1. Calculate a few ratios and compare Reed’s results with industry averages. (So
ID: 2663834 • Letter: 1
Question
1. Calculate a few ratios and compare Reed’s results with industry averages.(Some industry averages are shown in Exhibit 4.) What do these ratios indicate?
EXHIBIT 4
Reed’s Clothiers Selected Ratios*
Liquidity Ratios Industry
Current ratio 2.7
Quick ratio 1.6
Receivables turnover 7.7
Average collection period 47.4
Efficiency Ratios
Total asset turnover 1.9
Inventory turnover 7.0
Payable turnover 15.1
Profitability Ratios
Gross profit margin 33.0
Net profit margin 7.8
Return on common equity 25.9
*Since many ratios may have different meanings the following definitions were used in the above calculations:
Receivable turnover 5 sales/accounts receivable
Average collection period 5 365/receivable turnover
Total asset tumover 5 cost of sales/total assets
Inventory turnover 5 cost of sales/inventories
Payable turnover 5 cost of sales/ accounts payable
Explanation / Answer
Answer: Ratios can be calculated from figures, and they mostly requires two variables, these variables may come from income statement, balance sheet for the year, owner's equity statement and cash flow statement. Ratio (2010) = Variable 1 (2010) / Variable 2 (2010) Current ratio = Current Assets / Current Liabilities Quick ratio = (Current Assets - Inventories ) / Current Liabilities Receivables turnover = Sales / Accounts Receivables Average Collection Period = 365 / Receivables turnover ratio Note: 365 represent days in a year Total asset turnover = Sales / Total Assets Inventory turnover = Cost of Goods Sold (CoGS) / Average Inventory Payable turnover = Cost of Goods Sold (CoGS) / Accounts Payables Gross profit margin = Gross Profit or Gross Income / Sales Net profit margin = Net Profit or Net Income / Sales Return on common equity = Net Profit or Net Income / Common equity
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.