helprul u ule l 5.4. How is the 5.5. Eleanor\'s Computers is a retailer of compu
ID: 2789007 • Letter: H
Question
helprul u ule l 5.4. How is the 5.5. Eleanor's Computers is a retailer of computer products. Using the financial data pro- Du Pont System that indicate potential problems and provide an explanation of possible causes of the problems vided, complete the financial ratio calculations for 2016. Advise management of any ratios Averages 2016 2015 2016 Financial Ratios 2014 1.65X 0.89X Current ratio Quick ratio Average collection period Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Times interest earned Gross profit margin Operating profit margin Net profit margin Return on total assets Return on equity 0.95X 65 days 4.50X 0.92X 60 days 4.20X 3.20X 1.40X 59.20% 4.20X 25.00% 12.50% 6.10% 8.54% 20.93% 60 days 3.90X 3.33X 1.35X 61.00% 3.70X 23.00% 12.70% 1.37x 60.00% 4.75X 8.10% 20.7 4% 6.50% 8.91% 22.25% Income Statement for Year Ended 12/31/16 Balance Sheet at 12/31/16 Sales Cost of goods sold Gross profit Operating expenses Operating profit Interest expense Earnings before tax Income tax (40%) Net Income 125,000 275,000 325,000 $725,000 $ 420,000 1,145,000 150,000 225,000 100,000 475,000 $1,500,000Cash 1,200,000 $ 300,000 Accounts receivable Inventory 100,000 200,000 Fixed assets (net) 72,000 128,000 Accounts payable 51,200 Notes payable Current assets Total Assets s 76800 Accrued liabilities Current liabilities ong-term debt Total liabilities ul Total liabilities and equityExplanation / Answer
1) Current Ratio = Current Assets / Current Liabilities
= 725000 / 475000 = 1.53 X
We can see that the current Ratio is decreasing and is much less than the average. Thus this would be a potential alarm that the firm will not have sufficient current assets to meet its current liabiliities.
2) Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities
= (125000 + 275000) / 475000 = 0.84
We can see that the Quick Ratio is decreasing and is much less than the average. Thus this would be a potential alarm that the firm will not have sufficient liquid assets to meet its current liabiliities.
3) Average Collection Period = (Accounts Receiable / Net Sales) * 365
= (275000 / 1500000) * 365 = 67 Days
The Average collection period is increasing which means a lot of money is tied up in the form of Accounts Receiable which implies that the colection policy of the firm needs to be improved other wise it can lead to bad debts as well.
4) Inventory Turnover = Cost of Goods Sold / Average Inventory
= 1200000 / 325000 = 3.69
The Inventory Turnover is decreasing which would mean that the firm can run out of inventory soon and will not be able to meet custome demands and thus lose on customers as well.
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