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Homework answers / question archive /  Analysis of Financial Statements (Financial Ratios) M & G Industries Balance Sheet For December 31, 2020 and 2021 2020 2021 Cash $ 9,000 $ 500 Accounts receivable 12,500 16,000 Inventories 29

 Analysis of Financial Statements (Financial Ratios) M & G Industries Balance Sheet For December 31, 2020 and 2021 2020 2021 Cash $ 9,000 $ 500 Accounts receivable 12,500 16,000 Inventories 29

Accounting

 Analysis of Financial Statements (Financial Ratios) M & G Industries Balance Sheet For December 31, 2020 and 2021 2020 2021 Cash $ 9,000 $ 500 Accounts receivable 12,500 16,000 Inventories 29.000 45,500 Total current assets $ 50,500 $ 62,000 Land 20.000 26,000 Buildings and equipment 70,000 100,000 Less: allowance for depreciation (28,000) (38,000) Total fixed assets $ 62,000 $ 88,000 Total assets $112.500 $150,000 Accounts Payable $ 10,500 $ 22,000 Short-term bank notes 17,000 47,000 Total current liabilities $ 27,500 $ 69,000 Long-term debt 28.750 22,950 Common stock 31,500 31,500 Retained earnings 24,750 26,550 Total debt and equity $112,500 $150,000 M & G Industries Income Statement For the Years Ended December 31, 2020 and 2021 2020 2021 $125,000 75.000 $ 50,000 $160,000 96,000 $ 64,000 Sales (all credit) Cost of goods sold Gross profit Operating expenses Fixed cash operating expenses Variable operating expenses Depreciation Total operating expenses Earnings before interest and taxes Interest expense Earnings before taxes Tazes Net income $ 21,000 12,500 4,500 $ 38,000 $ 12,000 3,000 59,000 4,500 4,500 $ 21,000 16.000 10.000 $ 47,000 $ 17,000 6,100 $ 10,900 5,450 $ 5,450
2020 Based on the preceeding statements, complete the following table: M & G Industries Ratio Analysis Industry Adsua! Actual Averages 2021 Current ratio 1.80 Acid-test ratio .70 Average collection period 37.00 Inventory turnover 2.50 Debt ratio 58% Times interest camned 3.80 Total asset tumover 1.14 Fixed asset turnover 1.40 Return on equity 9.5% Instructions: I. Resolve the ratios listed on table a for each year (2020 & 2021): a. For each ratio includes the formula with math computes (2020 & 2021) b. .Fill M&G Industries Ratio Analysis Table A. (2020 & 2021) Perform the following Analysis: a. Explain each ratio results for 2021 only. b. Compare each ratio performance with the previous year results (compare 2021 results with 2020 results) c. Compare each Ratio results for 2021 with their respective Industry average. III. Base on the previous results, evaluate and explain the Company financial position using the following questions: 1. How liquid is the firm? 2. Is management generating adequate operating profits on the firm's assets? 3. How is the firm financing its assets? 4. Are the owners (stockholders) receiving an adequate return on their investment?

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    2020 2021
Current Ratio Current Assets/ Current Liabilities 50500/27500 = 1.83 62000/69000 = 0.89
Acid test ratio Quick assets/ current liabilities 21500/27500 = 0.78 16500/69000 = 0.23
Average Collection Period 365* average accounts receivables/ net credit sales 365*12500/125000 = 36.5 365*16000/160000 =36.5
Inventory Turnover COGS/ Average inventory 75000/29000 =2.58 96000/45500 = 2.10
Debt Ratio Total liabilities/ total assets 56250/112500= 0.5 = 50% 91950/150000 =0.613 =61.3%
Times to interest earned EBIT/ interest expense 9000/3000 = 3 10900/6100 = 1.78
total asset turnover ratio net sales/ average total assets 125000/112500= 1.11 160000/150000=1.066
Fixed asset turnover ratio net sales/ average total fixed assets 125000/62000 = 2.01 160000/88000 = 1.81
Return on Equity net income/ equity 4500/56250 = 0.08 = 8% 5450/58050 = 0.09 = 9%

Current Ratio= this is computed to measure the short term financial position of the company, it helps us to assess hte companies ability to meet its short term liabilities. 2:1 is the ideal ratio. If we compare with (Previous year) it is very low which indicated inadequacy of liquidity which is not a good sign. ( industry average) if we compare with industry average which is 1.80 still the ratio in 2021 is very low which is not a good sign and show inadequacy of liquiditiy

Acid Turnover ratio= this ratio also indicates company's short term liquidity but it takes into account only those current assets which are easily be converted into cash that is why we have ignored iventories while computing ratio. the ideal ratio is 1:1(Previous year) if we compare with previous year it is 0.23 in 2021 which is low from previous year as well as industry average, this implies liquidity of the company is not good.

Times interest earned ratio= this ratio signifies how the company is able to cover its interest obligations from teh earnings. so in 2021 the ratio is 1.78 , this ratio is weak as compared with the 2020 ratio which is 3 and industry average 3.8. this shows it would be difficult for the company to meet its interest payments.

Inventroy turnover Ratio= this ratio signifies the efficiency with which stock is used to geenrate sales. As compared with 2020 ratio is 2.58 and industry average is 2.5 ratio in 2021 is 2.10 is low which indicates either over investement in stock or inefficient use of investment in stocks.

Average Collection Period = this tells us the days within which trade receivables are converted into cash. in 2020 hte ratio is 36.5 and in 2021 it is same which indicates efficiency of management in collection is same there is no improvement in it, if we compare with industry average which is 37 it is little low not much but can be improved.

Debt Ratio= The debt ratio indicates the percentage of the total asset amounts that is owed to creditors. in 2020 it is 50% whereas in 2021it is 61.3% , this show in comparison from 2020 in 2021 more assets are begged by debt which is not a good sign, if we compare with industry average which is 58% it is still more.

Fixed Asset Turnover Ratio = this ratio indicates how effectively company is using its fixed assets to generate sales. in 2020 the ratio is 2.01 whereas in 2021 it is 1.81, it is low from 2020 which shows company is being less efficient in earning from its fixed asstes. But if we compare from industry average it is doing well as average is 1.4 and in 2021 it is 1.8 so as compared to industry company is able to effectively use its fixed assets.

Total asset turnover ratio = The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. in 2020 the ratio is 1.11 whereas in 2021 is 1.066 so if we see it is less than 2020 which signfies company is becaming less efficient to generate ravenue from its assets. if we compare with industry average which is 1.4 comapny is not doing good.

Return on Equity = ROE signifies how effectively the company is in generating returns on the investment it received from its shareholders. So, (Previous year) if we compare the ROE of 2021 with that of 2020 we can see that in 2021 company is able to generate more returns than in 2020. ( industry average) industry average is 9.5% whereas in 2021 it is 9% so we can say that company is not able to generate returns better if we compare with the industry but yes it is near which is a good sign.

iii

A) As compared to the industry average company is not liquid as both the current and acid test ratio are less than industry average which is not a good sign for the company. company should take necessary steps to come up from this issue. short term solvency of the firm is not good which company will not be able to meet it short term cash requirements.

B) company is able to generate profits from its fixed assets even more than the industry but it is lagging behind generating it from total asset, which we can see is the problem with the with current assets of teh company.

C) company is financing its assets from the debt. if we compare with industry average also company is using more debt funds to finance its assets, which is not a good sign as it will increase the interest burden also on the company.

D) as compare with industry company is able to give good returns to its shareholder but yes company can do more to give better interest to its shareholders.