Compute the financial ratios discussed in the chapter for Wholesome Foods for 2014 and 2015.

Current Ratio Formula = Current Assets / Current Liabilities

2014 Current Ratio = 138,300/75,000 = 1,844

2015 Current Ratio = 169,000/84,400 = 2002

Return on Assets = Net Income / Average Total Assets

Average Total Assets = Average of the Aggregate Assets During a 2 Year Period

Return on Assets 2014 = 42,900/401,200+408,300 = 0.052

Return on Assets 2015 = 43,000/408,300+475,000 = 0.048

Operating Profit Margin = Operating Profit / Revenue

Operating Profit Margin 2014 = 80,000/600,000 = 0.133

Operating Profit Margin 2015 = 85,000/650,000 =0.130

Total Asset Turnover = Net Sales / Average Total Sales

Total Asset Turnover 2014 = 600,000 /409,500 = 1.645

Total Asset Turnover 2015 = 650,000 /883,300 = 0.735

Debit Ratio = Total Liabilities / Total Assets

Debit Ratio 2014 = 63,900/408,300 = 0.156

Debit Ratio 2015 = 98,300/475,000 = 0.206

Return on Equity = Net Income / Equity

Return on Equity 2014 = 42,900 /183,300 = 0.234

Return on Equity 2015 = 43,000 /205,600 = 0.209

Prepare a cash flow statement for the firm for 2014 and 2015

2015 $ 85,000 (12,000) $ 73,000 Income Statement Operating profits Interest expense Profits before taxes Taxes Net profits Net profits Dividends paid Addition to retained earnings 2014 $ 80,000 (10,000) $ 70,000 (27,100) $ 42,900 $ 42,900 (31,800) $ 11,100 (30,000 $ 43,000 $ 43,000 (33,000 $ 10,000 Peer Companies 1.80 Financial Ratios (Averages) Current ratio Return on assets Operating profit margin Total asset turnover Debt ratio Return on equity 16.8% 14.0% 1.20 0.50 18.0% Situation 3 Philip Spencer, the owner of Wholesome Foods, has hired you to evaluate his firm's financial performance. The firm's financial data is provided below, along with an average for the financial ratias that Spencer collected on several competing peer firms. ofitable, but Abrahams has been disap- of cash flows. She had hoped to have about ilable for personal living expenses. However, there never seems to be much cash available for purposes other than business needs. Abrahams has asked you to examine the financial statements and explain why, although they show prof- its, she does not have any discretionary cash for personal needs. She observed, "I thought that I could take the profits and add back depreciation to find out how much cash I was generating. However, that doesn't seem to be the case. What's happening?" Question 1 Given the information provided by the financial statements, what would you tell Abrahams? (As part of your answer, calculate the firm's cash flows.) Question 2 How would you describe the cash flow pattern for the Maitz Company? Question 1 Compute the financial ratios discussed in the chapter for Wholesome Foods for 2014 and 2015. Question 2 Prepare a cash flow statement for the firm for 2014 and 2015 Question 3 Interpret your findings, both for the firm's financial ratios compared to those of the peer group and for the cash flow statement Assets Cash Accounts receivable Inventory Prepaid rent Total current assets Gross property, plant, and equipment Accumulated depreciation Net property, plant, and equipment TOTAL ASSETS 2013 $ 21,000 42,000 51,000 ____1,200 $ 115,200 650,000 (364,000) $ 286,000 $ 401,200 2014 $ 20,200 33,000 84,000 1,100 $ 138,300 664,000 (394,000) $ 270,000 $ 408,300 2015 25,000 46,000 96,000 2,000 $ 169,000 740,000 (434,000) $ 306,000 $ 475,000 2014 $ 57,000 9,000 Debt (Liabilities) and Equity Accounts payable Accrued expenses Short-term notes Total current liabilities Long-term debt Common stock Retained earnings Total owners' equity TOTAL