Module 3 – SLP
The Income Statement
Before you start the assignment, test your understanding of concepts covered in the assignment. It is not a graded quiz, but a tool for reviewing some key points. The tool can be used multiple times.
The purpose of this SLP is to apply ratio analysis to assess the financial health of ABC Company. Use the income statement presented in the case during this module to compute general or overall profitability ratios. Compute three ratios using at least one of the income statement accounts for each ratio. Some profitability ratios include both income and balance sheet accounts. The balance sheet accounts are found in module 2.
Assume that ABC Company is a small specialty retail store. Ratios are relevant when assessed over time or across companies. IBIS is a comprehensive resource containing market research and statistics, which can be used to compare ABC Company to the industry and leaders in the industry.
Required
Part 1
First, choose three ratios from the background materials. ABC is a simple organization (see income statement in case), so pick profitability ratios for which sufficient financial data is available. Verify that at least one of the ratios is included in the IBISWorld database.
Identify the name of the ratio, the formula, and show your computations.
Part 2
Next, respond to the following questions.
- Comment on the purpose and information conveyed by each ratio.
- What did you learn about ABC Company by reviewing the three ratios?
- What is your conclusion about the profitability of the company?
- How successful is ABC Company relative to the industry average and leaders in the small specialty retail store industry? Comment from a profitability perspective. Write two paragraphs or more. Include ratios found in the IBIS database to support your conclusion.
Suggestion for the approach to the assignment:
Step 1
Watch the brief introduction to financial ratios using IBISWorld as a refresher. The video is located in module 2.
Step 2
Access the IBISWorld database in the Trident library. See screenshots on this page for guidance.
Step 3
Choose and identify three profitability ratios found in the background materials or from other sources. Show the computation of the three ratios.
A General Example Not Using ABC Company data.`
Last year, EFG Corporation had net sales of $800,000 and its cost of goods sold was $600,000. As a result, EFG’s ‘s gross profit was $200,000.
Gross margin = gross profit / sales
Gross margin = $200,000 / $800,000
Gross margin = 0.25 or 25%
EFG’s gross margin equals 25%. What does this tell us? What are some of the factors considered in evaluating this percentage?
Step 4
Use data from the Module 3 case income statement to compute ratios. Show the computations and give the name of each ratio. Note that many profitability ratios do use one balance sheet account. It is acceptable for this assignment.
Step 5
Analyze and interpret.
Step 6
Locate at least one of the industry ratios computed above in the IBISWorld database to make a comparison to the ABC Company. See instructions for how to access the data base in the Trident library.
Step 1
Step 2
Step 3
Step 4
Step 5
This short presentation provides the same information as above.
SLP Assignment Expectations
Identify three profitability ratios. Use numbers from ABC’s income statement. Show the formula and computations.
- The use of IBISWorld database is required (found in the Trident library).
- Three to five sentences are sufficient to respond to questions 1 to 3 in the second part. Do not use an essay format.
- The use of IBISWorld is a requirement for question 4. Refer to at least one actual ratio and write a minimum of two paragraphs.
Show sources when appropriate. APA format is suggested but not required.
