QUESTION 3 (40 MARKS)

You have been asked by your CEO to evaluate, analyse and calculate commonly used ratios relating to a companys profitability, liquidity, solvency and management efficiency.

Requirement:

1. Complete the balance sheet and sales data (fill in the blanks), using the following financial data:

Debt/net worth 60%

Acid test ratio 1.2

Asset turnover 1.5 times

Day sales outstanding in accounts receivable 40 days

Gross profit margin 30%

Inventory turnover 6 times

Balance sheet

Cash ________ Accounts payable ________

Accounts receivable ________ Common stock RM15,000

Inventories ________ Retained earnings RM22,000

Plant & equipment ________

Total assets ________ Total liabilities ________

& capital

Sales ________

Cost of goods sold ________

1. Explain how do analysts use ratios to analyse a firms leverage? Which ratios convey more important information to a credit analyst those revolving around the levels of indebtedness or those measuring the ability to service debt? What is the relationship between a firms level of indebtedness and risk? What must happen in order for an increase in leverage to be successful? Discuss and illustrate all your answer. PLZ Answer clear Balance sheet