PROBLEM 4-22

Data for Barry Computer Co and its industry averages are as follow:

Barry Computer Company:

Balance Sheet as of December 31, 2012 (Thousands of Dollars)

Cash $ 77,500 Account Payable $ 129,000

Receivables 336,000 Notes Payable 84,000

Inventories 241,500 Other Current Liabilities 117,000

Total Current
$ 655,000 Total Current Liabilities $ 330,000
Assets

Long-term Debt 256,500

Net Fixed Assets 292,500 Common Equity 361,000

Total Liabilities and

Total Assets $ 947,500 $ 947,500
Equity

Barry Computer Company:

Income Statement for Year Ended December 31, 2012 (Thousands of Dollars)

Sales $1,607,500

Cost of Good Sold

Materials $717,000

Labors 453,000

Heat, light, and power 68,000

Indirect Labor 113,000

Depreciation 41,500 1,392,500

Gross Profits $215,000

Selling Expenses 115,000

General and administrative expenses 30,000

Earning before Interest and Taxes (EBIT) $70,000

Interest Expense 24,500

Earning before Taxes (EBT) $45,500

Federal and State Income Taxes (40%) 18,200

Net Income $27,300

1.0 Ratio Analysis
1.0.1 Current Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

$ 655,000
=
$ 330,000

= 1.985

1.0.2 Quick Ratio

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 (𝑄𝑅) =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

655,000 − 241,500
=
330,000

413,500
=
330,000

= 1.25
1.0.3 Days Sales Outstanding

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐷𝑎𝑦𝑠 𝑆𝑎𝑙𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 (𝐷𝑆𝑂) =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠⁄365

336,000
=
1,607,500⁄365

336,000
=
4404.11

= 76.29 𝑑𝑎𝑦𝑠 ≈ 76 𝑑𝑎𝑦𝑠

1.0.4 Inventory Turnover

𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

1,607,500
=
241,500

= 6.66
1.0.5 Total Assets Turnover
𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

1,607,500
=
947,500

= 1.70

1.0.6 Profit Margin

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑆𝑎𝑙𝑒𝑠

27,300
=
1,607,500

= 1.70%
1.0.7 Return on Assets

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

27,300
=
947,500

= 2.88%

1.0.8 Return on Equity

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 =
𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

27,300
=
361,000

= 7.56%

1.0.9 Debt-to-Assets Ratio

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 − 𝑡𝑜 − 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

330,000 + 256,500
=
947,500

= 61.90%
 Ratio Barry Computer Co. Industry Average

Current Ratio 2.0x 2.0x

Quick Ratio 1.3x 1.3x

Days Sales Outstanding 76.29 days 35 days

Inventory Turnover 6.7x 6.7x

Total Asset Turnover 1.7x 3.0x

Profit Margin 1.7% 1.2%

Return on Assets 2.9% 3.6%

Return on Equity 7.6% 9.0%

Debt-to-assets Ratio 27.1% 60.0%

2.0 Performances of Barry Computer Co.

According to the results above, Barry Computer Company’s current ratio, quick ratio, and
inventory turnover are on par with the industry average which are 2.0 times, 1.3 times, and
6.7 times respectively. This means that Barry Computer Company’s liquidity position is strong
and it has a good control on its inventory.

However, Barry Computer Company has longer days sales outstanding (76.29 days)
compared with the industry average (35 days) which around 41 days different. This shows
that Barry collects on sales are too slow compared to the industry average. Besides of that,
the total asset turnover of Barry which is 1.7 times is 1.3 times lower than the industry average.
It points out that Barry Computer Company is not efficient in managing its assets.

The profit margin of the Barry (1.7%) is 0.5% higher than the industry average which
is only 1.2%. It shows that Barry is more efficient in converting sales into actual profits than
the industry average. The return on assets of Barry (2.9%) is 0.7% lower than the industry
average which is 3.6%. It means that Barry may having low income problem which is not
efficient in generating more income through the assets. After that, the return on equity of
Barry with 7.6% is 1.4% lower than the industry average which is 9.0%. It still means that
the Barry is less efficient in generating profits compare to the industry average. Lastly, the
debt-to-assets ratio of the Barry with 27.1% is 32.9% lower than the industry average with
60%. It shows that the Barry is less risky than the industry average.
3.0 Strengths and Weaknesses of Barry Computer Co.
3.1 Strengths of Barry Computer Co.

