Picasso Company is a wholesale distributor of packaging equipment and supplies.
ID: 2578288 • Letter: P
Question
Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to $850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
In terms of the ratios provided,
a.) what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2015–2017 period?
b.) what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?
Current ratio Acid-test (quick) ratio Accounts receivable turnover Inventory turnover Debts to assets Long-term debt to assets Sales to fixed assets (fixed asset turnover) Sales as a percent of 2015 sales Gross margin percentage Net income to sales Return on assets Return on common stock equity 2015 1.80 1.04 8.75 4.91 51.0 % 31.0% 1.58 1.00 36.0 % 2016 1.89 0.99 7.71 4.32 46.0 % 27.0 % 1.69 1.03 35.1% 7.0 % 7.7% 13.1% 2017 1.96 0.87 6.42 3.42 41.0 % 24.0 % 1.79 1.07 34.6 % 7.2% 7.8% 12.7% 6.9% 7.70/0 13.6%Explanation / Answer
.a) Financial leverage of the company decreased during the 2015-2017 period.
Debt to assets decreased from 51% to 41% .
Long term debts to assets decreased from31% in 2015 to 24% in 2017. This means that 31% assets were financed by debt in 2015 and it came down to 24% in 2017. The rest financed by Equity.
Hence portion of equity increased in 2017 compared to 2015. The Debt equity ratio decreased and financial leverage decreased over the three year period, 2015-2017
.b) Total asset at the end of 2017=$850,000
Annual sales=$900,000
Sales to fixed asset increased from 1.58 in 2015 to 1.79 in 2017.
Sales remained constant around $ 900,000
Hence fixed assets decreased during the period
In 2015 :
Sales/fixed asset=1.58
Sales=$900,000
Fixed assets=(900000/1.58)= $ 569,620
In 2016 :
Sales of 2016/Sales of 2015=1.03
Fixed asset =(900000*1.03/1.69)= $ 548,521
Sales of 2017/Sales of 2015=1.07
In 2017: Fixed assets=(900000*1.07/1.79)= $ 537,989
It can be concluded that there was no significant investment in plant and equipment during the period 2015-2017.
There was reduction in value of plant & equipment.