Question

Required: 1. Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer You are only required to calculate the ratios for 2017, however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation) 2. Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points) 3. Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points) 4. In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business (8 points) The income statement data for Dependable DME Company follows: Assume that you are a health care consultant ired by the Dependable DME Company DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical condition The owner of the company David Smith is interested in applying for a loan to expand his business he desires to open a second location in another city. He is preparing to apply to a local bank for a loan The bank will base its decision on the following average for the DME Industry Ratio Current ratio Quick ratio Receivables turnover ratio Inventory turnover ratio Debt to assets ratio Profit margin Industry Average 150 10.30 10 T12070 10 56 10.25% The balance sheet data for Dependable DME Company follows. Accounts receivable Inventory Prepaid Insurance Total current assets Property and equipment Accumulated depreciation Total property and equipment Total assets Accounts payable Other current liabilities Total current abilities Bonds payable Total liabilities Common stock Retained earnings Total stockholders equity Total abilities and stockholders equity December 31, 2017 $75.000 40000 0000 151000 1407000 1600 000 140 000 460 000 ESHOO 000 S60 000 40 000 100.000 150 000 250 000 250 000 100.000 350 000 100 000 December 31, 2016 550 000 120,000 120 000 5.000 1051000 1550000 1110 000 400 000 1565000 TSGO000 45 000 105 000 150 000 255 000 250.000 40.000 290.000 15545.000 Sales Cost of goods sold Gross profit Operating expenses Operating income Interest expense Income before taxes Income tax expense Net income $600,000 350,000 $250,000 100,000 $150,000 25,000 $125,000 65,000 $60,000

Answer 1

The ratios provide us the information about the various aspects of the company. The ratios are calculated on the basis of formulas. The calculation of the various ratios are shown as under:
boo Current Ratio = Current Assets Current liability Current Carrew Assels & Wbility = 140000 100000 Current Ratio z) 140000 ) 00000 ) 1.4 ! 2 Quick Ratio & Cont Account Ree + Morkel see - Current Wbility Oruck Assclo & Cash & Account Reierable a $ 75000 + 40000 a $10 5000 Curreed libelbte of 100000 t Quick Rute I & 105000 & 61.05 1 oooou I Recirable Turnover Ratio 2) Net Cread Sales ito lett tala stat Average Recirebles fria Met credit sales a $600000 Average Recerable of obening + closing 2 20000 + 40000 2 30000 6000o do times Recevable Turnover Ratio s 90000

- 4. Inrentory Turnover Rato si - Cost of Goods seld Arg. Inventory Cest of Goodi Celda $ 350000 Hverage Inventory 2 30000 + 20000 & 25000 2 t. Inventory Turnover Retot 3sbooъ - 25000 чhea fet 02 Net Net Margie Ratio f. Nel Income wil 0 - Net Sales Income of $60000 stalled Sales & 600000 st Prefet Margie Retro f $100000 60000 & lo times 6. Debt to Assets Raro y Total Depty Total Assets $ 150000 hon to & 600000 Boud, Tokel Payable of Assets Debt to & 4 times Asset 01 Retro f 000 $ 600000 $ soood