Chapter 12, Problem 12.61AP

LO 2, 4, 5

(Learning Objectives 2, 4, 5: Analyze trends; calculate and interpret ratios; evaluate earnings quality)

Selected data from Tompkin Furniture, Inc., follows.

Industry averages have been gathered for several ratios.

Furniture industry averages
Current ratio................................	2.3
Quick ratio..................................	1.0
Days′ inventory outstanding.........	80.0
Days′ sales outstanding................	60.0
Days′ payable outstanding...........	32.0
Debt ratio.....................................	62%
Times-interest-earned ratio..........	12.0
Gross margin percentage..............	51%
Operating income percentage.......	10%

Requirements

1. Perform a trend analysis on Tompkin’s sales revenue, inventory, and receivables over the past three years, using 2015 as the base. Is the trend in each of these areas favorable or unfavorable for the company?

2. Using the industry averages as benchmarks, analyze Tompkin’s performance over the past three years in the following areas:

1. a. Liquidity
2. b. Turnover
3. c. Overall debt payment ability
4. d. Profitability

3. Evaluate Tompkin’s quality of earnings. Are there any red flags in your analysis? Explain.