Cary Corporations forecasted financial statements for next year follow, along with industry average ratios.

a.Compare Carys forecasted ratios with the industry average data, and comment briefly on Carysprojected strengths and weaknesses. Cary Corporation: Forecasted Balance Sheet as of December 31 Cash $ 72,000 Accounts and notes payable $ 432,000 Accounts receivable 439,000 Accruals 170,000 Inventories 894,000 Total current liabilities $ 602,000 Total current assets $1,405,000 Long-term debt 404,290 Land and building 238,000 Common stock 575,000 Machinery 132,000 Retained earnings 254,710 Other fixed assets 61,000 Total assets $1,836,000 Total liabilities and equity $1,836,000 Cary Corporation: Forecasted Income Statement Sales $4,290,000 Cost of goods sold (3,580,000) Gross operating profit $ 710,000 General administrative and selling expenses ( 236,320) Depreciation ( 159,000) Miscellaneous ( 134,000)

Earnings before taxes (EBT) $ 180,680 Taxes (40%) ( 72,272) Net income $ 108,408 Number of shares outstanding 23,000 Per-Share Data EPS $ 4.71 Cash dividends per share $ 0.95 P/E ratio 5.0 Market price (average) $23.57 Industry Financial Ratiosa Quick ratio 1.0 Current ratio 2.7 Inventory turnoverb 5.8 Days sales outstanding 32 days Fixed assets turnoverb 13.0 Total assets turnoverb 2.6 Return on assets 9.1% Return on equity 18.2% Debt ratio 50.0% Profit margin on sales 3.5% P/E ratio 6.0 a) Industry average ratios have been constant for the past four years. b) Based on year-end balance sheet figures.

b. What do you think would happen to Carys ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? To answer this question, suppose inventories drop to $700,000 and the inventory turnover is 5.0 (HINT: In this case, cost of goods sold will change.).

c. Suppose Cary Corporation is considering installing a new computer system that would provide tighter control of inventories, accounts receivable, and accounts payable. If the new system is installed, the following data are projected (rather than the data given earlier) for the indicated balance sheet and income statement accounts: Accounts receivable $ 395,000 Inventories $ 700,000 Other fixed assets $ 150,000 Accounts and notes payable $ 275,000 Accruals $ 120,000 Cost of goods sold $3,450,000 Administrative and selling expenses $ 248,775 P/E ratio 6.0 How do these changes affect the projected ratios and the comparison with the industry averages? (Note that any changes to the income statement will change the amount of retained earnings; therefore, the model is set up to calculate next years retained earnings as this years retained earnings plus net income minus dividends paid. The model also adjusts the cash balance so that the balance sheet balances.)

d. If the new computer system were even more efficient than Carys management had estimated and thus caused the cost of goods sold to decrease by $125,000 from the projections in part (c), what effect would it have on the companys financial position? e. If the new computer system were less efficient than Carys management had estimated and caused the cost of goods sold to increase by $125,000 from the projections in part (a), what effect would it have on the companys financial position?

f. Change, one by one, the other items in part (c) to see how each change affects the ratio analysis. Then think about and write a paragraph describing how computer models such as this one can be used to help make better decisions about the purchase of such items as a new computer system.