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 ________ (8 marks) Accounts payable ________ (8 marks)

Accounts receivable ________ (8 marks) Common stock RM15,000

Inventories ________ (8 marks) Retained earnings RM22,000

Plant & equipment ________ (8 marks)

Total assets ________ (8 marks) Total liabilities ________ (8 marks)

& capital

Sales ________ (8 marks)

Cost of goods sold ________ (8 marks)

2) Discuss what precautions must one take when using ratio analysis to make financial decisions? Which ratios would be more useful for a financial managers internal financial analysis? How about an analyst trying to decide on which stocks are most attractive within an industry?

(14 marks)

3) 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?

(14 marks)