5 - 5. $25 3,000 2,500 2,500 (550) $7,475 (current...

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5. Calculating and interpreting short-term financial ratios: ASSUMPTIONS 2000 2001 2002 2003 2004 (current assets shaded) $25 $75 $100 $50 $25 Accounts Receivable 450 700 1,200 2,000 3,000 Inventory 400 500 800 1,400 2,500 Gross Fixed Assets 1,000 1,000 1,500 1,500 2,500 (Accumulated Depr) (200) (250) (350) (400) (550) Total Assets $1,675 $2,025 $3,250 $4,550 $7,475 (current liabilities shaded) Accounts Payable $100 $200 $400 $700 $1,226 Notes Payable 50 275 1,092 598 1,550 Accrued Operating Exp. 60 55 60 70 80 Current Maturities 50 50 50 50 200 Long-Term Debt 400 382 330 1,508 2,315 Shareholders Equity 1,015 1,063 1,318 1,624 2,104 Total Liabilities & NW $1,675 $2,025 $3,250 $4,550 $7,475 Revenues (Sales) $1,500 $2,250 $3,750 $5,500 $9,000 Cost of Goods Sold 750 1,125 1,875 2,750 4,500 Operating Expenses 700 750 900 1,600 2,500 Depreciation 100 50 100 50 150 Interest 40 45 100 200 400 Taxes (36) 112 310 360 580 Net Profit (54) 168 465 540 870 Dividends 45 120 210 234 390 a.) SOLVENCY RATIOS 2000 2001 2002 2003 2004 Current Ratio 3.37 2.20 1.31 2.43 1.81 Quick Ratio 1.83 1.34 0.81 1.45 0.99 NWC 615 695 498 2032 2469 WCR 690 945 1540 2630 4194 NLB -75 -250 -1042 -598 -1725 WCR / S 46.00% 42.00% 41.07% 47.82% 46.60% Example of calculations for 2000 (see definitions in problem 3): Current Ratio = (25 + 450 + 400) / (100 + 50 + 60 + 50) = 3.365 Quick Ratio = (25 + 450) / (100 + 50 + 60 + 50) = 1.827 NWC = (25 + 450 + 400) - (100 + 50 + 60 + 50) = $615 WCR = (450 + 400 + 0 + 0) - (100 + 60 + 0) = $690 NLB = 25 + 0 - 50 - 50 = - $75 WCR / S = (690 / 1500) * 100 = 46.0% Discuss and interpret the trends: As the numbers for the current and quick ratios indicate, company's level of solvency first declined from 2000 to 2002, then increased for two years, and then declined during the last year. The level of net working capital and working capital requirements rose and fell also, but they ended the five-year period at a substantially higher level than they began with in Page 8
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Chapter 2 - Page 2 2000 because of the general growth of the company. b.) Calculating operating cash flows. 2001 2002 2003 2004 Net Income $168 $465 $540 $870 Depreciation 50 100 50 150 (Increase) decrease in AR (250) (500) (800) (1,000) (Increase) decrease in INV. (100) (300) (600) (1,100) Increase (decrease) in AP 100 200 300 526 Increase (decrease) in Accruals (5) 5 10 10 Net Cash Flow From Operations ($37) ($30) ($500) ($544) Example of calculations for 2001: Net Cash Flow = 168+50-250-100+100-5 = (37) Interpret the 4-year trend: The level of cash flow from operations shows a decidedly bleak picture with the company running an increasing deficit cash flow position. c.) Calculating the cash conversion period.
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This note was uploaded on 01/24/2012 for the course FIN 4260 taught by Professor Victorwakeling during the Spring '12 term at Kennesaw.

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5 - 5. $25 3,000 2,500 2,500 (550) $7,475 (current...

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