Analyzing Financial Statements
If the average sales volume remains the same, then the cost of goods sold will also
remain the same.
If the inventory decreases by 25%, the inventory turnover ratio
In a period of increasing prices, a change from FIFO to weighted average will cause
inventory to decrease and cost of good sold to increase.
Impact of change
Profit margin = Net income / Net sales
Fixed asset turnover = Net Sales / Average net fixed assets
Current ratio = Current assets /Current liabilities
Quick ratio = (Cash + ST investments + A/R) / CL
Current assets = $38,914 + $202,539 + $389,905 + $198,000 + $11,163 = $840,521
Current liabilities = $71,635 + $51,615 + $43,694 + $4,288 = $171,232
= Current assets / Current liabilities = $840,521 /$171,232 = 4.91
= Quick assets / Current liabilities = $631,358 / $171,232 = 3.69
= Cost of goods sold / Average inventory
= $1,406,829 / [($216,412 + $198,000) / 2] = 6.79
Receivables turnover = Net credit sales / Average net accounts receivable
= $2,568,776 x 60% / [($326,896 + $389,905) / 2] = 4.30
The current ratio and the quick ratio indicate clearly that the company has sufficient
current assets to pay its current liabilities.
In fact, these ratios are relatively high.
inventory turns over about 7 times per year, once every two months. These levels seem
reasonable but should be compared with similar ratios for the previous years to detect
any improvement or deterioration over time.
Comparisons with industry ratios are also
useful. Furthermore, the average collection period of 85 days (365 / 4.30) should be