Spectrum's fianancial performance and ratio analysis
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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
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Solution Summary
Calculation and explanation of the ratios of Spectrum, Inc. and comparison with the industry ratio.
Education
- Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
- Bachelor of Commerce, West Bengal University
Recent Feedback
- "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect. It looks like you've mistaken the Debt ratio for the Equity Multiplier. You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already. You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount. Equity multiplier is not provided for us and we need to calculate it. I really hope this is helpful to you. "
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