Calculation of Average Collection Period and Return on Equity.
Utilizing the attached Enclosure 1 "Balance Sheet and Income Statement for Spectrum, Inc"
ENCLOSURE 1
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Spectrum, Inc. BALANCE SHEET (000)
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Cash
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$500
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Accounts receivable
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1,500
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Inventories
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500
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Current assets
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2,500
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Net fixed assets
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5,000
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Total Assets
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$7,500.00
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Accounts payable
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1,200
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Bank note
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300
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Total current liabilities
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1,500
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Long term debt
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4,000
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Common stock
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300
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Retained earnings
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1,700
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Total liabilities and owner's equity
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$7,500
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Spectrum, Inc. INCOME STATEMENT (000)
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Net sales
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$8,500
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Cost of goods sold
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3,400
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Gross profit
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5,100
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Operating expenses
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2,900
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Net operating income
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2,200
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Interest expense
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580
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Earnings before taxes
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1,620
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Income tax (34%)
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551
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Net income
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$1,069
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a) Compute the following ten (10) 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.
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Industry Norms
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Average collection period*
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75 days
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Return on Equity
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12%
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* ---Assume all sales are credit sales