DEBT AND EQUITY 2013 $ 48,000 9,500 11,500 $ 69,000 160,000 $ 22,200 150,000 $ 172,200 $ 401,200 9,000 $ 75,000 150,000 $ 22,200 161,100 $ 183,300 $ 408,300 2015 $ 52,400 12,000 20,000 $ 84,400 185,000 $ 34,500 171,100 $ 205,600 $475,000 Income Statement Sales Cost of goods sold Gross profits Operating expenses: 2014 $ 600,000 (460,000) $ 140,000 2015 $ 650,000 (487,500) $ 162,500 General and administrative expenses $ 30,000 30,000 $ 60,000 $ 37,500 40,000 $ 77,500 Depreciation expense lotal operating expenses 293 Chapter 10 Understanding a Firm's Financial Statements 2015 $ 85,000 (12,000) $ 73,000 Income Statement Operating profits Interest expense Profits before taxes Taxes Net profits Net profits Dividends paid Addition to retained earnings 2014 $ 80,000 (10,000) $ 70,000 (27,100) $ 42,900 $ 42,900 (31,800) $ 11,100 (30,000 $ 43,000 $ 43,000 (33,000 $ 10,000 Peer Companies 1.80 Financial Ratios (Averages) Current ratio Return on assets Operating profit margin Total asset turnover Debt ratio Return on equity 16.8% 14.0% 1.20 0.50 18.0% Situation 3 Philip Spencer, the owner of Wholesome Foods, has hired you to evaluate his firm's financial performance. The firm's financial data is provided below, along with an average for the financial ratias that Spencer collected on several competing peer firms. ofitable, but Abrahams has been disap- of cash flows. She had hoped to have about ilable for personal living expenses. However, there never seems to be much cash available for purposes other than business needs. Abrahams has asked you to examine the financial statements and explain why, although they show prof- its, she does not have any discretionary cash for personal needs. She observed, "I thought that I could take the profits and add back depreciation to find out how much cash I was generating. However, that doesn't seem to be the case. What's happening?" Question 1 Given the information provided by the financial statements, what would you tell Abrahams? (As part of your answer, calculate the firm's cash flows.) Question 2 How would you describe the cash flow pattern for the Maitz Company? Question 1 Compute the financial ratios discussed in the chapter for Wholesome Foods for 2014 and 2015. Question 2 Prepare a cash flow statement for the firm for 2014 and 2015 Question 3 Interpret your findings, both for the firm's financial ratios compared to those of the peer group and for the cash flow statement Assets Cash Accounts receivable Inventory Prepaid rent Total current assets Gross property, plant, and equipment Accumulated depreciation Net property, plant, and equipment TOTAL ASSETS 2013 $ 21,000 42,000 51,000 ____1,200 $ 115,200 650,000 (364,000) $ 286,000 $ 401,200 2014 $ 20,200 33,000 84,000 1,100 $ 138,300 664,000 (394,000) $ 270,000 $ 408,300 2015 25,000 46,000 96,000 2,000 $ 169,000 740,000 (434,000) $ 306,000 $ 475,000 2014 $ 57,000 9,000 Debt (Liabilities) and Equity Accounts payable Accrued expenses Short-term notes Total current liabilities Long-term debt Common stock Retained earnings Total owners' equity TOTAL DEBT AND EQUITY 2013 $ 48,000 9,500 11,500 $ 69,000 160,000 $ 22,200 150,000 $ 172,200 $ 401,200 9,000 $ 75,000 150,000 $ 22,200 161,100 $ 183,300 $ 408,300 2015 $ 52,400 12,000 20,000 $ 84,400 185,000 $ 34,500 171,100 $ 205,600 $475,000 Income Statement Sales Cost of goods sold Gross profits Operating expenses: 2014 $ 600,000 (460,000) $ 140,000 2015 $ 650,000 (487,500) $ 162,500 General and administrative expenses $ 30,000 30,000 $ 60,000 $ 37,500 40,000 $ 77,500 Depreciation expense lotal operating expenses 293 Chapter 10 Understanding a Firm's Financial Statements