Accounting Class Discussion

6 Accounting Class Discussion

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M6: Discussion


Do you think a firm should not have any liquidity or solvency questions if it is very profitable? 

The financial information of ABC Inc. and the industry average of certain financial ratios are presented below.


  • Calculate the following financial ratios: Current ratio, Quick ratio, Accounts receivable turnover, Inventory turnover, Total assets turnover, Debt ratio, Times interest earned, Operating income%, Return on assets, Return on equity, EPS, and Price-earnings ratio for each of the three years (i.e., complete every cell containing an “A” in the attached Excel spreadsheet).
  • To assign qualitative assessments of Good, OK/Good, OK, OK/Poor, or Poor to the trends in each of the firm’s financial ratios as well as to the degree to which the firm’s financial ratios are superior to the matching industry ratios (e., every cell containing a “B” in the attached Excel spreadsheet).
  • What is your overall evaluation of ABC’s profitability, liquidity, asset management, and solvency?
  • What is the stock market’s assessment of ABC’s financial condition? Does the stock market’s assessment confirm or refute your analysis?

Note 1: Complete req. (1) and (2) in the Excel spreadsheet and attach it to your initial post. Using cell-referenced equations to calculate ratios. Your initial post should be your responses to req. (3) and (4).

Note 2: For simplicity, all financial ratios requiring balance sheet data should be calculated using year-end figures rather than an average of beginning-of-year and end-of-year data.

Balance Sheet (in thousands) Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019
Assets $ $ $
Cash & cash equivalents 1,512 1,176 1,097
Accounts receivable 6,237 10,271 15,919
Inventories 4,536 7,838 12,570
Prepaid expenses 3,780 5,140 6,840
Total current assets 16,065 24,425 36,426
Gross fixed assets 6,300 9,080 12,918
Less: Accumulated depreciation 2,050 2,958 4,250
Net Fixed assets 4,250 6,122 8,668
Intangible assets 567 588 605
All other noncurrent assets 1,323 1,790 1,985
Total assets 22,205 32,925 47,684
Liabilities and Stockholders’ Equity
Accounts payable 3,570 5,958 9,955
Notes payable 1,205 3,243 6,323
Current maturities–L.T.D. 1,008 1,460 2,246
Income taxes payable 84 336 336
Accruals and other current liabilities 1,995 3,360 5,016
Total current liabilities 7,862 14,357 23,876
Long-term debt 2,940 6,100 9,350
Total liabilities 10,802 20,457 33,226
Stockholders’ Equity
Paid-in capital 3,360 3,360 3,360
Additional paid-in capital 2,100 2,100 2,100
Retained earnings 5,943 7,008 8,998
Total stockholders’ equity 11,403 12,468 14,458
Total liabilities & stockholders’ equity 22,205 32,925 47,684
Income Statement (in thousands) 2017 2018 2019
$ $ $
  Sales revenue 50,400 65,100 81,312
  Less: Cost of goods sold 35,431 45,872 57,098
  Gross profit 14,969 19,228 24,214
  Less: Operating expenses
           SG&A 12,331 15,099 17,296
           Depreciation expense 630 908 1,292
           Total operating expenses 12,961 16,007 18,588
  Operating income (EBIT) 2,008 3,221 5,626
  Less: Interest expense 335 756 1,343
  Earnings before taxes (EBT) 1,673 2,465 4,283
  Less: Income Taxes (34%) 569 838 1,456
  Net income 1,104 1,627 2,827
Selected Data from Cash Flow Statement (in thousands) 2017 2018 2019
$ $ $
    Net cash from operating activities (1,980) (2,156) (2,308)
    Net cash from investment activities (2,975) (3,268) (4,050)
    Net cash from financing activities 4,890 5,088 6,279
Additional Data 2017 2018 2019
Number shares common stock outstanding (in thousands) 1,120 1,120 1,120  
Stock price per common share at the year end $17.25 $17.71 $18.43
Financial Ratios 2017 2018 2019 Industry Average for 2019 Time-series 2017-19 Cross-sectional 2019
     Current ratio (times) A A A 1.6 B B
     Quick or Acid-test ratio (times) A A A 0.8 B B
  Asset Management
     Accounts receivable turnover (times) A A A 9.4 B B
     Inventory turnover (times) A A A 3.8 B B
     Total assets turnover A A A 1.8 B B
     Debt ratio (%) A A A 60% B B
     Times interest earned (times) A A A 3.4 B B
     Operating income % A A A 5% B B
     Return on assets (%) [before tax] A A A 7% B B
     Return on equity (%) [before tax] A A A 18% B B
     Earnings per common share (EPS) A A A $1.20 B B
  Market analysis ratio
     Price-earnings ratio (times) A A A 10 B B


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