Question

4-9 (Ratio analysis). The financial statements and industry norms are shown below for Pamplin Inc.

Compute the financial ratios for Pamplin to compare both for 2012 and 2013 industry normsHow liquid is the firm?Are its managers generating an adequate operating profit on the firm's assetsHow is the firm financing its assets?Are its managers generating a good return on equity?

INDUSTRY NORMS

Current ratio

Acid-test (quick) ratio

Inventory turnover

Average collection period

Debt ratio

Times interest earned

Total asset turnover

Fixes-asset turnover

Operating profit margin

Return on common equity 5.00

3.00

2.20

90.00

0.33

7.00

0.75

1.00

20%

9%

Pamplin Inc. Balance Sheet at 12/31/2012 and 12/31/2013

ASSETS 2012 2013

Cash

Accounts receivable

Inventory

Current Assets

Plan and equipment

Less accumulated depreciation

Net plant and equipment

Total assets 2,200

(1,000) $200

450

550

1,200

1,200

2,400 2,600

(1,200) $150

425

625

1,200

$1,400

$2,600

LIABILITIES AND OWNERS' EQUITY

Accounts payable

Note payable-current (9%)

Current liabilities

Bonds (8.33% interest)

Total debt

Owners' equity Common stock

Paid-in capital

Retained earnings

Total owners' equity

Total liabilities and owners' equity $300

600

700 $200

0

$200

600

800

1,600

2,400 300

600

800 150

150

300

600

900

1,700

2,600

Pamplin Inc. Income Statement for Years Ending 12/31/2012 and 12/31/2013

2012 2013

Sales

Cost of goods sold

Gross profit

Operation expenses

Depreciation

Operation profits

Interest expense

Net income before taxes

Taxes (40%)

Net income 30

220 1,200

700

500

250

250

50

200

80

120 40

200 1,450

850

600

240

360

64

296

118

178

15% of sales are cash sales, with the remaining 85% being credit sales