Chapter $2$ Spreadsheet Problem Financial Statement Analysis The problem requires you to use File C$02$ on the computer problem spreadsheet.$$ Cary Corporation$$s forecasted financial statements for next year follow, along with industry average ratios. Compare Cary$$s forecasted ratios with the industry average data, and comment briefly on Cary$$s projected strengths and weaknesses.Accounts and notes payable $ $432,000$ Accounts receivable $439,000$ Accruals $170,000$ Inventories $894,000$ Total current liabilities $ $602,000$ Total current assets $$1,405,000$ Long$-$term debt $404,290$ Land and building $238,000$ Common stock $575,000$ Machinery $132,000$ Retained earnings $254,710$ Other fixed assets $61,000$ Total assets $$1,836,000$ Total liabilities and equity $$1,836,000$ Cary Corporation: Forecasted Income Statement Sales $$4,290,000$ Cary Corporation: Forecasted Balance Sheet as of December $31$ Cash $ $72,000$ Cost of goods sold $(3,580,000)$ Gross operating profit $ $710,000$ General administrative and selling expenses $(236,320)$ Depreciation $(159,000)$ Miscellaneous $(134,000)$ Earnings before taxes $($EBT$)$ $ $180,680$ Taxes $(40\%)(72,272)$ Net income $ $108,408$ Number of shares outstanding $23,000$ Per$-$Share Data EPS $ $4\mathrm{.}71$ Cash dividends per share $ $0\mathrm{.}95$ P$/$E ratio $5\mathrm{.}0$ Market price $($average$)$ $$23\mathrm{.}57$ Industry Financial Ratiosa Quick ratio $1\mathrm{.}0$ Current ratio $2\mathrm{.}7$ Inventory turnoverb $5\mathrm{.}8$ Days sales outstanding $32$ days Fixed assets turnoverb $13\mathrm{.}0$ Total assets turnoverb $2\mathrm{.}6$ Return on assets $9\mathrm{.}1\%$ Return on equity $18\mathrm{.}2\%$ Debt ratio $50\mathrm{.}0\%$ Profit margin on sales $3\mathrm{.}5\%$ P$/$E ratio $6\mathrm{.}0$ aIndustry average ratios have been constant for the past four years. bBased on year$-$end balance sheet figures. What do you think would happen to Cary$$s ratios if the company initiated cost$-$cutting measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? To answer this question, suppose inventories drop to $$700,000$ and the inventory turnover is $5\mathrm{.}0($HINT: In this case, cost of goods sold will change.$).$ c$.$ Suppose Cary Corporation is considering installing a new computer system that would provide tighter control of inventories, accounts receivable, and accounts payable. If the new system is installed, the following data are projected $($rather than the data given earlier$)$ for the indicated balance sheet and income statement accounts: Accounts receivable $ $395,000$ Inventories $ $700,000$ Other fixed assets $ $150,000$ Accounts and notes payable $ $275,000$ Accruals $ $120,000$ Cost of goods sold $$3,450,000$ Administrative and selling expenses $ $248,775$ P$/$E ratio $6\mathrm{.}0$ How do these changes affect the projected ratios and the comparison with the industry averages? $($Note that any changes to the income statement will change the amount of retained earnings; therefore, the model is set up to calculate next year$$s retained earnings as this year$$s retained earnings plus net income minus dividends paid. The model also adjusts the cash balance so that the balance sheet balances.$)$ d$.$ If the new computer system were even more efficient than Cary$$s management had estimated and thus caused the cost of goods sold to decrease by $$125,000$ from the projections in part $($c$),$ what effect would it have on the company$$s financial position? e$.$ If the new computer system were less efficient than Cary$$s management had estimated and caused the cost of goods sold to increase by $$125,000$ from the projections in part $($a$),$ what effect would it have on the company$$s financial position? f$.$ Change, one by one, the other items in part $($c$)$ to see how each change affects the ratio analysis. Then think about and write a paragraph describing how computer models such as this one can be used to help make better decisions about the purchase of such items as a new computer system.