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This term you have learned to understand a companys financial story using the language of accounting. The recording and reporting of information is essential to

This term you have learned to understand a companys financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the companys financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.

The bank will base its decision on the following averages for the DME industry:

Ratio

Industry Average

Current ratio

1.50

Quick ratio

0.80

Receivables turnover ratio

18.0

Inventory turnover ratio

20.0

Debt to assets ratio

0.56

Profit margin

10.25%

The balance sheet data for Dependable DME Company follows:

December 31, 2017

December 31, 2016

Cash

$75,000

$60,000

Accounts receivable

40,000

20,000

Inventory

30,000

20,000

Prepaid insurance

5,000

5,000

Total current assets

140,000

105,000

Property and equipment

600,000

550,000

Accumulated depreciation

140,000

110,000

Total property and equipment

460,000

440,000

Total assets

$600,000

$545,000

Accounts payable

$60,000

$60,000

Other current liabilities

40,000

45,000

Total current liabilities

100,000

105,000

Bonds payable

150,000

150,000

Total liabilities

250,000

255,000

Common stock

250,000

250,000

Retained earnings

100,000

40,000

Total stockholders equity

350,000

290,000

Total liabilities and stockholders equity

$600,000

$545,000

The income statement data for Dependable DME Company follows:

Sales

$600,000

Cost of goods sold

350,000

Gross profit

$250,000

Operating expenses

100,000

Operating income

$150,000

Interest expense

25,000

Income before taxes

$125,000

Income tax expense

65,000

Net income

$60,000

Required:

Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)

Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)

Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)

In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)

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