Question 1
The recent financial statements for the Royal Caribbean Company are given below:
Balance Sheet for the period ending June 30
Assets 2006 2005
Current assets
Cash $21,000 $24,000
Accounts receivables $160,000 $162,000
Inventories $300,000 $315,000
Prepaid expenses $9,000 $10,000
Total current assets $490,000 $511,000
Property and equipment $810,000 $700,000
Total assets $1,300,000 $1,211,000
Liabilities and shareholders equity
Liabilities
Current liabilities $200,000 $290,000
10% bonds payable $300,000 $275,000
Total liabilities $500,000 $565,000
Shareholders equity
Common stock $5 per share $100,000 $150,000
Retained earnings $700,000 $496,000
Total liabilities and shareholders equity $1,300,000 $1,211,000
Income statement for the year ended June 30
Sales $2,100,000 $1,900,000
Less cost of goods sold $1,260,000 $1,190,000
Gross margin $840,000 $710,000
Less operating expenses $660,000 $510,000
Net operating income $180,000 $200,000
Less interest expense $30,000 $60,000
Net income before taxes $150,000 $140,000
Less income taxes $45,000 $55,000
Net income $105,000 $85,000
Notes: Accounts balance at the beginning of 2005 financial year were: Accounts receivable
$140 000. Inventory $260,000. All sales were credit.
a. Calculate the following ratios for 2006 and 2005.
i. Gross margin percentage
ii. Net income percentage
iii. Current ratio
iv. Acid test ratio
v. Inventory turn over
vi. Debt to equity ratio
vii. Interest cover
b. Briefly comment on the company performance in the area of liquidity and profitability:
Question 2
Key Ratios for ABC, Inc. and Its Industry
ABC, Inc. 1994 Ratios Industry Average Ratios in 1994
Current ratio 1.2 1.4
Acid test ratio 0.89 0.94
Average collection period 30 days 25 days
Inventory turnover 18.1 20.3
Fixed assets turnover 4.1 4.8
Total asset turnover 2.78 2.8
Debt ratio 50% 60%
Times-interest-earned 5.5% 4.5%
Net profit margin 1.15% 1.5%
Return on equity 5.21% 7.32%
ABC, Inc. Income Statement (in thousands)
December 31, 1995
Sales (all credit) $200,000
Cost of goods sold 140,000
Gross profit on sales 60,000
Operating expenses 56,000
Operating income 4,000
Interest expense 1,000
Earnings before tax 3,000
Income tax 1,050
Net income available to common stockholders $1,950
ABC, Inc. Balance Sheet (in thousands)
December 31, 1995
Assets
Cash $2,000
Accounts receivable 17,800
Inventories 8,700
Total current assets 28,500
Gross fixed assets 70,000
Accumulated depreciation 26,500
cNet fixed assets 43,500
Total assets $72,000
Liabilities and Equity
Accounts payable $18,000
Accruals 13,350
Total current liabilities 31,350
Long-term debt 8,250
Total liabilities 39,600
Common stock (par value and paid in capital) 2,000
Retained earnings 30,400
Total stockholders’ equity 32,400
Total liabilities and equity $72,000
Required:
a. Calculate the following ratios for ABC Inc. for 1995
– Average collection period
– Inventory turnover
– Fixed asset turnover
– Current ratio
– Acid test ratio
– Debt to total asset ratio
– Net profit margin
– Return on equity
b. Comment on the firms liquidity and profitability, taking into consideration the industry averages.
Question 3
Christmas Ltd
Sales 600,000
Opening stock 50,000
Purchases 430,000
480,000
Less closing stock 60,000 420,000
Gross profit 180,000
Less running expenses 100,000
Net profit before tax 80,000
Less interest 8,000
Profit before taxes 72,000
Less taxes 30,000
Profit after tax 42,000
Less dividends 2000
Retain profits for the year 40,000
Christmas Ltd
Balance sheet
as at December 31 2010
Fixed assets 140,000
Current assets:
Stocks 60,000
Debtors 2,000
Bank and cash 38,000
100,000
Less current assets 40,000 60,000
Net assets employed 200,000
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Share capital
Ordinary shares 20,000
Profit and loss account 100,000
120,000
10 % debentures 80,000
Net capital employed 200,000
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Calculate the following ratios
1. Current ratio
2. Quick Ratio
3. Gross margin
4. Net Margin
5. Inventory turnover ratio
6. Clearly explain the term ratio analysis, and list any three limitations of financial statement analysis.
