Note: When answering this question, please use the expanded Depont analysis, as

Question

Note: When answering this question, please use the expanded Depont analysis, as follows: ROE = Net Profit Margin X Total Asset Turnover X Equity Multiplier Ratio

Following are financial statement for the Genatron Manufacturing Corporation for 1998 & 1999.

a. Apply DuPont analysis to both the 1998 and 1999 financial statements' data.

b. Explain how financial performance differed between 1998 and 1999.

c. Calculate Genatron's dollar amount of net working capital in each year.

d. Calculate the current ratio and the quick, or cid-test, ratio in each year.

e. Calculate the average collection period and the inventory turnover ratio in each year.

f. What changes in the management of Genatron's current assess seem to have occured between the two years?

g. Calculate Genatron's Debt to Total Asset ratio

h. Calculate Genatron's Debt to Total Equity ratio

i. Calculate Genatron's Time-Interest Earned ratio

Balance Sheet 1999 1998 ASSETS Cash $40,000 $50,000 Accounts receivable 260,000 200,000 Inventory 500,000 450,000 Total current assets 800,000 700,000 Fixed assets, net 400,000 300,000 Total assets $1,200,000 $1,000,000 LIABILITIES AND EQUITY Accounts payable $170,000 $130,000 Bank loan, 10% 90,000 90,000 Accruals 70,000 50,000 Total current liabilities 330,000 270,000 Long-term debt, 12% 400,000 300,000 Common stock, $10 par 300,000 300,000 Capital surplus 50,000 50,000 Retained earnings 120,000 80,000 Total liabilities and equity $1,200,000 $1,000,000 Income Statement 1999 1998 Net Sales $1500,000 $1,300,000 Cost of goods sold 900,000 780,000 Gross profit 600,000 520,000 Expenses: general & adminstrative 150,000 130,000 Marketing 150,000 130,000 Depreciation 53,000 40,000 Interest 57,000 45,000 Earnings before taxes 190,000 155,000 Income taxes 76,000 62,000 Net Income $114,000 $93,000

Explanation / Answer

Note data of 1999 and 1998 given but not of 1997 so for 1999 I can use average of 1999 and 1998 in the ratio where ever required but for 1998n this cannot be done so for proper comparison I will be using ending balance for both 1999 and 1998 and also showed average for 1999 1999 1998 Ans a DuPont Analysis 26.46 % Net Income/Net Sales*Net sales/Average or Ending Total assets*Total assets/Total Equity 114000/1500000*1500000/((1200000+1000000)/2)*1200000/470000 Used ending total asset instead of avereage 24.26 21.63 % 114000/1500000*1500000/1200000*1200000/470000 93000/1300000*1300000/1000000*1000000/430000*100 Ans b There has been increase in return on equity which shows that the company is performing well. There is slight decraese in cuurent and quick ratio which is acceptable and does not affect financila posiy=tion Average collection period is less in 1999 which is a good sign that the company is able to recovere money in a better manner Inventory turnover ratio has increased which is god for the company There has been slight increase in solvency ratio which is acceptable Ans c Net working capital=Current assets-Current liabilities 470000 430000 800000-330000 700000-270000 Ans d Current ratio=Current assets/current Liabilities 2.42 2.59 800000/330000 700000/270000 Quick Ratio=Current assets-Inventory/current Liabil. 0.91 0.93 800000-500000/330000 700000-450000/270000 ans e Average collection period Average accounts Receivable/Annula salesdivided by 365 55.97 ((200000+260000)/2)/(1500000/365) 63.27 73 From ending balance 260000/(1500000/365) 200000/(1000000/365) Average not available Inventory Turnover Ratio=COGS/Average Inventory 1.89 900000/((500000+450000)/2) 1.8 1.73 Ending Inventory 900000/500000 780000/450000 Ans f There has been increase in Accounts receivable and increase in inventory and cash has been decreased Ans g Debt to Total assets= Total Debt/Total assets 0.61 0.57 (330000+400000)/1200000 (270000+300000)/1000000 Debt To Total equity=Total debts/Total equity 1.55 1.33 (330000+400000)/470000 (270000+300000)/430000 Times Interest earned ratio=EBIT/Interest expense 4.33 4.44 (190000+57000)/57000 (155000+45000)/45000

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