PART 1
Critical Thinking assignment Module
Ratio Analysis
The Vanguard Group, Inc. has compiled the following financial statements and comparative financial ratios for the year-end review.
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Balance Sheet
Vanguard Group, Inc.
December 31, 2007
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Assets
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Current assets
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Cash
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$ 118,750
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Accounts receivable
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296,250
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Inventory
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303,750
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Total current assets
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$ 718,750
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Gross fixed assets
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$625,000
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Less: Accumulated depreciation Net fixed assets
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93,750
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531,250
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Total assets
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$1,250,000
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Liabilities and stockholders' equity
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Current liabilities
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Accounts payable
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$ 111,250
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Notes payable
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211,250
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Accruals
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108,750
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Total current liabilities
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$ 431,250
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Long-term debt
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235,000
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Total liabilities
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$ 666,250
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Stockholders' equity
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Common stock
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318,750
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Retained earnings
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265,000
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Total stockholders' equity
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$ 583,750
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Total liabilities and stockholders' equity
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$1,250,000
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Income Statement
Vanguard Group, Inc.
for the Year Ended December 31, 2007
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Sales revenue
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$1,680,000
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Cost of sales
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1,362,480
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Gross profits
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$ 317,520
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Less: Operating expenses
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Selling expense
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$ 125,600
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General and administrative expense
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81,600
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Depreciation expense
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24,000
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Total operating expense
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$231,200
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Operating profits
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$ 86,320
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Less: Interest expense
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15,600
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Net profits before taxes
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$ 70,720
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Less: Taxes (40%)
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28,288
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Net profits after taxes
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$ 42,432
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Historical and Industry Average Ratios
Vanguard Group, Inc.
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Industry Average
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Ratio
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2005
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2006
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2007
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2007
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Current ratio
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1.6
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1.7
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-
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1.6
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Quick ratio
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0.9
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1.0
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-
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0.9
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Inventory turnover
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6.0
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5.0
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-
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8.4
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Average collection period
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40 days
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50 days
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-
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40 days
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Total asset turnover
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1.5
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1.5
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-
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1.75
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Debt ratio
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60%
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56%
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-
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50%
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Times interest earned
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2.5
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3.5
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-
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4.0
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Gross profit margin
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20%
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19.7%
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-
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20%
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Operating profit margin
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4.7%
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4.8%
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-
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6%
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Net profit margin
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2.0%
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2.3%
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-
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3%
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Return on investment
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3.0%
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3.5%
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-
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5.25%
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Return on equity
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7.5%
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7.95%
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-
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10.5%
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1. Calculate the firm's 2007 financial ratios.
2. Prepare an executive summary on the firm's overall financial condition and performance. Your summary must be at least one page, but no more than 3 pages. Comment on the meaning of each ratio, discussing its trend and its comparison to the industry average.
PART 2
It is important for companies, particularly retailers, to have strong liquidity. How does the current ratio compare with the quick ratio and why would these two ratios be important for retailers?
2-3 paragraphs with 1-2 sources. APA style