Is the company using leverage to it's advantage? Explain.

Based on the information given. The textbook is asking "is the company using leverage to its advantage? Explain."

P15 RATIO ANALYSIS (RATIOA) LEARNING OBJECTIVES . . Using 10 key ratios, perform standard analysis on a company over a three-year period. Interpret the results and compare them to industry norms. Contrast rate of return on assets with rate of return on equity. Alter the worksheet to include two additional ratios. Create a chart contrasting the quick (acid test) and current ratios. PROBLEM DATA The comparative financial statements of Global Technology are as follows: Global Technology Comparative Income Statement For Years Ended December 31, 2012 and 2011 2012 Net sales $ 3,516,075 $ Cost of merchandise sold 2,820,000 Gross profit $ 696,075 $ Selling expenses $ 123,000 $ General expenses 81,660 Total operating expenses S 204,660 $ Operating income $ 491,415 $ Other expense interest) 36,000 Income before income tax $ 455,415 $ Income tax 164,400 Net income $ 291,015 $ 2011 3,300,330 2,550,000 750,330 127,500 88,500 216,000 534,330 19,500 514,830 220,905 293,925 Global Technology Comparative Retained Earnings Statement For Years Ended December 31, 2012 and 2011 2012 Retained earnings, January 1 $ 1,420,095 $ Net income for year 291,015 Total $ 1,711,110 $ Common stock dividends 82,500 Retained earnings, December 31 $ 1,628,610 $ 2011 1,186,170 293,925 1,480,095 60,000 1,420,095 Global Technology Comparative Balance Sheet December 31, 2012 and 2011 Assets 2012 Cash $ 34,830 $ Accounts receivable 232,500 Merchandise inventory 825,480 Prepaid expenses 22,500 Plant assets (net) 1,800,000 Total assets $ 2,915,310 $ Liabilities & Stockholders' Equity Accounts payable 326,400 $ Bonds payable, 10% due 2020 360,000 Total liabilities 686,400 $ Common stock $ 600,300 $ Retained earnings 1,628,610 Total stockholders' equity $ 2,228,910 $ Total liabilities & stockholders' equity $ 2,915,310 $ 2011 63,000 298,575 637,500 25,500 1,530,000 2,554,575 $ $ 339,180 195,000 534,180 600,300 1,420,095 2,020,395 2,554,575 REQUIREMENT 1. Review the worksheet RATIOA that follows these requirements. You have been asked to perform a ratio analysis of this company for 2012. 2. Open the file RATIOA from the website for this book at cengagebrain.com. Enter the formulas in the appropriate cells. Enter your name in cell A1. Save the completed model as RATIOA2. Print the worksheet when done. Also print your formulas. Check figure: Acid test (quick) ratio (cell C58), .82. 3. a. What information does a comparison of the current ratio and acid test ratio provide? b. Is the company using leverage to its advantage? Explain. Answer Section 0.82 3.42 13.24 10.62 Liquidity ratios: Acid-test (quick) ratio Current ratio Activity ratios: Accounts receivable turnover Inventory turnover Profitability ratios Gross profit ratio Net income to sales Rate earned on total assets - Rate earned on common stock equity 3 Coverage ratios. 2 Debt to total assets Times interest earned 1 19.80% 8.28% 10.64% 13.06% 0.24 13.65