According to the results, the strengths of the Barry will be the higher profit margin and
lower debt-to-assets ratio. The profit margin of the Barry is 0.5% higher than the industry
average. Thus, this indicates that the Barry is more efficient in operating and management or
the cost control than the industry average. The Barry Computer Company’s debt ratio, 27.1%
is much safer than the industry average with 60% debt ratio. The higher the debt ratio, the
riskier the company. A company with more than 50% debt ratio is considered as the leveraged
companies as will use more debt to fuel their funding. Thus, they are much riskier.

3.2 Weaknesses of Barry Computer Co.

The weakness of the Barry is its longer days sales outstanding, lower total assets
turnover, lower return on assets, and lower return on equity compared to the industry average.
Barry has longer days sales outstanding which indicates that it is not fast enough in collecting
debt compared to the industry average. Barry’s lower the total assets turnover, return on
assets and return on equity compare to the industry average indicates that Barry is much
inefficient in generating profits compare to the industry average.

4.0 Recommendation

Barry Computer Company should put more effort in shortening the days sales
outstanding by improve the speed to collect the account receivable and it process. For example,
Barry should improve the cash flow management which shorten the cash cycle and may
improve the process and speed of the account receivable collection. After that, Barry may
need to ensure it always having high productive level beside control the cost for some
purchases. With this, Barry can generate more profits which then increase the total assets
turnover, return on assets and return on equity.

5.0 Summary

In a nutshell, the Barry Computer Company should maximize in generating its the profits from
the sales beside minimizing the costs of its expenses. With this, the Barry Computer Company
can attract more potential investors and gaining more profits.
Problem 4-24

Corrigan Corporation: Balance Sheets as of December 31

2012 2011
Cash $72,000 $65,000
Account receivable 439,000 328,000
Inventories 894,000 813,000
Total Current Assets $1,405,000 $1,206,000
Land and building 238,000 271,000
Machinery 132,000 133,000
Other fixed assets 61,000 57,000
Total Assets $1,836,000 $1,667,000
Accounts and notes payable $432,000 $409,500
Accrued liabilities 170,000 162,000
Total Current Liabilities $602,000 $571,500
Long-term debt 404,290 258,898
Common stock 575,000 575,000
Retained earnings 254,710 261,602
Total Liabilities and Equity $1,836,000 $1,667,000

Corrigan Corporation: Income Statements for Year Ending December 31

2012 2011
Sales $4,240,000 $3,635,000
Cost of goods sold 3,680,000 2,980,000
Gross operating profit $560,000 $655,000
General administrative and selling expenses 236,320 213,550
Depreciation 159,000 154,500
Miscellaneous 134,000 127,000
Earning before taxes (EBT) $30,680 $159,950
Taxes (40%) 12,272 63,980
 Net Income $18,408 $95,970

Per-Share Data
2012 2011
EPS $0.80 $4.17
Cash dividends $1.10 $0.95
Market price (averages) $12.34 $23.57
P/E ratio 15.43x 5.65x
Number of shares outstanding 23,000 23,000

1.0 Ratio Analysis

1.1 Ratio Analysis between Corrigan Corporation and Industry Financial

Ratio Corrigan Corporation Industry Financial

2012
Current ratio 2.33x 2.7x
Inventory Turnover 4.74x 7.0x
Days sales outstanding 37.79 days 32.0days
Fixed Assets Turnover 9.84x 13.0x
Total assets turnover 2.31x 2.6x
Return on Assets 1% 9.1%
Return on Equity 2.22% 18.2%
Profit Margin 0.43% 3.5%
Debt-to-assets-ratio 22.02% 50.0%
P/E ratio 15.43% 6.0%

1.2 Ratio Analysis between 2011 and 2012 of Corrigan Corporation

 Ratio Corrigan Corporation
2012 2011
Current ratio 2.33x 2.11x
Inventory Turnover 4.74x 4.47x
Days sales outstanding 37.79 days 32.94 days
Fixed Assets Turnover 9.84x 7.89x
Total assets turnover 2.31x 2.18x
Return on Assets 1% 5.76%
Return on Equity 2.22% 11.47%
Profit Margin 0.43% 2.64%
Debt-to-assets ratio 22.02% 15.53%
P/E ratio 15.43% 5.65%

