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Accounting Question:
Eleanor's Computers is a retailer of computer products. Using the financial data provided, complete the financial ratio calculations for 2007. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems.

2005 2006 2007 Industry Averages 2005
Current ratio 1.71X 1.65X 1.70X
Quick ratio .92X .89X .95X
Average collection period 60 days 60 days 65 days
Inventory turnover 4.20X 3.90X 4.50X
Fixed Asset turnover 3.20X 3.33X 3.00X
Total asset turnover 1.40 1.35X 1.37X
Debt ratio 59.20% 61.00% 60.00%
Times interest earned 4.20 3.70X 4.75X
Gross profit margin 25.00% 23.00% 22.50%
Operating profit margin 12.50% 12.70% 12.50%
Net profit margin 6.10% 6.00% 6.50%
Return on total assets 8.54% 8.10% 8.91%
Return on equity 20.93% 20.74% 22.28%
Income Statement for Year Ended 12/31/X7
Sales $1,500.000
Cost of goods sold 1,200,000
Gross profit 300,000
Operating expenses 100,000
Operating profit 200,000
Interest expense 72,000
Earnings before tax 128,000
Income tax (0.4) 51,200
Net income $76,800
Balance Sheet at 12/31/07
Cash $125,000
Accounts receivable 275,000
Inventory 325,000
Current assets 725,000
Fixed assets (net) 420,000
Total assets 1,145,000
Accounts payable 150,000
Notes payable 225,000
Accrued liabilities 100,000
Current liabilities 475,000
Long-term debt 400,000
Total liabilities 875,000
Equity 270,000
Total liabilities and equity $1,145,000

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Solution Summary

Financial analysis of Eleanor's Computers

Solution Preview

A ratio is nothing more than a simple division of two numbers. Often numbers by themselves do not convey anything until they are related. It needs a contextual reference.

Evaluation of Eleanor

Liquidity is a company's ability to meet its maturing short-term obligations. Liquidity is important for conducting business activity especially in times of adversity such as when operating losses occur due to economic conditions or drastic price increases of raw materials or parts. Liquidity must be sufficient to cushion such losses. If not, serious financial ...

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