Question

Marks] Gestion Twer Problem Solving Sepa Corporation Comparative Balance Sheet As at June 10, 2016 and 2017 Millions of Dollars) Assets 2016 $20 Accounts Receivable 120 Gross feed assets Accumulated depreciation 480 160 548 Total assets Uabilities and owners Accounts payable Notes payable 100 140 182 Long term debt Common stock Retained earnings Total abilities and owners equity 116 548 Where, Sepma profit after tax and Sales for 2017 are $100 million and $250 million, respectively. On the other hand, Sema profiter tax and Sales for 2016 are $ 60 milion and $200 million, respectively. Based on the aforementioned information, analyze the financial performance for Segma using the following financial ratios 1) Quick Ratio (Acid-Test) 2) Total Assets Turnover 3) Average collection period 4) Return on common equity (ROE) 5) Debt Ratio Note: Use the format provided in next page, don't forget to show your calculation for each ratio and to provide your evaluation on company performance based on your ratios. 2016 2017 Ratio Quick Ratio (Acid-Test) Total Assets Turnover Average collection period Return on common equity (RO) Debt Ratio

Answer 1

Answer:

Calculation Answer 2016 2017 Current asset = Cash + account receivable inventories Quick assets Current assets inventories Current liabilities Account payable Notes payable Quick assets ratio = quick assets / current liabilities $192 million $92 million $116 million $798 million $678 million $160 million 1 0.79 4.24 $200 million $432 million $250 million $548 million Net sales Total assets 2 Total Asset turnover ratio Net sales / Total asset 0.46 0.46 Avg. account receivable Beg. Bal. + Ending Bal. /2 Receivable turnover Net sales/Avg. Account receivable Average collection period 365/Receivable turnover $60 million $72 million 2.78 4.17 131.40 87.60 Net profit Owner's equity Return on owner's equity Net profit / owner's equity $60 million $216 million $100 million $248 million 4 27.78 40.32 $216 million Total debt Current liabilities long-term debt Debt ratio Total debt / Total assets $300 million 0.50 0.55 st LO

Performance evaluation:

(i) Quick assets ratio:- This ratio indicates the firm's ability to meet immediate liabilities. The ideal ratio is 1:1. For year 2016, it is less than 1 which indicates firm's inability to meet all immediate liabilities as and when they become due.

(ii) Total assets turnover ratio:- This ratio indicates the firm's ability to generate sales per dollar of total assets. The higher the ratio, the better it is for the firm. For both the years, the ratio is same. So firm has not been able to grow sales in 2017 when it comes to generation of sales per dollar of total assets.

(iii) Average collection period:- This indicates on average how long a firm have to wait to make collection of account receivable. It can be noticed that the firm has been able to reduce the waiting period from 131.40 days to 87.60 days in 2017.

(iv) Return on owner's equity:- This ratio indicates the firm's profitability on the owner's equity invested in the business. The higher the ratio, the better it is for the firm. It can be noticed that the firm has been able to increase this ratio27.78% to 40.32% in 2017.

(v) Debt ratio:- The debt ratio shows a company’s ability to pay off its liabilities with its assets. It measures the financial leverage of a company. It can be noticed that in year 2017 it's degree of leverage has increased which may be riskier for the company.