Please note:

Net Sales = Gross Sales (Customer Discounts, Returns, Allowances)

Operating Cash flow: To keep the questions simpler we are going to assume there were no changes in balance from last year for Deferred Tax Asset/Liability, A/R, Inventories, A/P, Accrued Interest Receivables and Interest Payable. Therefore, we have only Depreciation, Interest Expense and Other Income to adjust for to derive Operating Cash Flow and we get = $690,000 + $45,000 + $110,000 - $15,000= $830,000 in Cash Flow From Ops. Therefore, (since there is no change in the receivables, Payables or Inventory) the accrual accounting Gross Operating Income equals the Cash Flow from Operations for the period.

Coverage Ratios:

1) Operating Cash flow Ratio = ( operating cash flow / current liabilities) = (Note: Cash Flow from Operations was $830,000 for the year).

2) Times interest earned = (Earnings - interest - taxes)/ (interest Expenses) =?

3 ) Is the company generating enough cash flow to service its debt (pay the interest on its debt)?_____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Profitability Ratios:

4) This is a general question, so dont Use the financial statements provided herein to answer number 4: If an organization has a high Gross Profit Margin relative to its industry but a low Net Profit Margin when compared to the industry, this could be a sign of what? You do not need to restrict your answer to one reason but please be specific as possible in defending your reasoning and stick with one theme for a possible reason why we are observing this phenomenon. Please recall financial ratios dont tell us why things happened just what happened on a relative comparative basis.

Coverage Ratios:

5) Debt Service Coverage Ratio = (Operative cash flow) / (total debt service) = ?

6) short-term debt service coverage ratio = (operating cash flow)/ (current liabilites) = ?

Activity or Utilization Ratios:

7) Inventory Turnover = (cost of goods sold)/(average inventory) (Assume the Inventory balance was unchanged from the previous year) =

8) Circle True or False: A higher Inventory Turnover Ratio is typically better? True False

9) return on equity = (income after taxes)/ (average total shareholder's equity)

Solvency Ratios:

10) current ratio = current assets /current liabilities

11) Quick Ratios = (current assets - inventories) / current liabilites

12) Which solvency ratio ( Current or Quick Ration) is a more conservative measurement of an organizations ability to pay its debts?

Why We Analyze Company Income Statement For Year Ended December 31, 2013 Net Sales Cost of Goods Sold Gross Margin/Gross Profit $3,500,000 $2,580,000 $ 920,000 Operating Expenses: Selling General & Administrative Rent Gross Operating Income $ 22,000 $ 40,000 $28,000 $ 830,000 $ 110,000 $ 720,000 Depreciation Net Operating Income Other Income: Royalties $15,000 Other Expenses: Interest Expense $ 45,000 Net Income Before Taxes Income Taxes Net Income After Taxes $ 690,000 $ 241,500 $ 448,500