ABC Inc. manufactures a variety of consumer products. Currently owners are seeking a purchaser who will continue its operations, and a group of investors, Case Inc., is looking into the acquisition of ABC. To evaluate its financial stability and operating efficiency, ABC was requested to provide the latest financial statements and selected financial ratios. Summary information provided by ABC is as follows.

ABC INC.

INCOME STATEMENT

FOR THE YEAR ENDED NOVEMBER 30, 2015

(IN THOUSANDS)

Sales (net)	30,500
Interest income	500
Total revenue	31,000
Costs and expenses
Cost of goods sold	17,600
Selling and administrative expenses	3,550
Depreciation and amortization expense	1,890
Interest expense	900
Total costs and expenses	23,940
Income before taxes	7,060
Income taxes	2,800
Net income	4,260

ABC INC.

BALANCE SHEET

AS OF NOVEMBER 30

(IN THOUSANDS)

	2015	2014
Cash	400	500
Short-term investments (at cost)	300	200
Accounts receivable (net)	3200	2900
Inventory	6000	5400
Total current assets	9900	9000
Property, plant, & equipment (net)	7100	7000
Total assets	17000	16000
Accounts payable	3700	3400
Income taxes payable	900	800
Accrued expenses	1700	1400
Total current liabilities	6300	5600
Long-term debt	2000	1800
Total liabilities	8300	7400
Common stock ($1 par value)	2700	2700
Paid-in capital in excess of par	1000	1000
Retained earnings	5000	4900
Total stockholders equity	8700	8600
Total liabilities and stockholders equity	17000	16000

SELECTED FINANCIAL RATIOS

	2014	2013	Average
Current ratio 1.61 1.62 1.63	1,61	1,62	1,63
Acid-test ratio .64 .63 .68	0,64	0,63	0,68
Times interest earned 8.55 8.50 8.45	8,55	8,5	8,45
Profi t margin on sales 13.2% 12.1% 13.0%	13,20%	12,10%	13%
Asset turnover 1.84 1.83 1.84	1,84	1,83	1,84
Inventory turnover 3.17 3.21 3.18	3,17	3,21	3,18

Instructions

(a) Perform common size analysis of the company

(b) Calculate a new set of ratios for the fiscal year 2015 for ABC based on the financial statements

presented.

(c) Explain the analytical use of each of the six ratios presented, describing what the investors can learn

about ABCs financial stability and operating efficiency.

(d) Identify two limitations of ratio analysis.