Question:

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Step: 1

a. The indicated ratios for Barry:

The indicated ratios for Barry are calculated as follows:

Current ratio = Current assets / Current liabilities

Explanation

Current ratio: This ratio measures the ability of a firm to pay its current liabilities with its current assets.

Currentratio = ＄655000/ 330000 = ＄1.98

Quick ratio = (Cash + Receivables) / Current liabilities

Explanation

Quick ratio: This ratio measures the ability of a firm to pay its current liabilities with its most liquid assets (cash and receivables).

Quickratio = ( ＄77500 + 336000)/ ＄330000 = 1.25

Days sales outstanding = 365 / Receivables turnover = 365 / (Sales / Average receivables)

Explanation

Days sales outstanding: This ratio measures the average number of days it takes for a firm to collect its sales revenue from its customers.

Dayssalesoutstanding = 365/ (1607500/ 336000) = 76.29

= 76.29 days

Inventory turnover = Cost of goods sold / Inventory

I nventoryturnover = 1392500/ 241500 = 5.77

Total assets turnover = Sales / Total assets

T otalassetsturnover = 1607500/ 947500 = 1.70

Profit margin = Net income / Sales

P rof itmargin = 27300/ 1607500 = 0.02

=2.0%

ROA = Net income / Total assets

ROA = 27300/ 947500 = 0.03

= 3.0%

ROE = Net income / Common equity

ROE = 27300/ 361000 = 0.08

= 8.0%

Total debt/total assets = (Total current liabilities + Long-term debt) / Total assets

/
T otaldebt totalassets = ( ＄330000 + ＄256500)/ ＄947500 = 0.62

= 62.0%

Step: 2

b. The DuPont equation for both Barry and the industry:

Explanation

This shows how to use the DuPont equation to decompose the ROE into three components: profit margin, total assets turnover, and equity multiplier.

The DuPont equation for both Barry and the industry is constructed as follows

For Barry:

Equity multiplier = Total assets / Common equity

Equitymultiplier = ＄947500/ 361000 = ＄2.62

ROE = (Net income / Sales) x (Sales / Total assets) x (Total assets / Common equity)

ROE = 0.02 ∗1.70 ∗2.62 = 0.09

= 9.0%

For the industry:

ROE = (Net income / Sales) x (Sales / Total assets) x (Total assets / Common equity)

ROE = 0.012 ∗3.0 ∗2.5 = 0.090

= 9.0%

Step: 3

c. Barry’s strengths and weaknesses as revealed by the analysis are as follows:

Strengths: Barry has a higher current ratio, quick ratio, inventory turnover, total assets turnover, profit margin, and ROA than the industry average. This indicates that
Barry is more liquid, efficient, and profitable than its competitors.

Weaknesses: Barry has a lower days sales outstanding, ROE, and total debt/total assets than the industry average. This indicates that Barry is slower in collecting its
receivables, less leveraged, and less profitable for its shareholders than its competitors.

Step: 4

d. If Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2008, that information would affect the validity of the ratio
analysis as follows:

The ratio analysis would be distorted by the effects of rapid growth on the numerator and denominator of the ratios. For example, the inventory turnover would be inflated
by the higher sales and inventory, while the days sales outstanding would be deflated by the higher sales and receivables. The ROE would also be affected by the higher
sales, net income, and common equity.

The ratio analysis would not reflect the true performance of Barry compared to the industry average, as the industry average is based on the year-end data, while Barry’s
data would be based on the average of the beginning and ending data. Therefore, the ratio analysis would not be meaningful or reliable.

Final Answer

Summary:

Barry Computer Co. is more liquid, efficient, and profitable than the industry average, as indicated by its higher current ratio, quick ratio, inventory turnover, total assets
turnover, profit margin, and ROA.

However, Barry Computer Co. is slower in collecting its receivables, less leveraged, and less profitable for its shareholders than the industry average, as indicated by its
lower days sales outstanding, ROE, and total debt/total assets.

The ratio analysis would be distorted and unreliable if Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2008, as the
effects of rapid growth on the numerator and denominator of the ratios would not reflect the true performance of Barry compared to the industry average.

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