Picasso Company is a wholesale distributor of packaging equipment and supplies. The company's sales have averaged about $900,000 annually for the 3-year period 2018–2020. The firm's total assets at the end of 2020 amounted to $850,000. The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company's operations for the past 3 years. This report will be presented to the board of directors at their next meeting. In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2018–2020. 2018 2019 2020 Current ratio 1.80 1.89 1.96 Acid-test (quick) ratio 1.04 0.99 0.87 Accounts receivable turnover 8.75 7.71 6.42 Inventory turnover 4.91 4.32 3.42 Debt to assets ratio 51.0% 46.0% 41.0% Long-term debt to assets ratio 31.0% 27.0% 24.0% Sales to fixed assets (fixed asset turnover) 1.58 1.69 1.79 Sales as a percent of 2018 sales 1.00 1.03 1.07 Gross margin percentage 36.0% 35.1% 34.6% Net income to sales 6.9% 7.0% 7.2% Return on assets 7.7% 7.7% 7.8% Return on common stockholders' equity 13.6% 13.1% 12.7% In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period. Instructions The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend. In terms of the ratios provided, what conclusion(s) can be drawn regarding the company's use of financial leverage during the 2018–2020 period? Using the ratios provided, what conclusion(s) can be drawn regarding the company's net investment in plant and equipment?

Picasso Company is a wholesale distributor of packaging equipment and supplies. The company's sales have averaged about $900,000 annually for the 3-year period 2018–2020. The firm's total assets at the end of 2020 amounted to $850,000. The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company's operations for the past 3 years. This report will be presented to the board of directors at their next meeting. In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2018–2020. 2018 2019 2020 Current ratio 1.80 1.89 1.96 Acid-test (quick) ratio 1.04 0.99 0.87 Accounts receivable turnover 8.75 7.71 6.42 Inventory turnover 4.91 4.32 3.42 Debt to assets ratio 51.0% 46.0% 41.0% Long-term debt to assets ratio 31.0% 27.0% 24.0% Sales to fixed assets (fixed asset turnover) 1.58 1.69 1.79 Sales as a percent of 2018 sales 1.00 1.03 1.07 Gross margin percentage 36.0% 35.1% 34.6% Net income to sales 6.9% 7.0% 7.2% Return on assets 7.7% 7.7% 7.8% Return on common stockholders' equity 13.6% 13.1% 12.7% In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period. Instructions The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend. In terms of the ratios provided, what conclusion(s) can be drawn regarding the company's use of financial leverage during the 2018–2020 period? Using the ratios provided, what conclusion(s) can be drawn regarding the company's net investment in plant and equipment?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Instructions

The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.
In terms of the ratios provided, what conclusion(s) can be drawn regarding the company's use of financial leverage during the 2018–2020 period?
Using the ratios provided, what conclusion(s) can be drawn regarding the company's net investment in plant and equipment?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

		2018		2019	2020
Current ratio	1.80	1.89	1.96
Acid-test (quick) ratio	1.04	0.99	0.87
Accounts receivable turnover	8.75	7.71	6.42
Inventory turnover	4.91	4.32	3.42
Debt to assets ratio	51.0%	46.0%	41.0%
Long-term debt to assets ratio	31.0%	27.0%	24.0%
Sales to fixed assets (fixed asset turnover)	1.58	1.69	1.79
Sales as a percent of 2018 sales	1.00	1.03	1.07
Gross margin percentage	36.0%	35.1%	34.6%
Net income to sales	6.9%	7.0%	7.2%
Return on assets	7.7%	7.7%	7.8%
Return on common stockholders' equity	13.6%	13.1%	12.7%