2.0 Identify the Performances of Corrigan Corporation

2.1 The Comparison for the Performances of Corrigan Corporation with the Industry
Financial

According to the results, the Corrigan Corporation with 2.33 times current ratio is 0.37 times
lower than the industry average. It mean that the Corrigan Corporation is less efficient in paying
the debt compare to the industry average. The Corrigan Corporation with 4.74 times of the
inventory ratio is 2.26 times lower than the industry average with 7.0 times. It indicate that the
Corrigan Corporation may hold on too much inventory on hand or facing unproductive problem
compare to the industry financial. Beside that, the Corrigan Corporation which with 37.79 days
of the days sales outstanding are around 5 days longer than the industry financial which is only
32 days. This mean that the Corrigan Corporation may facing problem in collecting the debt or
account receivables.

For the fixed assets turnover, the Corrigan Corporation with 9.84 times is 3.16 times
lower than the industry financial which is 13.0 times. It show that the industry financial is using
their fixed assets more efficiently for generating revenues than the Corrigan Corporation. After
that, the total assets turnover of the Corrigan Corporation which is 2.31 times is 0.29 times
lower than the industry financial which with 2.6 times. It mean the Corrigan Corporation not
efficient in generating sales compare to the industry financial. Corrigan Corporation with 1%
of return on assets is 8.1% lower than the industry financial with 9.1%. Thus, the Corrigan
Corporation is having poor management in generating profits. The return on equity of the
Corrigan Corporation with 2.22% also 15.98% lower than the industry financial which is 18.2%.
This mean that the Corrigan Corporation facing problem in generating revenues and profits.
The profit margin of the Corrigan Corporation which is 0.43% is 3.07% lower than the industry
financial with 3.5%. It indicate that the Corrigan Corporation is having poor management in
cost control and operation compare to the industry financial. However, the debt-to-assets ratio
of the Corrigan Corporation which is 22.02% is 27.98% lower than the industry financial with
50%. It show that the Corrigan Corporation is less riskier than the industry financial. Lastly,
the price-to-earning ratio of the Corrigan Corporation with 15.43% is 9.43% higher than the
industry financial which is 6.0%. It show that the Corrigan Corporation having high chance to
have positive future performance and the amount of the investments from the potential investors
will increase.

2.2 The comparison for the performances of Corrigan Corporation between 2011 and
2012

The current ratio of the Corrigan Corporation (CC)is increasing from 2.11 times in 2011 to
2.33 times in 2012. It indicates that the Corrigan Corporation’s ability for paying the short-
term liabilities is more efficient. Inventory turnover of the CC also increasing from 4.47 times
in 2011 to 4.74 times in 2012. It show that the cash cycle of the CC is more better than the
previous year. However, the days sales outstanding of CC is increasing from 32.94 days in
2011 to 37.79 days in 2012. This mean that the CC having problem in collecting the account
receivables.

After that, the fixed assets turnover of the CC that increasing from 7.89 times in 2011
to 9.84 times in 2012 indicates that the CC is more efficient in manage the fixed assets to
generate revenues. The total assets turnover of the CC which increasing from 2.18 times in
2011 to 2.31 times in 2012 show that the CC is more efficient in generating profits from the
sales through the assets. Beside that, the return on assets of CC is decreasing form 5.67% in
2011 to 1% in 2012 which mean that the CC’s productivity is facing problems. The return on
equity of the CC that decreasing from 11.47% in 2011 to 2.22% in 2012 indicate that the CC
may having difficulty in generating profits and can’t promise have a good return for the
investors.

The profit margin of the CC also decreasing from 2.64% in 2011 to 0.43% in 2012. It
mean that the CC having poor performances compare to the previous year. The debt-to-assets
ratio of CC which increase from 15.53% in 2011 to 22.02% show that the CC is facing higher
financial and credit risks than the previous year. Lastly, the price-to-earning ratio of CC which
is increasing from 5.65% in 2011 to 22.02% in 2012 indicates that the CC having high growth
prospects and become less riskier than the previous year..

3.0 Identify the Strengths and Weakness of Corrigan Corporation

3.1 Strengths and Weakness of Corrigan Corporation based on Comparison of Corrigan

Corporation and Industry Financial.

