402 CHAPTER 10 Analysis of Financial Statements
Barry Computer Company: Income Statement for Year Ended December 31, 2002
(In Thousands)
Sales $1,607,500
Cost of goods sold 1,392,500
Selling, general, and administrative expenses 145,000
Earnings before interest and taxes (EBIT) $ 70,000
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300
Ratio Barry Industry Average
Current assets/current liabilities 2.0
Days sales outstandinga 35 days
Sales/inventory 6.7
Sales/fixed assets 12.1
Sales/total assets 3.0
Net income/sales 1.2%
Net income/total assets 3.6%
Net income/common equity 9.0%
Total debt/total assets 60.0%
aCalculation is based on a 365-day year.
Complete the balance sheet and sales information in the table that follows for Hoffmeister In-
dustries using the following financial data:
Debt ratio: 50%
Quick ratio: 0.80
Total assets turnover: 1.5
Days sales outstanding: 36.5 daysa
Gross profit margin on sales: (Sales Cost of goods sold)/Sales 25%
Inventory turnover ratio: 5
aCalculation is based on a 365-day year.
BALANCESHEET
Cash Accounts payable
Accounts receivable Long-term debt 60,000
Inventories Common stock
Fixed assets Retained earnings 97,500
Total assets $300,000 Total liabilities and equity
Sales Cost of goods sold
The Corrigan Corporation’s forecasted 2003 financial statements follow, along with some in-
dustry average ratios.
a.Calculate Corrigan’s 2003 forecasted ratios, compare them with the industry average data,
and comment briefly on Corrigan’s projected strengths and weaknesses.
b.What do you think would happen to Corrigan’s ratios if the company initiated cost-cutting
measures that allowed it to hold lower levels of inventory and substantially decreased the
cost of goods sold? No calculations are necessary. Think about which ratios would be af-
fected by changes in these two accounts.
10–11
RATIO ANALYSIS
10–10
BALANCE SHEET ANALYSIS
398 Analysis of Financial Statements
