Gary Company

Solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance.

Balance Sheet as of December 31, 2010
Gary and Company

Cash $45 Accounts payables $45
Receivables 66 Notes payables 45
Inventory 159 Other current liabilities 21
Marketable securities 33 Total current liabilities $111
Total current assets $303
Net fixed assets 147 Long Term Liabilities
Total Assets $450 Long-term debt 24
Total Liabilities $135

Owners Equity
Common stock $114
Retained earnings 201
Total stockholders’ equity 315
Total liabilities and equity $450

Income Statement Year 2010

Net sales $795
Cost of goods sold 660
Gross profit 135
Selling expenses 73.5
Depreciation 12
EBIT 49.5
Interest expense 4.5
EBT 45
Taxes (40%) 18
Net income 27

1. Calculate the following ratios AND interpret the result against the industry average:
Ratio Your Answer Industry Average Your Interpretation
Profit margin on sales 3%
Return on assets 9%
Receivable turnover 1.6X
Inventory turnover 10X
Fixed asset turnover 2X
Total asset turnover 3X
Current ratio 2X
Quick ratio 1.5X
Times interest earned 7X

2. Analysis:
Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers.