Summer Corporation has just completed its comparative statements for the year ended December 31, 2012. At this point, certain analytical and interpretive procedures are to be undertaken. The completed statements (summarized) are as follows:

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1. Compute appropriate ratios for 2012 and explain the meaning of each.
2. Answer the following for 2012 :

a. Evaluate the financial leverage. Explain its meaning by using the computed amount(s).

b. Evaluate the profit margin ratio and explain how a shareholder might use it.

c. Explain to a shareholder why the current ratio and the quick ratio are different. Do you observe any liquidity problems? Explain.

d. Assuming that credit terms are \(1 / 10, \mathrm{n} / 30\), do you perceive an unfavourable situation for the company related to credit sales? Explain.

e. By how much should the balance of trade receivables decrease if the company wishes to reduce its average collection period to 30 days?

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2012 2011 Income Statement Sales revenue $480,000 Cost of sales 270,000 $420,000* 230,000 Gross margin 210,000 190,000 Operating expenses (including interest on bonds) 171,000 168,000 Pretax profit 39,000 Income tax 12,000 Profit $ 27,000 22,000 6,000 $ 16,000 Statement of Financial Position Cashi $ 6,800 42,000 25,000 $ 3,900 28,000 20,000 Trade receivables (net) Merchandise inventory Prepayments Property, plant, and equipment (net) Trade payables Income taxes payable Bonds payable (10% interest rate) Common shares (20,000 shares) Retained carnings "Credit sales totalled 40 percent of total sales. $20.000 of bonds were issued on January 2, 2012. 200 130.000 $204.000 $ 17,000 1,000 70,000 100 120,000 $172,000 $ 18,000 2,000 50,000 100,000 100,000 16.000" 2,000 $204,000 $172,000 The market price of the stock at the end of 2012 was $18 per share. *During 2012, the company declared and paid a cash dividend of $13,000.