The Finnerty Furniture Company, a manufacturer and wholesaler of high-quality home furnishings, has experienced low profitability in recent years. As a result, the board of directors has replaced the president of the firm with a new president, Elizabeth Brannigan, who has asked you to make an analysis of the firm's financial position using the DuPont chart. The most recent industry average ratios and Finnerty's financial statements are as follows:

Finnerty Furniture Company:
Income Statement for Year Ended December 31, 2012 ($ million)
Net sales...................................................................$795.0
Cost of goods sold.......................................................(660.0)
Gross profit...............................................................$135.0
Selling expenses.........................................................( 73.5)
Depreciation expense....................................................( 12.0)
Earnings before interest and taxes (EBIT)............................$ 49.5
Interest expense............................................................( 4.5)
Earnings before taxes (EBT) ...........................................$ 45.0
Taxes (40%)...............................................................( 18.0)
Net income................................................................$ 27.0
a. Calculate those ratios that you think would be useful in this analysis.
b. Construct a DuPont equation for Finnerty and compare the company's ratios to the industry average ratios.
c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profit?
d. Which specific accounts seem to be most out of line compared with those of other firms in the industry?
e. If Finnerty had a pronounced seasonal sales pattern, or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?

Transcribed Image Text:

Industry Average Ratios Current ratio Debt ratio Times interest earned Inventory turnover Days sales outstanding 2.0× Fixed assets turnover Total assets turnover Profit margin on sales Return on total assets 6.0x 3.0× 3.0% 9.0% 12.9% 30.0% 7.0× 8.5x 24.0 days Finnerty Furniture Company: Balance Sheet as of December 31. 2012 ($ million) Cash Marketable securities Net receivables Inventories Total current assets Accounts payable Notes payable Other current liabilities Total current lia bilities Long-term debt Total liabilities Common stock Retained earnings Total stockholders' equity Total labilities and equity 21 $111 24 $135 114 201 $315 $450 159 $303 Gross fixed assets Less: Depreciation Net fixed assets Total assets 225 (78) S147