ll statements 21 Allaiy Lo2,3,4,5 has applied for a loan from a local bank The i
ID: 2558408 • Letter: L
Question
ll statements 21 Allaiy Lo2,3,4,5 has applied for a loan from a local bank The is basing its decision on the following informath Ratio Industry average Current ratio Quick ratio Receivable turnovert Inventory turnover ra Debt to assets ratio Times interest earned Profit margin Return on assets Return on equity 1.5 0.80 18 20 0.56 6.52 10.25% 11.50% 20.30% Amanda's Anchors Statement of comprehensive income For the year ended 30 June 2016 $600000 350000 $250000 100000 $150000 25000 $125000 65000 $60000 Sales revenues Cost of goods sold Gross profit Other expenses Profits before interest and taxes Interest expense Profits before taxes ncome tax expense Net profits
Explanation / Answer
30 June 2014 is wrongly printed as 30 June 2016. This can be easily made out from the fact that as Retained Earning in the year ended 30.06.2014 is 60000 i.e.100000-40000 which is equal to the profit mentioned in Statement of comprehensive income.
Comparing Ratios of the financial position ended 30.06.2014 and the Industry Average
1) Current ratio = Current assets/Current liabilities
=$140000/$100000
=1.4 times
The Higher the ratio, more the company is able to pay off its obligation of loans, which is below the industry,s average of 1.5 times
2) Quick ratio:
= (Total Current Assets- Inventory- Prepaid Expenses)/Current Liabilities
=$140000-$30000-$5000/ $100000
=1.05 Times which is above the Industry average of 0.8 times.
As the Quick Ratio increases the liquidity of company increases, so higher the ratio better it is.
3) Receivable's Turnover Ratio
= Net Credit Sales/ Average Accounts Receivable
=600000/(20000+30000)
= 24 Times which is more than the industry's average of 18 times
Higher the Ratio, better it is
5) Inventory Turnover Ratio=
Cost of Goods Sold/ Average Inventory
=350000/(30000+20000)
= 14 Times as compared to Industry average of 20 Times. Higher the Ratio, better it is.
6) Debt to Asset Ratio=
Total liabilities/ Total Assets
=250000/600000
=0.42 as compared to industries average of 0.56
Lower the ratio, better it is since a higher ratio indicates that the company has the risk of defaulting the loans borrowed by it.
7) Times Interest Earned=
Profit Before Interest and expenses/ Interest expense
= 150000/25000
= 6 times as compared to Industry average of 6.52 times
Higher ratio indicates, firms better ability to pay off the interest expenses
8) Profit margin ratio
=Net Income/ Net sale
=60000/600000
=10% as compared to Industry Avg of 10.25%
It Indicates what percentage of sales is made of net income
9) return On Assets ratio
=Net Income/ Average Total Assets
=60000/572500
=10.48 % as compared to 11.50%(Industry avg)
higher ratio, Better it is
10) Return on Equity
=Net Income/ Equity
=60000/350000
=17.14% as compared to Industry Average of 20.3%
Higher the ratio, better it is
The Bank may grant loan to comapny since quick ratio, debt to asset ratio and receivable turnover ratio is high than the industry avg. Moreover, the interest coverage ratio and profit margin ratio is very close to acceptable ratio. If the company is able to increase its inventory turnover ratio which is beyond below the acceptable level, it would do good in long run and will achieve the industry avg ratios set by the bank as benchmark. Therefore, on condition of achieve the set benchmark of 20 times in near future the bank may grant the loan to company
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