BUSINESS PRINCIPLES – BUSI 1301

Horizontal Analysis & Financial Ratios Assignment

Instructions: For Dewey, Cheatum, & Howe Inc., review the financial information presented below,
complete the horizontal analysis (in grey), and answer the questions on the following page. All
calculations that do not require the use of two years (where you have to average) should use only the
current year’s numbers.

Dewey, Cheatum, & Howe Inc.

Balance Sheet
January 1-December 31, 2018

Assets
Current Assets
Cash
Accounts receivable
Inventory
Total current assets
Fixed Assets
Land, buildings
Furniture & fixtures
Equipment
Total fixed assets
Total Assets
Liabilities
Current Liabilities
Accounts payable
Short-term notes payable
Total current liabilities
Long-term Liabilities
Mortgages payable
Long-term notes payable
Total long-term liabilities
Total Liabilities
Owner's Equity (net worth)
Total Liabilities & Net Worth
in thousands
%
Last Year Budgeted Current Year Change
$ 25 $ 35 $ 5 -80%
$ 50 $ 55 $ 55 10%
$ 50 $ 55 $ 85 70%
$ 125 $ 145 $ 145 16%
$ 100 $ 95 $ 95 -5%
$ 50 $ 47 $ 47 -6%
$ 50 $ 47 $ 47 -6%
$ 200 $ 189 $ 189 -5.5%
$ 325 $ 334 $ 334 2.8%
$ 75 $ 69 $ 80 6.7%
$ 10 $ 10 $ 10 0%
$ 85 $ 79 $ 90 5.9%
$ 70 $ 65 $ 65 -7.1%
$ 45 $ - $ 20 -55.6%
$ 115 $ 65 $ 85 -26.1%
$ 200 $ 144 $ 175 -12.5%
$ 125 $ 190 $ 159 27.2%
$ 325 $ 334 $ 334 2.8%
 BUSINESS PRINCIPLES – BUSI 1301
Horizontal Analysis & Financial Ratios Assignment
Dewey, Cheatum, & Howe Inc.
Profit & Loss Statement
January 1-December 31, 2018

in thousands
%
Last Year Budgeted Current Year Change
Sales (revenues) $ 450 $ 475 $ 500 11.1%
-Cost of goods sold $ 200 $ 210 $ 225 12.5%
=Gross margin $ 250 $ 265 $ 275 10%

Expenses
Wages & salaries $ 75 $ 77 $ 97 29.3%
Rent $ 50 $ 52 $ 54 8%
Selling expenses $ 55 $ 58 $ 61 10.9%
Telephone $ 10 $ 11 $ 11 10%
Utilities $ 10 $ 11 $ 11 10%
Total Expenses $ 200 $ 209 $ 234 17%
Net income (pretax) $ 50 $ 56 $ 41 -18%

1. What is the Current Ratio? ____1.61______

2. What is the Inventory Turnover Ratio? ____3.33______

3. What is the Days Inventory Ratio? _____109.61_____

4. What is the Debt-to-Equity Ratio? ____1.10______

5. What is the Debt-to-Assets Ratio? _____0.09_____

6. What is the Return on Equity Ratio? ____0.26______

7. What trends are evident in the Horizontal Analysis? Be specific and justify your answer with data
in the financial statements.

There are many negative percentages in the assets. The only real growth of assets is in the
inventory with an 80% growth; however, from the financial ratios, it can be found that the business has a
low turnover ratio of 3.33, implying that there are weak sales and possible overstocking of inventory. So
the growth of inventory is unlikely to benefit the company. There is a trend of negative to no growth in
the liabilities with only a growth of 6.7% in the accounts payable. This gives a total of -12.5% change in
the liabilities, giving less sources to the assets and resulting in only 2.8% growth. Although the gross
margin went up 10%, expenses increased to a total of 17%. This is an overall negatively impacting trend,
as net income decreased 18%.
 BUSINESS PRINCIPLES – BUSI 1301
Horizontal Analysis & Financial Ratios Assignment
8. As an investor, would you invest in Dewey, Cheatum, & Howe? Why or why not? Justify your
answer and be specific in your response.

I would not invest in Dewey, Cheatum, & Howe because I believe there is little to no return in
this company. Although I can only see a year’s worth of change, it is evident that the company is
not growing and would be a risk to invest in. Although they are able to pay off short-term debts
now with a current ratio of 1.61, I predict that this will continue to decrease down the line. It
takes the company approximately 109.61 days to clear out their stock and has a very low
inventory turnover rate of 3.33. This indicates poor sales. The return on equity ratio of 0.26
implies that the business is not generating enough return on investment. Therefore, I would not
invest in this company.