Case -1- The Universal Corporation’s financial statements for 2017 as follows, a

ID: 2657710 • Letter: C

Question

Case -1-

The Universal Corporation’s financial statements for 2017 as follows, along with some industry average ratios.

a) Calculate the Universal 2017 indicated ratios, compare them with the industry average data.

b) Answer the following questions by comparing between the two years:

1. How liquid is the corporation?

2. Is the management, generating adequate operating profit on the firm’s assets?

3. How is the firm financing its assets?

4. Are the common stockholders receiving a good return on Investment (ROI)?

Universal Corporation: Forecasted Income Statement for the year ended 12/31/2017

2017

Sales $1,450

Cost of goods sold 850

Gross profit $600

Operating expenses $40

Depreciation 200

Operating Income $360

Interest Expense 64

Net Income Before Tax 296

Taxes (40%) 118

Net Income $178

Universal Corporation: Forecasted Balance Sheet as of December 31,2017

2017

Cash $150

Accounts Receivable 425

Inventories 625

Total current assets $1,200

Land and building $2,600

Less: Accumulated Dep. (1,200)

Total Fixed Assets $1,400

Total Assets $2,600

Accounts and notes payable 150

Accrued Liabilities 150

Total current Liabilities $300

Long term debt 600

Total Liabilities $900

Common stock 900

Retained earnings 800

Total Stockholders’ equity $1,700

Total Liabilities &SE $2,600

Industry Norms for 2017

Current ratio 1.5:1

Inventory Turnover 2 X

Total assets turnover 1.5 X

Operating Profit margin 19 %

Operating Income Return on Investment 18 %

Debt ratio 50 %

Average Collection Period 90 days

Fixed assets turnover 2.6 X

Return on equity 18.2 %

Explanation / Answer

Current Ratio=(Current assets)/(Current Liabilities)=1200/300= 4

.Inventory turnover=Cost of goods sold/Inventory=850/625=1.36

Total Asset turnover=Sales/total assets=1450/2600=0.56

Operating Profit margin=Operating Income/Sales=360/1450=0.2483=24.83%

Operating Income Return on Investment=Operating Income/Investment=360/2600=0.1385=13.85%

Debt Ratio=Total Debt/Total asset=900/2600=0.3462=34.62%

Average Collection Period =365/Receivable turnover

Accounts Receivable Turnover=( sales)/Accounts receivable)=1450/425=3.411765

Average Collection Period=365/3.411765=107 days

Fixed Asset turnover=Sales/Fixed assets=1450/1400=1.04

Return on Equity= Net Income/Shareholders’ equity=178/1700=0.1047=10.47%

Universal

Industry Average

Current ratio

1.5

Inventory Turnover

1.36

Total assets turnover

0.56

1.5

Operating Profit margin

24.83%

19%

Operating Income Return on Investment

13.85%

18%

Debt ratio

34.62%

50%

Average Collection Period(days)

107

Fixed assets turnover

1.04

2.60

Return on equity

10.47%

18.20%

Liquidity as expressed by Current ratio is good.Corporationhas higher liquidity thanindustry average

Operating Profit on assets is lower thanthe industry average

34.62% of assets are financed by Debt .The Industry average is 50%

Common Stockholders are receiving 10.47% return which is lower than industry average of 18.20%