Interpreting profitability and risk ratios. The Limited operates specialty retail stores in shopping malls throughout the United States. Exhibit 5.28 presents financial ratios for The Limited for Year 6, Year 7, and Year 8. During Year 6, The Limited carried the accounts receivable from its credit cards on its books. During Year 7 and Year 8. The Limited sold the accounts receivable arising from its credit cards to another company in return for cash soon after the sale on account. Selected additional data appear in Exhibit 5.29.

a. What are the likely reasons for the decrease in the cost of goods sold to sales percentage from 69.5 percent in Year 6 to 66.2 percent in Year 8?

b. What are the likely reasons for the increase in the selling and administrative expenses to sales percentage from 18.7 percent in Year 6 to 23. 1 percent in Year 8?

c. What are the likely reasons for the increase in the accounts receivable turnover from 1 1.5 times in Year 6 to 120.9 times in Year 8?

d. What are the likely reasons for the increase in the fixed asset turnover from 1.4 in Year 6 to 1 .7 in Year 8?

e. Did financial leverage work to the benefit of the common shareholders in each year? Explain.

f. The proportion of debt in the capital structure increased during the three years whereas interest expense (net of taxes) as a percentage of sales decreased. Suggest reasons for this seeming inconsistency.

g. What are the likely reasons for the increases in the cash flow from operations to liabilities ratios between Year 6 and Year 7?

LO1.