Final Financial Ratio Analysis Last name:

Assignment
This term you have learned to understand a company’s financial story using the language of accounting.
The recording and reporting of information is essential to decision makers and other users of financial
information; numbers on the various financial statements are used to help further understand the financial
condition of the business. This process is known as financial ratio analysis and allows us to analyze the
company’s financial position in relation to other organizations in the industry. In this final assignment, you
will apply the concepts you have learned throughout the term to perform financial statement analysis and
to offer some recommendations.

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable
Medical Equipment and includes all equipment that benefits patients who have certain medical conditions.
The owner of the company, David Smith, is interested in applying for a loan to expand his business; he
desires to open a second location in another city. He is preparing to apply to a local bank for a loan.

The bank will base its decision on the following averages for the DME industry:

Ratio Industry Average

Current ratio 1.50
Quick ratio 0.80
Receivables turnover ratio 18.0
Inventory turnover ratio 20.0
Debt to assets ratio 0.56
Profit margin 10.25%

The balance sheet data for Dependable DME Company follows:

December 31, 2017 December 31, 2016

Cash $75,000 $60,000
Accounts receivable 40,000 20,000
Inventory 30,000 20,000
Prepaid insurance 5,000 5,000
Total current assets 140,000 105,000
Property and equipment 600,000 550,000
Accumulated depreciation 140,000 110,000
Total property and equipment 460,000 440,000
Total assets $600,000 $545,000
Accounts payable $60,000 $60,000
Other current liabilities 40,000 45,000
Total current liabilities 100,000 105,000
Bonds payable 150,000 150,000
Total liabilities 250,000 255,000
Common stock 250,000 250,000
Retained earnings 100,000 40,000
Total stockholders’ equity 350,000 290,000
Total liabilities and stockholders’ equity $600,000 $545,000

The income statement data for Dependable DME Company follows:

 Sales $600,000
Cost of goods sold 350,000
Gross profit $250,000
Operating expenses 100,000
Operating income $150,000
Interest expense 25,000
Income before taxes $125,000
Income tax expense 65,000
Net income $60,000

Required:

1. Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio,
Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the
actual calculation as well as your final answer.

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables
Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula.
When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this
scenario. (24 points; 4 points for each ratio calculation)

2. Below each ratio, comment on the interpretation of the ratio. In other words, what does the result
tell you, specifically? (8 points)

3. Based upon the industry averages upon which the bank relies, should they approve the loan to
Mr. Smith? Why or why not? (7 points)

4. In one-half page, comment on what financial aspect of Dependable DME Company looks good
and where can Mr. Smith make some improvements. Specifically identify at least two
recommendations to Mr. Smith that can be made to improve the financial position of his business.
(8 points)

Type your name in the upper-right corner of this page next to Last Name
Save your file as a Word Document (.docx).
Include the term Final and your Last Name when saving your file. Example: Final_Smith.docx
Upload your completed document using the Browse button, and then click the Submit button.

Points Possible: 50

32 points for ratio calculations and ratio interpretations

15 points for written responses
3 points for writing level