Exercise 1: Selected information from the comparative financial statements of Fr

Question

Exercise 1: Selected information from the comparative financial statements of Fryman Company for the year ended December 31, appears below: (Total 5 marks: each ratio 1 mark) 2008 Accounts receivable (net) Inventory Total assets Current liabilities Long-term debt Net credit sales Cost of goods sold Interest expense Income tax expense Net income S 180,000 140,000 1,200,000 140,000 340,000 1,520,000 750,000 40,000 60,000 160,000 $200,000 160,000 800,000 110,000 300,000 700,000 530,000 25,000 29,000 85,000 Instructions Answer the following questions relating to de yeer ended December 31, 2009. Show computa-tions. I. Inventory turnover for 2009 is 2. Times interest curned ir 2009 is 3. The debt to total assets ratio for 2009 is 4. Receivables turnover for 2009 is 5. Returh on assets for 2009 is Exercise 2: The following iteins wer taken from the fiaancial statements of Ritz, Inc., over a four-year per.od: Item20102009 20082007 Net Sales Cost of Goods Sold 560,000 500,000 420.000 400,000 Gross Profit $800,000 $700,000 $550,000 $500,000 $240,000 $200,000 S130,000 S100,000 Instructions Using horizontal analysis and 2007 as tie base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. (1 mark for cach year). Explain whether the trends are favorable or unfavorable for each item (1 nark)

Explanation / Answer

Exercise 1: 1. Inventory Turnover for 2009 Cost of Goods sold/Average Inventory 750000/((160000+140000)/2)= 5 2. Times Interest earned in 2009 EBIT/Interest expense EBIT=Net Income+Income tax expense+interest expense TIE=(160000+60000+40000)/40000 6.5 3. The Debt to Total assets ratio for 2009 is LT Debt/Total Assets= 340000/1200000= 28% Or Total debt/total assets= (140000+340000)/1200000= 40% Or Av.LT Debt/Av.Total Assets= ((300000+340000)/2)/((800000+1200000)/2) 0.32 Av.Total Debt/Av.assets ((110000+300000+140000+340000)/2)/((800000+1200000)/2)= 44.5% 4.Receivables turnover for 2009 is Net Credit sales/Average receivables 1520000/((200000+180000)/2)= 8 5. Return on assets for 2009 is: Net Income/(Average total assets) 160000/((800000+1200000)/2)= 16% Exercise:2 Year Base Yr.2007 2008 (2008-2007)/2007 2009 (2009-2007)/2007 2010 (2010-2007)/2007 compared to 2007 Net Sales 500000 550000 10% 700000 40% 800000 60% Favourable Revenue increasing Cost of Goods sold 400000 420000 5% 500000 25% 560000 40% Unfavourable Cost increasing Gross Profit 100000 130000 30% 200000 100% 240000 140% Favourable Profit increasing

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