Question

The Ferri Furniture Company: Balance Sheet as of December 31, 2016 (In Thousands) Cash $ 277,000...

The Ferri Furniture Company: Balance Sheet as of December 31, 2016 (In Thousands)

Cash $ 277,000 Accounts Payable $ 169,000 Receivables 220,000 Notes Payable 74,000 Inventories 145,000 Other current liabilities 57,000 Total current assets $ 642,000 Total current liabilities $ 300,000 Net fixed assets 305,000 Long-term debt 66,500 Common equity 581,000 Total assets $ 947,500 Total liabilities & equity $ 947,500

The Ferri Furniture Company: Income Statement for Year Ended December 31, 2016 (In Thousands) Sales $ 3,231,000 Cost of Goods Sold Material $ 717,000 Labour 453,000 Heat, light and power 68,000 Indirect labour 113,000 Depreciation 41,500 1,838,500 Gross Profit $ 1,392,500 Selling Expenses 115,000 General and Administrative expenses 30,000 Earnings before interest and taxes (EBIT) $ 1,247,500 Interest expense 22,500 Earnings before taxes (EBT) 1,225,000 Corporate taxes (40%) 490,000 Net income $ 735,000

A – Calculate and interpret the financial ratios for 2016 corresponding to the industry norms provided as follows:

INDUSTRY NORMS Current ratio 1.5 Inventory turnover 3 Total asset turnover 1 Operating profit margin 18% Operating income return on investment 18% Debt ratio 60% Average collection period 100 days Fixed asset turnover 1.5 Return on equity 15%

B – Comment on Ferri Company’s financial position in terms of liquidity, profitability and solvency as well as its overall performance, by using the ratios that you have found and comparing them with the industry averages.

Homework Answers

Answer #1

a)

1)

Current Ratio = Current assets / Current liablities

Current ratio = 642,000 / 300,000

Current ratio = 2.14

Current ratio is a measure of liquidity and a hiigher ratio indicates higher liquidity ( i.e., a greater ability to meet its short term obligations). The Ferri Furniture Company has better current ratio than the industry norm which has current ratio of 1.5. This means Ferri Furniture Company is able to manage short term obligations better than its competitors.

2)

Inventory Turnover = Cost of goods sold / Average inventory.

Inventory turnover = 717,000 / 145,000

Inventory turnover = 4.9

Inventory turnover is an efficiency ratio that indicates how many times a company's invetory is sold and replaced over a period of time. Therefor it indicates inventory management effectiveness of the firm. A higher turnover ration relative to industry might indicate highly effective inventory management. Inventory tunover of the industry is 3 which sates ferri company has a better inventory managemennt system which has a turover of 4.9.

Note: If opening inventory is not given, closing inventory can be taken as average inventory.

3)

Total Asset turnover = Revenue / Average total assets

Total asset turnover = 3,231,000 / 947,500

Total asset turnover = 3.41

Total asset turnover measures company's overall ability to generate revenue with a given level of assets. A ratio of 3.41 would indicate that company is generating $3.41 for every $1 of average assets. A higher ratio indicates graeter efficiency. The industry which has a total asset turnover of 1 indicates that ferri company is managing its assets more efficiently than its competitors.

4)

Operating Profit Margin = Operating income / Revenue

Operating income, EBIT =  1,247,500

Operating profit margin = 1,247,500 / 3,231,000

Operating profit margin = 0.38 or 38%'

Operating profit margin is profitability ratio which measures how much profit a company makes after paying for variable or operating costs have been paid. Feri comapny has higher operating marging than the industry norm of 18% which indicates a better profitibilty for ferri company.

5)

Operating income return on investment = Operating income / Total Operating Assets

Opreating Income =  1,247,500

Total opearting assets = Total current assets + net fixed assets

Total operating assets = 642,000 + 305,000 = 947,000

Operating income return on investment = 1247500 / 947000

Operating income return on investment = 13.1

This is a profitability measure which shows how a company's core businesses are performing, excluding financing activities, tax particulars etc. ferri company's Operating income return on investment is less than industry norm which has a measure of 18%

6)

Debt rato = Debt / Total Assets

Debt ratio =  66,500 / 947,500

Debt Ratio = 0.07 or 7%

Debt ratio is a solvency ratio that measures the extent of company's leverage. That Is, debt level of a business as a percentage of total assets. the lower the percentage, less levearge the company is using and a stronger equity position. Ferri company has a significantly lower debt ratio than the indusrty norm of 60%.

7)

Average collection period = 365 days in a year / accounts receivable turnover ratio

Accounts accounts receivable turnover ratio = Revenue / average receivable

Accounts accounts receivable turnover ratio = 3,231,000 / 220,000

Accounts accounts receivable turnover ratio =14.6

Average collection period = 365 / 14.6

Average collection period = 25

The average collection period represents the elapsed time between sale and a collection period, reflecting how fast the company collects cash from customers to whom it offers credit. Ferri company has a better collection period than the indusrty norm. Ferri company is collecting its receivables in every 25 days.

8)

Fixed asset turnover = Revenue / Average net fixet assets

Fixed asset turnover = 3,231,000 / 305,000

Fixed asset turnover =10.5

The ratio measures how efficiently the company generates revenues from its investments in fixed assets. Generally, a higher fixed asset turnover ratio indicates more efficient use of fixed aasets in generating revenue. Ferri has a highher turnover than industry norm which indicates more efficiency in the management of fixed assets.

9)

Return on equity = Net income / Average total equity

Return on equity = 735,000 / 581,000

Return on equity = 126%

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is an important measure of profitability. Ferri company has a significantly higher return of equty that the industry norm which is 15%.

b)

Liquidity measues include current ratio for which ferri copmany has a better current ratio of 2.14 than the industry norm of 2.14. This means  Ferri Furniture Company is able to manage short term obligations better than its competitors.

Profitability measue includes Operating profit margin, operating income return on investment and return on equity.

Although operating income return on investment for ferri company is less than the industry norm, it sis doing better when we check Operating profit margin and return on equity. Therefore ferry company's profitabilty measue is better than the indusrty norm.

