Income Total Other Income (Expense) Income Before Provision for Income Taxes Provision for Income Taxes Income Net Income
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Shoes Clothing Accessories Total $ 9,500,000 $ 5,500,000 $ 2,650,000 $ 17,650,000 - - - 9,500,000 5,500,000 2,650,000 17,650,000 7,280,000 2,157,000 1,065,000 10,502,000 2,220,000 3,343,000 1,585,000 7,148,000 1,000,000 1,000,000 1,000,000 3,000,000 1,220,000 2,343,000 585,000 4,148,000 (17,000) - - (17,000) 12,000 12,000 12,000 36,000 - - - (5,000) 12,000 12,000 19,000 1,215,000 2,355,000 597,000 ## 4,167,000 303,750 588,750 149,250 ## 1,041,750 911,250 1,766,250 447,750 3,125,250 - - - - $ 911,250 $ 1,766,250 $ 447,750 $ 3,125,250 $ 911,250 $ 1,766,250 $ 447,750 $ 3,125,250
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