Assignment #1

Chapter 4:

Please use Excel for question #3, you can answer the first two in Excel as well, just use a new tab.

Link to excel sheet to use: https://1drv.ms/x/s!Ag6WjAqSgm6igUKHwDX2i-frfmUI

1. Describe the "five-question approach" to using financial ratios.

2. What is liquidity, and what is the rationale for its measurement?

3. The financial statements and industry norms are shown below for E.R.T., Inc.:

a. Compute Seven financial ratios for Pamplin for 2020 and 2021 and compare them against the industry norms (better/worse). b. How liquid is the firm? c. Are its managers generating an adequate operating profit on the firm's assets? d. How is the firm financing its assets? e. Are its managers generating a good return on equity?

Pick 7 ratio's from below	Norms
Current Ratio	5.00
Acid Test (quick) ratio	3.00
Inventory Turnover	2.20
Average collection period	90.00
Debt Ratio	0.33
Times Interest Earned	7.00
Fixed-asset turnover	1.00
Operating profit margin	25%
Return on common equity	9%

E.R.T. Inc., Balance Sheet
Assets	2020	2021
Cash	$325	$150
Accounts Receivable	475	300
Inventory	225	300
Current Assets	$1,025	$750
Plant & Equipment	$2,800	$2,700
Less accumulated depreciation	(1,000)	(900)
Net plant & equipment	$1,800	$1,800
Total
Total Assets	$2,825	$2,550
Liabilities and Owners Equity
Accounts payable	$400	$150
Notes payable (9%)	125	150
Current Liabilities	$525	$300
Bonds (8.33% interest)	600	650
Total debt	$1,125	$950
Owners' equity common stock	$400	$300
Paid-in capital	600	600
Retained earnings	700	700
Total owners' equity	$1,700	$1,600
Total liabilities and owners' equity	$2,825	$2,550
Income Statement	2020	2021
Sales*	$2,125	$2,300
Cost of goods sold	520	900
Gross profit	$1,605	$1,400
Operating (expenses)	(45)	(40)
Depreciation	(180)	160
Operating profits	$1,380	$1,520
Interest expense	(50)	(75)
Net income before taxes	$1,330	$1,445
Taxes	50	118
Net income	$1,280	$1,327
*10% of sales are cash sales, with the remaining 90% being credit sales

Confine both calculations and comments to the Seven ratios for which you are responsible. You can use TextBoxes to show your comments.

Please be sure to carefully read Part A, it asks you compare both years to the industry norms.

Your calculations should be done in Excel and you should use Excel formulas to do the calculations.

I must see your work when you calculate each ratio and the Excel formulas are "your work".