Following are the auditor’s calculations of several key ratios for ROCO. The primary purpose of this information is to understand the client’s business and assess the risk of financial failure, but any other relevant conclusions are also desirable. Ratio 2020 2019 2018 2017 2016 1 Current ratio 2.42 2.83 3.17 3.20 3.25 3.15 2 Quick ratio 1.60 2.25 2.92 2.87 2.64 2.58 3 Times interest earned 2.35 2.76 3.38 4.81 6.12 4.86 4 Accounts receivable turnover 3.31 4.42 3.13 4.25 4.50 4.48 5 Days to collect receivables 110.27 82.58 116.61 85.88 81.11 81.47 6 Inventory turnover 1.08 .96 1.45 2.24 2.26 2.01 7 Days to sell inventory 337.96 380.2 251.72 162.94 161.5 181.59 8 Profit margin .52 .51 .62 .57 .53 .6 9 Return on assets .08 .08 .13 .1 .08 .11 10 Return on equity .05 .06 .10 .10 .11 .09 11 Earnings per share 3.14 3.24 3.40 3.32 3.13 3.12 Required: a . What major conclusions can be drawn from this information about the company’s future? b . What additional information would be helpful in your assessment of this company’s financial condition? c . Based on the preceding ratios, which aspects of the company do you believe should receive special emphasis in the audit?
Following are the auditor’s calculations of several key ratios for ROCO. The primary purpose of this information is to understand the client’s business and assess the risk of financial failure, but any other relevant conclusions are also desirable.
|
|
Ratio |
2020 |
2019 |
2018 |
2017 |
2016 |
|
|
1 |
|
2.42 |
2.83 |
3.17 |
3.20 |
3.25 |
3.15 |
|
2 |
Quick ratio |
1.60 |
2.25 |
2.92 |
2.87 |
2.64 |
2.58 |
|
3 |
Times interest earned |
2.35 |
2.76 |
3.38 |
4.81 |
6.12 |
4.86 |
|
4 |
|
3.31 |
4.42 |
3.13 |
4.25 |
4.50 |
4.48 |
|
5 |
Days to collect receivables |
110.27 |
82.58 |
116.61 |
85.88 |
81.11 |
81.47 |
|
6 |
Inventory turnover |
1.08 |
.96 |
1.45 |
2.24 |
2.26 |
2.01 |
|
7 |
Days to sell inventory |
337.96 |
380.2 |
251.72 |
162.94 |
161.5 |
181.59 |
|
8 |
Profit margin |
.52 |
.51 |
.62 |
.57 |
.53 |
.6 |
|
9 |
Return on assets |
.08 |
.08 |
.13 |
.1 |
.08 |
.11 |
|
10 |
Return on equity |
.05 |
.06 |
.10 |
.10 |
.11 |
.09 |
|
11 |
Earnings per share |
3.14 |
3.24 |
3.40 |
3.32 |
3.13 |
3.12 |
Required:
a . What major conclusions can be drawn from this information about the company’s future?
b . What additional information would be helpful in your assessment of this company’s financial condition?
c . Based on the preceding ratios, which aspects of the company do you believe should receive special emphasis in the audit?
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