Assignment
Part 1
Discuss the importance of quality in a firm's financial statements and how you would go about evaluating the quality of a firm's financial statement. What do you consider to be the four main pro forma financial statements to financial forecasting, and why?
List all references.
Part 2
Solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance.
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Balance Sheet as of December 31, 2010
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Gary and Company
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Cash
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$45
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Accounts payables
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$45
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Receivables
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66
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Notes payables
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45
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Inventory
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159
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Other current liabilities
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21
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Marketable securities
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33
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Total current liabilities
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$111
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Total current assets
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$303
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Net fixed assets
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147
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Long Term Liabilities
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Total Assets
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$450
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Long-term debt
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24
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Total Liabilities
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$135
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Owners Equity
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Common stock
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$114
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Retained earnings
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201
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Total stockholders' equity
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315
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Total liabilities and equity
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$450
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Income Statement Year 2010
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Net sales
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$795
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Cost of goods sold
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660
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Gross profit
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135
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Selling expenses
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73.5
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Depreciation
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12
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EBIT
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49.5
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Interest expense
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4.5
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EBT
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45
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Taxes (40%)
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18
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Net income
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27
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1. Calculate the following ratios AND interpret the result against the industry average:
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Ratio
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Your Answer
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Industry Average
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Your Interpretation
(Good-Fair-Low-Poor)
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Profit margin on sales
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3%
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Return on assets
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9%
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Receivable turnover
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16X
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Inventory turnover
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10X
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Fixed asset turnover
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2X
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Total asset turnover
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3X
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Current ratio
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2X
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Quick ratio
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1.5X
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Times interest earned
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7X
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2. Analysis:
Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers. List all references.