Analytical Foundation of Business

Financial Accounting
Exercise 4: Profitability and credit risk analysis
Antonio Huerta A01139270

1. Barnes Appliances had net sales for $10 million dollars, net earnings for $450,000
dollars, total assets for $4 million dollars and total equity for $2 million dollars. With this
information answer the next questions:

a) What is the profit margin? 4.5%

b) What is the return on assets? 11.25%
c) What is the return on equity? 22.5%
d) At the present time, the debt to assets ratio is 50%. If this changes to 60%, ¿What is
the new return on equity? To answer this question, use the DuPont formula.
a. 0.5=2/4
b. 0.6=X/4
i. X=0.6(4)
ii. X=2.4
c. Total Assets = Total Equity + Total Liability
i. 4 = Total Equity + 2.4
ii. Total Equity = 4-2.4
iii. Total Equity = 1.6
d. ROE= 450,000/1,600,000
e. ROE= 28.125%
2. With information from the Balance Sheet and the Income Statement of Gilliam Corp.,
compute:
a) profitability ratios
a. Profit Margin = 5.625%
b. ROE =21.77%
c. ROA = 12.27%
d. Gross margin = 33.33%
e. Operating Margin = 10%
b) liquidity ratios
a. Current ratios = 2 times
b. Quick ratios = 1.28 times
c. Cash ratios = 0.25 times
c) solvency analysis
a. Debt ratio = 0.43 times
b. Debt to equity ratio = 0.77 times
c. Interest coverage ratio = 8 times
d) What are your conclusions?
a. It is a company mostly funded by equity
b. They are a profitable company
c. They can pay their liabilities as long as they don’t need to use only cash
 Analytical Foundation of Business
Financial Accounting
Exercise 4: Profitability and credit risk analysis
Antonio Huerta A01139270
Balance Sheet, at december 2018
Assets
Current assets
Cash and cash equivalents 70,000.00
Short-term investments 40,000.00
Receivables 250,000.00
Inventory 200,000.00
Total current assets 560,000.00
Property, plant and equipment 540,000.00
Total assets 1,100,000.00

Current liabilities
Accounts payable 130,000.00
Other accounts payable 120,000.00
Deferred taxes 30,000.00
Total current liabilities 280,000.00
Long term-debt 200,000.00
Total liabilities 480,000.00

Shareholder´s equity
Preferred stocks, $100-par value 150,000.00
Common stocks, -$5 50,000.00
Capital in excess of par value 200,000.00
Retained earnings 220,000.00
Total shareholder´s equity 620,000.00
Total liabilities and shareholder´s equity 1,100,000.00

Income Statement, at december 2018

Net sales 2,400,000.00
Cost of sales 1,600,000.00
Gross margin 800,000.00
Selling, general and administrative expenses 560,000.00
Earnings before interest and taxes 240,000.00
Interest expenses 30,000.00
Earnings before taxes 210,000.00
Taxes 75,000.00
Net earnings 135,000.00