problem: Balance Sheet and Income Statement for Spectrum, Inc.
[A] find out the following 10 financial ratios & provide a one sentence explanation of the analytic use of each ratio test. Demonstrate your formulas and input. Accuracy to two (2) decimal points is sufficient.
[B] Determine how Spectrum's financial performance compares to their Industry for each computed ratio. It is sufficient to rate each ratio as "G"= good, "S" = satisfactory, or "P" = poor.
|
1
|
Current ratio
|
2
|
|
2
|
Acid test ratio
|
1.06
|
|
3
|
Debt Ratio
|
0.58
|
|
4
|
Total asset turnover
|
1.18
|
|
5
|
Inventory Turnover
|
5.78
|
|
6
|
Operating Income Return on Investment
|
9.80%
|
|
7
|
Operating profit margin
|
8.30%
|
|
8
|
Times interest earned
|
3.93
|
|
9
|
Average collection period*
|
75 days
|
|
10
|
Return on Equity
|
12%
|
Suppose all sales are credit sales
|
Spectrum, Inc. BALANCE SHEET (000)
|
|
Cash
|
$500
|
|
Accounts receivable
|
1,500
|
|
Inventories
|
500
|
|
Current assets
|
2,500
|
|
Net fixed assets
|
5,000
|
|
Total Assets
|
$7,500.00
|
|
|
|
|
Accounts payable
|
1,200
|
|
Bank note
|
300
|
|
Total current liabilities
|
1,500
|
|
Long term debt
|
4,000
|
|
Common stock
|
300
|
|
Retained earnings
|
1,700
|
|
Total liabilities and owner's equity
|
$7,500
|
|
Spectrum, Inc. INCOME STATEMENT (000)
|
|
Net sales
|
$8,500
|
|
Cost of goods sold
|
3,400
|
|
Gross profit
|
5,100
|
|
Operating expenses
|
2,900
|
|
Net operating income
|
2,200
|
|
Interest expense
|
580
|
|
Earnings before taxes
|
1,620
|
|
Income tax (34%)
|
551
|
|
Net income
|
$1,069
|