Part 4. Ratio Analysis Blue Cloud Inc.’s 2012 Income Statement and Comparative B
ID: 2490403 • Letter: P
Question
Part 4. Ratio Analysis Blue Cloud Inc.’s 2012 Income Statement and Comparative Balance Sheet follow. Blue Cloud Inc. Income Statement For the Year ending December 31 2012 Sales $1,500,000 Cost of goods sold 800,000 Gross profit $ 700,000 Operating expenses 330,000 Operating income $370,000 Interest expense 95,000 Income before taxes $ 275,000 Income tax expense 96,000 Net income $ 179,000 Comparative Balance Sheet 2012 2011 Cash $ 60,000 $ 75,000 Accounts receivable 190,000 230,000 Inventory 180,000 210,000 Prepaid insurance 70,000 100,000 Total current assets $ 500,000 $ 615,000 Property & equipment 1,020,000 1,130,000 Accumulated depreciation 550,000 600,000 Total property and equipment 470,000 530,000 Total assets $ 970,000 $1,145,000 Accounts payable $ 65,000 $ 110,000 Notes payable 55,000 130,000 Total current liabilities 120,000 240,000 Bonds payable 120,000 60,000 Total liabilities 240,000 300,000 Common stock 620,000 685,000 Retained earnings 110,000 160,000 Total stockholders’ equity 730,000 845,000 Total liability & stockholders’ equity $970,000 $1,145,000 a. Use Blue Cloud’s 2012 Income Statement and Comparative Balance sheet to calculate the ratios below. Enter your answers in the shaded boxes under column a. b. Note if the ratio is a Profitability, Liquidity, or Solvency Ratio. Enter your answers in the shaded boxes under column b. Ratio a. Calculation Answer b. Profitability, Liquidity, or Solvency ratio? Profit margin Debt to assets ratio Current ratio Quick ratio Return on assets Times interest earned Inventory turnover ratio Receivables turnover ratio Debt to equity ratio c. Based on your calculations, write a brief interpretation of this analysis.
Explanation / Answer
Profitability:
The profitability ratios measure the profitability or the operational efficiency of the firm . These ratios reflect the final results of business operations.
Liquidity:
Liquidity or short term solvency means ability of the business to pay its short term liabilities .
Solvency :
These ratios an inside into the financing techniques used by a business and focus, as a consequence ,on the long term solvency position .
Profit margin Ratio net income / net sale 179000/1500000 0.012 Current Ratio Current Assets/ Current Liability 500000/120000 = 4.17 Quick Ratio Quick Assets / Current Liability (500000-180000)/120000 = 2.67 *Quick Assets Current Asset- Inventory Debt to Asset Ratio Total Liability /Total Assets 970000/970000 = 1 Times Interest Earned Earning before interest and tax/interest expenses 370000/95000 = 3.89 times Inventory Turnover Ratio Sales/Average Invetory 1500000/195000 7.69 *Average Invetory (Opening Inventory+closing inventory)/2 (180000+210000)/2 195000 Receivable Turnover Ratio Sales/Average Account Receivable 1500000/(190000+230000)/2 = 7.14 Debt to Equity Ratio Debt +Preferred Long Term/shareholders equity 120000/730000 = 0.16 *Debt Total liability-shareholders equity-current liability 970000-730000-120000=120000