Solvency measures debt ratio. Ferri company has a better debt ratio than industry norm. Ferri company has a significantly lower debt ratio than the indusrty norm of 60%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Oriole Medical Comparative Balance Sheet As of December 31 2016 2015 Assets Current assets Cash $357,000...
Oriole Medical Comparative Balance Sheet As of December 31 2016 2015 Assets Current assets Cash $357,000 $417,400 Accounts receivable, net 1,065,600 776,450 Inventory 729,000 681,050 Other current assets 386,000 247,000 Total current assets 2,537,600 2,121,900 Property, plant, & equipment, net 8,574,855 8,389,815   Total assets $11,112,455 $10,511,715 Liabilities and Stockholders’ Equity Current liabilities $3,123,000 $2,846,100 Long-term debt 3,702,650 3,892,700 Total liabilities 6,825,650 6,738,800 Preferred stock, $5 par value 53,900 53,900 Common stock, $0.25 par value 195,000 103,850 Retained earnings 4,037,905 3,615,165...
The balance sheet and income statement for the A. Thiel Mfg. Company are as follows: Balance...
The balance sheet and income statement for the A. Thiel Mfg. Company are as follows: Balance Sheet ($000) Cash $ 500 Accounts receivable 2,000 Inventories 1,000 Current assets $3,500 Net fixed assets 4,500 Total assets $8,000 Accounts payable $1,100 Accrued expenses 600 Short-term notes payable 300 Current liabilities $2,000 Long-term debt 2,000 Owners’ equity 4,000 Total liabilities and owners’ equity $8,000 Income Statement ($000) Sales (all credit) $8,000 Cost of goods sold (3,300) Gross profit $4,700 Operating expenses (includes $500...
The Balance Sheet and the Income Statement for ABC Manufacturing Corporation are as follows: DATA (All...
The Balance Sheet and the Income Statement for ABC Manufacturing Corporation are as follows: DATA (All amounts in SAR unless otherwise indicated, all sales are on credit and no hard keys.) Balance Sheet: ABC Corporation Balance Sheet Other current assets Total current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets LIABILITIES (DEBT) AND EQUITY Accounts payable Short-term notes payable Total current liabilities Long-term debt Total liabilities Common stock (par & paid in capital) Retained earnings Total common...
Luther Corporation Consolidated Balance Sheet December 31, 2016 and 2015 (in $ millions) Assets 2016 2015...
Luther Corporation Consolidated Balance Sheet December 31, 2016 and 2015 (in $ millions) Assets 2016 2015 Liabilities and Stockholders' Equity 2016 2015 Current Assets Current Liabilities Cash 63.6 58.5 Accounts payable 87.6 73.5 Accounts receivable 55.5 39.6 Notes payable/ short-term debt 10.5 9.6 Inventories 45.9 42.9 Current maturities of long-term debt 39.9 36.9 Other current assets 6.0 3.0 Other current liabilities 6.0 12.0 Total current assets 171.0 144.0 Total current liabilities 144.0 132.0 Long-Term Assets Long-Term Liabilities Land 66.6 62.1...
Gulf Shipping Company Balance Sheet As of December 31, 2019 (amounts in thousands) Cash 38,000 Liabilities...
Gulf Shipping Company Balance Sheet As of December 31, 2019 (amounts in thousands) Cash 38,000 Liabilities 22,000 Other Assets 27,000 Equity 43,000 Total Assets 65,000 Total Liabilities & Equity 65,000 Gulf Shipping Company Income Statement January 1 to March 31, 2020 (amounts in thousands) Revenue 5,100 Expenses 2,800 Net Income 2,300 Between January 1 and March 31, 2020: 1. Cash decreases by $100,000 2. Other Assets do not change 3. Paid-In Capital does not change 4. Dividends paid of $400,000...
PT LARIS MANIS Balance Sheet (in Millions) 31 December 2015 & 2016 ASSETS 2016 2015 Current...
PT LARIS MANIS Balance Sheet (in Millions) 31 December 2015 & 2016 ASSETS 2016 2015 Current Assets: Cash and equivalents $ 3,641 $ 4,910 Short-term Investments 273 525 Accounts Receivable (net) 2,269 2,424 Inventories 278 400 Other 1,419 1,467 Total Current Assets $ 7,877 $ 9,726 Non-Current Assets: Total non-current assets $ 5,658 $ 3,499 Total Assets $13,535 $13,670 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 5,075 $ 4,286 Accrued Liabilities 1,600 1,550 Unearned Revenues 444 192 Notes...
Cullumber Medical manufactures hospital beds and other institutional furniture. The company’s comparative balance sheet and income...
Cullumber Medical manufactures hospital beds and other institutional furniture. The company’s comparative balance sheet and income statement for 2015 and 2016 follow. Cullumber Medical Comparative Balance Sheet As of December 31 2016 2015 Assets Current assets   Cash $397,000 $417,450   Accounts receivable, net 1,089,000 776,400   Inventory 733,000 681,050   Other current assets 381,400 247,100 Total current assets 2,600,400 2,122,000 Property, plant, & equipment, net 8,616,245 8,439,830   Total assets $11,216,645 $10,561,830 Liabilities and Stockholders’ Equity Current liabilities $3,156,000 $2,846,050 Long-term debt 3,702,600 3,892,600...
Balance Sheet December 31, Year 2 and Year 1 (in thousands of dollars) Year 2 Year...
Balance Sheet December 31, Year 2 and Year 1 (in thousands of dollars) Year 2 Year 1 Assets Current assets: Cash $ 205 $ 300 Accounts receivable, net 330 350 Inventory 300 270 Prepaid expenses 20 20 Total current assets 855 940 Plant and equipment, net 1,090 1,180 Total assets $ 1,945 $ 2,120 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 270 $ 300 Accrued liabilities 50 50 Notes payable, short term 40 40 Total current liabilities 360...
Data for Lozano Chip Company and its industry averages follow. Lozano Chip Company: Balance Sheet as...
Data for Lozano Chip Company and its industry averages follow. Lozano Chip Company: Balance Sheet as of December 31, 2019 (Thousands of Dollars) Cash $   220,000 Accounts payable $   600,000 Receivables 1,575,000 Notes payable 100,000 Inventories 1,155,000 Other current liabilities 540,000   Total current assets $2,950,000   Total current liabilities $1,240,000 Net fixed assets 1,325,000 Long-term debt 400,000 Common equity 2,635,000 Total assets $4,275,000 Total liabilities and equity $4,275,000 Lozano Chip Company: Income Statement for Year Ended December 31, 2019 (Thousands of Dollars) Sales...
MONTGOMERY INC. Comparative Balance Sheets December 31, 2016 and 2015 2016 2015   Assets   Cash $ 30,400...
MONTGOMERY INC. Comparative Balance Sheets December 31, 2016 and 2015 2016 2015   Assets   Cash $ 30,400 $ 30,550   Accounts receivable, net 10,050 12,150   Inventory 90,100 70,150   Total current assets 130,550 112,850   Equipment 49,900 41,500   Accum. depreciation—Equipment (22,500 ) (15,300 )   Total assets $ 157,950 $ 139,050   Liabilities and Equity   Accounts payable $ 23,900 $ 25,400   Salaries payable 500 600   Total current liabilities 24,400 26,000   Equity   Common stock, no par value 110,000 100,000   Retained earnings 23,550 13,050   Total liabilities and equity...