Page 210 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 11: Ratio Analysis

(iii) Sundry debtors Notes

(iv) Fixed assets
(v) Sundry creditors
(vi) Proprietors’ fund.
(b) Draft the balance sheet with as many as details as possible.
6. You have been hired as an analyst for Mellon Bank and your team is working on an
independent assessment of Daffy Duck Food In(c) (DDF In(c)) DDF In(c) is a fi rm that
specializes in the production of freshly imported farm products from France. Your assistant
has provided you with the following data for Flipper Inc. and their industry.

Ratio 2001 2002 2003 2005-Industry Average
Long-term debt 0.45 0.40 0.35 0.35
Inventory Turnover 62.65 42.42 32.25 53.25
Depreciation/Total Assets 0.25 0.014 0.018 0.015
Days’ sales in receivables 113 98 94 130.25
Debt to Equity 0.75 0.85 0.90 0.88
Profi t Margin 0.082 0.07 0.06 0.075
Total Asset Turnover 0.54 0.65 0.70 0.40
Quick Ratio 1.028 1.03 1.029 1.031
Current Ratio 1.33 1.21 1.15 1.25
Times Interest Earned 0.9 4.375 4.45 4.65
Equity Multiplier 1.75 1.85 1.90 1.88

In the annual report to the shareholders, the CEO of Flipper Inc wrote, “2003 was a good
year for the firm with respect to our ability to meet our short-term obligations. We had

higher liquidity largely due to an increase in highly liquid current assets (cash, account
receivables and short-term marketable securities).” Is the CEO correct? Explain and use
only relevant information in your analysis.
7. In the above question, what will you say when you are asked to provide the shareholders
with an assessment of the fi rm’s solvency and leverage. Be as complete as possible given
the above information, but do not use any irrelevant information.

8. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during

the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset

turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. What can we

analyse about the relationship between both the fi rms?
9. If a fi rm has ` 1,00,000 in inventories, a current ratio equal to 1.2, and a quick ratio equal to

1.1, what is the firm’s Net Working Capital?
10. What can you say about the asset management of the firm discussed in question 6?

Be as complete as possible given the above information, but do not use any irrelevant
information.
11. The data summarised in the table below show the performance of two firms A and B, over

fi ve years.

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