12 May A. Describe the analytical use of each of the five ratios presented in the chart.
15.
Ratio Analysis: Decision FocusLO1, 2, 4, 5, 6
Avantronics is a manufacturer of electronic components and accessories that has total assets of $20,000,000. Selected financial ratios for Avantronics and the industry averages for firms of similar size are as follows:
| Avantronics
|
Industry Average | |||
| Year 1 | Year 2 | Year 3 | ||
| Current ratio | 2.09 | 2.27 | 2.51 | 2.24 |
| Quick ratio | 1.15 | 1.12 | 1.19 | 1.22 |
| Inventory turnover | 2.40 | 2.18 | 2.02 | 3.50 |
| Profit margin | 0.14 | 0.15 | 0.17 | 0.11 |
| Debt-to-equity ratio | 0.24 | 0.37 | 0.44 | 0.35 |
Avantronics is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the following parties must recommend an action based on its evaluation of Avantronics’s financial position:
MidCoastal Bank. The bank is processing Avantronics’s application for a new five-year term note. MidCoastal has been the banker for Avantronics for several years but must reevaluate the company’s financial position for each major transaction.
Ozawa Company. Ozawa is a new supplier to Avantronics and must decide on the appropriate credit terms to extend to the company.
Drucker & Denon. A brokerage firm specializing in the stock of electronics firms that are sold over the counter, Drucker & Denon must decide whether it will include Avantronics in a new fund being established for sale to Drucker & Denon’s clients.
Working Capital Management Committee. This is a committee of Avantronics’s management personnel chaired by the chief operating officer. The committee is responsible for periodically reviewing the company’s working-capital position, comparing actual data against budgets, and recommending changes in strategy as needed.
Required
· A. Describe the analytical use of each of the five ratios presented in the chart.
· B. For each of the four entities described, identify the financial ratios, from those ratios presented, that would be most valuable as a basis for its decision regarding Avantronics.
· C. Discuss what the financial ratios presented in the question reveal about Avantronics. Support your answer by citing specific ratio levels and trends, as well as the interrelationships among these ratios.
· 16.
· Horizontal AnalysisLO2
· Following are the income statements for Martha’s Miscellaneous for Year 1 and Year 2:
| Martha’s Miscellaneous Comparative Statements of Income and Retained Earnings | ||||
| $ | % | |||
| Year 2 | Year 1 | Change | Change | |
| Sales revenue | $700,000 | $650,000 | ||
| Cost of goods sold | 500,000 | 455,000 | ||
| Gross profit | $200,000 | $195,000 | ||
| Payroll expense | $ 50,000 | $ 42,250 | ||
| Insurance expense | 30,000 | 29,000 | ||
| Rent expense | 18,000 | 18,000 | ||
| Depreciation | 35,000 | 15,000 | ||
| Total expenses | $133,000 | $104,250 | ||
| Operating income | $ 67,000 | $ 90,750 | ||
| Interest expense | (7,000) | (5,000) | ||
| Gain on vehicle sale | 25,000 | — | ||
| Loss on sale of securities | (25,000) | — | ||
| Interest revenue | 75,000 | 50,000 | ||
| Net income before interest and taxes | $135,000 | $135,750 | ||
| Income taxes | 40,000 | 40,250 | ||
| Net income | $ 95,000 | $ 95,500 | ||
| Dividends | 38,000 | 38,000 | ||
| Total retained earnings | $ 57,000 | $ 57,500 | ||
| Retained earnings, 1/1 | 193,500 | 136,000 | ||
| Retained earnings, 12/31 | $250,500 | $193,500 | ||
· Required
· Complete the comparative income statement by computing dollar change ($ change) and percentage change (% change).
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