Ratio Analysis

(Individual Assignment)

You may use excel or word.doc format for this assignment.
Please post your homework as a word.doc or excel file in the class discussion section below by the due date.

1. Analysis of cost of goods sold problem.

1992           1993           1994

Gross Profit Margin 60% 55% 51%

What is happening to cost of goods sold? As was done in the week 2 online lecture on ratio analysis, please assume sales of 1 dollar each year as you do your analysis. This problem follows the process shown in the Week 2 Ratio Analysis online lecture section titled: “Another Income Statement Analytical Approach: Percent of Sales”

(5 points)

Answer.

The gross profit margin has a reducing trend showing that cost of goods sold has been increased if we assume that sales is not decreasing .GP  margin is a relationship of Gross profit over sales .Reason for its reduction could be either increment in sales or reduction in GP .hence it can be concluded that cost of goods sold is increasing resulting in lower gross profit margin.

2. Overhead (or Sales, General and Administrative Expense) problem.

1992           1993           1994

Gross Profit Margin 40% 39% 41%

Operating Margin (NOI/Sales) 15% 10% 5%

What is happening to S,G and A (or overhead expenses)? Please set up an illustration assuming sales of 1.00 dollar each year just as you did in problem number one.


Answer

if we assume sales of dollar 1 then GP margin ratio indicates that Gross profits would be 0.4, 0.39 , 0.41 respectively .Operating margin in this equation would be 0.15, 0.1 , 0.05 respectively. S,G & A can be calculated by deducting operating profits from gross profits ={(0.4-0.15),(0.39-0.1),(0.41-0.05)=0.25,0.29,0.36}.Now it is evident that S. G & A expenses are increasing in the recent years.

(5 points)

3. Balance Sheet Problem

1992 1993 1994

Annual Sales Growth (over prior yr) + 1% 0% +1%

Current Ratio 3.5X 2X 1.2X

Average Collection Period 25 days 30 days 55 days

What is happening to liquidity? Why? What are some follow-up questions your would ask? (5 points)

Answer

Current ratio of a company defines a company’s ability to pay of it current liabilities out of its current asset or we can say it also describes the liquidity position of a company.in our scenario the liquidity position of the company is detoriating because its current ratio is falling .but in order to provide a better conclusion we need to have some more facts such as the breakup of its current assets .Acid test ratio provides a more accurate picture of the liquidity position but in order to calculate that we need to know the components of current assets such as cash, Accounts receivables etc.

4. Using the data provided below, which is the better managed company? Why? Please support your answers by calculating appropriate ratios. (5 points)

Company A Company B

Sales 10 million dollars 20 million dollars

Net Income 1 million dollars 2 million dollars

Total Assets 10 million dollars 15 million dollars

Answer

Ratio Analysis
Particulars Company A Company B
In millions of dollars In millions of dollars
Sales 10 20
Net Income 1 2
Total Assets 10 15
Ratios    
Return on Assets 10% 13%
Asset Turnover ratio 1 1.33

Company b appears to be in a better position because the return on asset ratio which identifies the potential of an entity to generate profits on its assets is higher .Asset turnover ratio highlights the capability of an organization to generate revenues by using their assets which is also higher for company B. On the basis of available information company B appears to be well manage business as both the return on assets and asset turnover are higher as compared to company A u

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