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 Carys projected 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 Ratios^a

Quick ratio 1.0

Current ratio 2.7

Inventory turnover^b 5.8

Days sales outstanding 32 days

Fixed assets turnover^b 13.0

Total assets turnover^b 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

^aIndustry average ratios have been constant for the past four years.

^bBased 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.)