4-9. (Ratio analysis) The financial statements and industry norms are shown below for Pamplin, Inc.: a. Compute the financial ratios for Pamplin to compare both for 2012 and 2013 against the industry norms. b. How liquid is the firm? c. Are its managers generating an adequate operating profit on the firm's assets? d. How is the firm financing its assets? e. Are its managers generating a good return on equity? INDUSTRY NORM Current ratio Acid-test (quick) ratio Inventory turnover 5.00 3.00 2.20 Average collection period 90.00 Debt ratio 0.33 Times interest earned 7.00 Total asset turnover 0.75 Fixed-asset turnover 1.00 Operating profit margin 20% Return on common equity 9% Pamplin Inc. Balance Sheet at 12/31/2012 and 12/31/2013 ASSETS 2012 2013 Cash $ 200 $ 150 Accounts receivable 450 425 Inventory 550 625 Current assets $1,200 $1,200 Plant and equipment $2,200 $ 2,600 Less accumulated depreciation (1,000) (1,200) Net plant and equipment $1,200 Total assets $2,400 $1,400 $2,600 LIABILITIES AND OWNERS' EQUITY Accounts payable Notes payable-current (9%) Current liabilities $ 200 0 $ 150 150 $ 300 $ 200 Pamplin Inc. Balance Sheet at 12/31/2012 and 12/31/2013 ASSETS 2012 2013 Cash $ 200 $ 150 Accounts receivable 450 425 Inventory 550 625 Current assets $1,200 $1,200 Plant and equipment $2,200 $ 2,600 Less accumulated depreciation (1,000) (1,200) Net plant and equipment $1,200 Total assets $2,400 $1,400 $2,600 LIABILITIES AND OWNERS' EQUITY Accounts payable $ 200 Notes payable-current (9%) 0 Current liabilities $ 200 $ 150 150 $ 300 Bonds (8.33% interest) 600 600 Total debt $ 800 $ 900 Owners' equity Common stock $ 300 $ 300 Paid-in capital 600 600 Retained earnings 700 800 Total owners' equity $1,600 $1,700 Total liabilities and owners' equity $2,400 $2,600 Sales* Cost of goods sold Gross profit Operating expenses Depreciation Operating profits Pamplin Inc. Income Statement for Years Ending 12/31/2012 and 12/31/2013 2013 $1,450 2012 $1,200 700 850 $ 500 $ 600 30 40 220 250 200 240 $ 250 $ 360 Interest expense Net income before taxes Taxes (40%) Net income * 15% of sales are cash sales, with the remaining 85% being credit sales. 118 $ 178 50 $ 200 64 $ 296 80 $ 120