Picasso Company is a wholesale distributor of packaging equipment and supplies The companys sales have averaged about $900,000 annually for the 3 year period 20152017 The firms total assets at the end of 2017 amounted to $850,000 The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the companys operations for the past 3 years This report will be presented to the board of directors at their next meeting In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends At the request of the controller, the accounting staff has calculated the following ratios for the 3 year period 20152017 2015 2016 2017 Current ratio 1 80 1 89 1 96 Acid test (quick) ratio 1 04 0 99 0 87 Accounts receivable turnover 8 75 7 71 6 42 Inventory turnover 4 91 4 32 3 42 Debts to assets 51 0 46 0 41 0 Long term debt to assets 31 0 27 0 24 0 Sales to fixed assets (fixed asset turnover) 1 58 1 69 1 79 Sales as a percent of 2015 sales 1 00 1 03 1 07 Gross margin percentage 36 0 35 1 34 6 Net income to sales 6 9 7 0 7 2 Return on assets 7 7 7 7 7 8 Return on common stock equity 13 6 13 1 12 7 In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3 year period 1 The current ratio is increasing while the acid test (quick) ratio is decreasing Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend 2 In terms of the ratios provided, what conclusion(s) can be drawn regarding the companys use of financial leverage during the 20152017 period 3 Using the ratios provided, what conclusion(s) can be drawn regarding the companys net investment in plant and equipment 1 2 3

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Picasso Company is a wholesale distributor of packaging equipment and supplies. The companys sales have averaged about $900,000 annually for the 3-year period 20152017. The

Picasso Company is a wholesale distributor of packaging equipment and supplies. The companys sales have averaged about $900,000 annually for the 3-year period 20152017. The firms total assets at the end of 2017 amounted to $850,000. The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the companys operations for the past 3 years. This report will be presented to the board of directors at their next meeting. In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 20152017.

	2015		2016		2017
Current ratio	1.80		1.89		1.96
Acid-test (quick) ratio	1.04		0.99		0.87
Accounts receivable turnover	8.75		7.71		6.42
Inventory turnover	4.91		4.32		3.42
Debts to assets	51.0	%	46.0	%	41.0	%
Long-term debt to assets	31.0	%	27.0	%	24.0	%
Sales to fixed assets (fixed asset turnover)	1.58		1.69		1.79
Sales as a percent of 2015 sales	1.00		1.03		1.07
Gross margin percentage	36.0	%	35.1	%	34.6	%
Net income to sales	6.9	%	7.0	%	7.2	%
Return on assets	7.7	%	7.7	%	7.8	%
Return on common stock equity	13.6	%	13.1	%	12.7	%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

1. The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.