Problem: Utilizing the attached Enclosure 1 "Balance Sheet and Income Statement for Spectrum, Inc"
a) Compute the following eight (8) financial ratios and provide a one sentence explanation of the analytic use of each ratio test. Show your formulas and input. Accuracy to two decimal points is sufficient.
b) Evaluate how Spectrum's financial performance compares to their Industry for each calculated ratio. It is sufficient to rate each ratio as "G"= good, "S" = satisfactory, or "P" = poor.
Industry Norms
-1-- Current ratio 1.5
-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 9.8%
-7-- Operating profit margin 8.3%
-8-- Times interest earned 3.93
-9-- Average collection period* 75 days
-10- Return on Equity 12%
* ---Assume 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.
.
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