Baker & Co. has applied for a loan from the Trust
Us Bank to invest in several potential opportunities. To evaluate
the firm as a potential debtor, the bank would like to compare
Baker & Co. to the industry. The following are the financial
statements given to Trust Us Bank:
Balance Sheet 12/31/13 12/31/14
Cash $305 270
Accounts receivable 275 290
Inventory 600 580
Current assets 1,180 1,140
Plant and equipment 1,700 1,940
Less: acc depr (500) (600)
Net plant and equipment 1,200 1,340
Total assets $2,380 $2,480
Liabilities and Owners' Equity
Accounts payable $150 $200
Notes payable 125 0
Current liabilities 275 200
Bonds 500 500
Owners' equity
Common stock 165 305
Paid-in-capital 775 775
Retained earnings 665 700
Total owners' equity 1,605 1,780
Total liabilities and owners' equity $2,380 $2,480
Income Statement
Sales (100% credit) $1,100 $1,330
Cost of goods sold 600 760
Gross profit 500 570
Operating expenses 20 30
Depreciation 160 200
Net operating income 320 340
Interest expense 64 57
Net income before taxes 256 283
Taxes 87 96
Net income $169
$187
Compute the following ratios for Years 2013 and 2014 and evaluate Baker’s trend: (10 pts.)
2013 2014 Industry Norms Evaluate
Current ratio 5.0
Inventory turnover 2.2
Average collection period 90 days
Debt ratio .33
Times interest earned 7.0
Net profit margin 12%
Return on equity
10.43%
As per rules I am answering the first 4 subparts of the question
Current ratio=Current assets/ current liabilities
2013
Current ratio = 1180/275=4.29
2014
Current ratio = 1140/200 = 5.7
Inventory turnover= COGS/Stock
2013
Inventory turnover= 600/600 = 1
2014
Inventory turnover= 760/580=1.31
Average collection period= 365*Receivables/ Net sales
2013
ACP = 365*275/1100=91.25 days
2014
ACP = 365*290/1330 = 79.59 days
Debt ratio= Total liabilities/ Assets
2013
Debt ratio = (275+500)/2380=0.33
2014
Debt ratio = (200+500)/2480= 0.28
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