ABC, Inc. Income Statement (in thousands)December 31, 2014 Sales$200,000 Cost of goods sold140,000 Gross profit on sales60,000 Operating expenses56,000 Operating income (EBIT) 4,000 Interest expense1,000 Earnings before tax3,000 Income tax1,050 Net income available to common stockholders $1,950 Number of shares outstanding1, 500Market price per share$22ABC, Inc. Balance Sheet (in thousands)December 31, 2014 Assets Cash$2,000 Accounts receivable17,800 Inventories8,700 Total current assets28,500 Gross fixed assets70,000 Accumulated depreciation26,500 Net fixed assets43,500 Total assets$72,000 Liabilities and Equity Accounts payable$18,000

Accruals13,350 Total current liabilities31,350 Long-term debt8,250 Total liabilities39,600 Common stock (par value and paid in capital)2,000 Retained earnings30,400 Total stockholders' equity32,400 Total liabilities and equity$72,000

Industry Key RatiosIndustry Average RatiosCurrent ratio1.1 Quick ratio0.60 Days Sales Outstanding (DSO)25 days Fixed assets turnover5.8 Total asset turnover2.95 Liabilities-to-assets ratio65% Times-interest-earned3.2 Net profit margin1.3% Return on equity7.32% Price/earnings ratio20.38 Market/book ratio3.19

1. Calculate current ratio and acid test ratio for the firm.

2. Calculate DSO, fixed assets turnover, and total asset turnover for the firm.

3. Calculate liabilities-to-assets ratio and times-interest-earned ratio for the firm.

4. Calculate net profit margin and return on equity for the firm.

5. Evaluate the performance of the firm in the following areas:

Liquidity management

Asset management

Debt management

Profitability management

When you explain the firm's strength or weakness in each area, you must support your arguments through the evaluative reasoning process by providing reasons, methods, criteria, or assumptions behind the claims made.

6. Deductive reasoning starts with a general principle and deduces that it applies to a specific case. Deductive reasoning moves with exacting precision from the assumed truth of a set of premises to a conclusion which cannot be false if those premises are true. Explain the deductive reasoning process applied to analyse the firm's performance