3.1.1 Strengths of Corrigan Corporation based on Comparison of Corrigan Corporation and

Industry Financial

The Corrigan Corporation’s strength are its’ debt-to-assets-ratio and price-to-earning ratio. The
Corrigan Corporation have lower debt-to-assets ratio compare to the industry financial. This
indicate that the Corrigan Corporation is more safer and less riskier than the industry financial.
After that, the price-to-earning ratio of the Corrigan Corporation which is higher than the
industry financial show that the Corrigan Corporation having good growth prospects and
having high chance in positive future performances. Thus, it will attract more investors for
invest in the corporation which will be used for generating profits.

3.1.2 Weakness of Corrigan Corporation based on Comparison of Corrigan Corporation and

Industry Financial
The weakness of the Corrigan Corporation are the current ratio, inventory ratio, days sales
outstanding, fixed assets turnover, total assets turnover, return on assets, return on equity, and
profit margin. The lower current ratio and days sales outstanding of the Corrigan Corporation
indicate that the Corrigan Corporation having problems either in collecting the account
receivable or the poor management for the receivable process. After that, the lower inventory
ratio of the Corrigan Corporation indicate that the inventory that hold in hand are high. This
mean the Corrigan Corporation did not manage the inventories properly. The Corrigan
Corporation also did not use the assets efficiently for generating revenues and profits which
cause the lower fixed assets turnover and lower total assets turnover compare with the industry
financial. Since the Corrigan Corporation did not use their assets efficiently for generating
profits, the return on assets and return on equity will also become lower due to the lower profits
generation. Lastly, the lower profit margin of the Corrigan Corporation indicate that the
corporation having poor performances and profitability compare to the industry financial.

3.2 Strengths and Weakness of Corrigan Corporation based on Comparison of Corrigan

Corporation in 2011 and 2012.

3.2.1 Strengths of Corrigan Corporation based on Comparison of Corrigan Corporation in 2011

and 2012

The Corrigan Corporation’s strengths will be the current ratio, inventory turnover, fixed assets
turnover, total assets turnover, and price-to-earning ratio. The current ratio of the Corrigan
Corporation is increasing which indicates that it become more efficient in paying the short-
term debt. The increasing inventory turnover indicate that the Corrigan Corporation is become
more efficient in manage the inventories on hand for generating profits than the previous year.
After that, the increasing of the fixed assets turnover and total assets turnover of the Corrigan
Corporation indicate that the Corrigan Corporation have become more efficient in using their
assets for generating revenues. After that, the increasing price-to-earning ratio of the Corrigan
Corporation indicate that the Corrigan Corporation having good and stable growth which make
it much safer to the investors to invest.

3.2.2 Weakness of Corrigan Corporation based on Comparison of Corrigan Corporation in 2011

and 2012
 The weakness of the Corrigan Corporation will be the days sales understanding, return on
assets, return on equity, profit margin, and debt-to-assets ratio. The Corrigan Corporation
having higher days sales outstanding in 2012 which indicate it facing difficulties in collecting
the account receivables. The decreasing of the return on assets and return on equity of the
Corrigan Corporation are cause by the inefficient in productivity of the assets and the
generating profits. After that, the decreasing of the profit margin indicate that the Corrigan
Corporation’s performance and profitability are poor compare to the previous year. Lastly,
the increasing debt-to-assets ratio of the Corrigan Corporation mean that corporation using
more debt to generate profits which is more riskier than the previous year.

4.0 Recommendation

For improving the competitive of the Corrigan Corporation toward the industry financial, the
Corrigan Corporation should trying to maximize the current assets by reducing the unnecessarily
current debt or liabilities for improving the current ratio. Corrigan Corporation also should
always keep the inventory level in low levels which mean to minimize the inventories on hand
to low levels.

After that, for improving the days sales outstanding, Corrigan Corporation should
minimize the duration for collecting the debts and manage the cash flow process efficiently. It
also should try to maximize the use of the assets for generating profits such as manage the
assets properly or reducing the costs of the assets. With this, it can improving the fixed asset
turnover and total assets turnover ratio. When the total assets turnover ratio is increasing, the
return on assets, return on equity, and profit margin will also increase due to the high generating
profits and return for the investors of the shareholders.

5.0 Summary

As a conclusion, Corrigan Corporation should be pay more attention to it’s liquidity, debt
management, and profitability. With the properly management on assets and debts, the
Corrigan Corporation can getting higher profits which can ensure it can compete with it’s
competitors beside maintain a position in the particular markets.