Using the formula sheet and Income Statement for FRS, solve the following ratios. I have given you the interpretation of each ratio in other words, what its purpose is and what it is telling you about the companys performance.

FANCY RETAIL STORE, INC. (FRS) INCOME STATEMENT

For the Year Ended December 31, 20XX

Gross Sales $500,000

Less: Sales Returns & Allowances $8,000

Sales Discounts 5,000 13,000

Net Sales Revenue $487,000

Cost of Goods Sold

Inventory, January 1, 20XX $80,000

Purchases $200,000

Less: Purchase Returns/Allow. 1,000

Purchase Discounts 500

Net Purchases 198,500

Plus: Freight-In 2,500 201,000

Goods Available for Sale 281,000

Less: Inventory, Dec. 31, 20XX 65,000

Cost of Goods Sold 216,000

Gross Margin 271,000

Operating Expenses

Salaries 25,000

Rent 25,000

Depreciation 1,000

Supplies 1,000

Total Operating Expenses 52,000

Operating Income 219,000

Other Revenue and (Expenses)

Interest Revenue 5,000 5,000

Income Before Tax 224,000

Taxes (30%) 67,200

Net Income $156,800

1. Gross Margin Ratio

Interpretation: How much of each dollar is left after subtracting COGS from sales. It is

your Gross Profit Margin before operating expenses have been deducted

2. Net Income Ratio

Interpretation: How much of each dollar earned by the company is pretax profit.

Measures the profitability of your company and is used primarily internally

3. Operating Expense Ratio

Interpretation: a measure of your operational financial efficiency. How much it costs to

market or sell products vs. how much income they generate. A cost/benefit analysis

4. Returns and Allowances Ratio

Interpretation: Can be a measure of customer dissatisfaction. You need to determine the reason they are returning items. Are your return policies too lenient? Do you have low quality or obsolete products. Compare year to year to make sure the rate isnt increasing. It also depends on the size of the retailer - A 2% return rate for Walmart is very acceptable but a 2% return rate for a small mom and pop operator will likely put them out of business.

5. Inventory Turnover Ratio

Interpretation: Determines how often you are selling your total inventory annually. A turn over rate of 2 times means that you are selling all of your inventory every 6 months. Is this good? Again, it depends on the business. If you own a flower shop this is terrible and you wont stay in business. However, if you own a high end jewelry store, this is probably acceptable. If you need to boost your inventory turnover, then you will implement strategies such as price incentives to get people to buy more frequently.

6. If FRS has a total invcstments of $1,000,000, then its Return on Investment is:

Interpretation: You always want to have the highest ROI (profit margin) as possible, so this will influence your pricing strategies. If FRS is a high end jewelry store, then they will increase ROI by charging higher prices because they have an inelastic consumer. However, if they are a lower priced, higher volume jewelry store, then they cant raise their prices, but must contain their costs because they have an elastic market demand or consumer.