Liquidity, Profitability and Solvency of Australian Manufacturing Co Case

Australian Manufacturing Co.

Balance sheet as at 30th of June 2013

Current assets Current liabilities

Cash 240,000 accounts payable 160,000

Receivables 400,000 notes payable 100,000

Inventory 600,000 other current liabilities 140,000

Total current assets 1,240,000 Total current liabilities 400,000

Non- current Assets Long term debt 350,000

Plant and Equipment (net) 760,000 Shareholder’s equity

Share capital 750,000

Retained earnings 500,000

Total assets 2,000,000 Total liabilities and equity 2000,000

Australian Manufacturing Co.

Income statement for the year ended 30th of June 2013

Sales $3,000,000

less Cost of goods sold

( Direct Materials 800,000 )

Plus Direct Labour 700,000

Plus Overhead 300,000) = (1,800,000)

=Gross margin 1,200,000

Less operating expenses

Selling expenses 240,000

General and admin. exp. 300,000 (540,000)

Operating income 660,000

Less: interest expense (40,000)

=Income before taxes 620,000

Less: income taxes (220,000)

=Net income $400,000

REQUIRED:

Evaluate the liquidity, profitability and solvency of Australian Manufacturing Co. with the use of the appropriate analytical procedures, utilising the financial information provided. (USE THE RATIOS PROVIDED IN THE TEXTBOOK ONLY. Use a table to provide the analysis.) As part of your ratios analyses identify any data limitations that you have experienced.

SOLUTION Question 3

Liquidity

Current ratio: Current assets/Current liabilities$1,240,000 / 400,00

3.1

Quick ratio: Cash+ receivables/ current liabilities

$240,000 + $400,000 /400,000

= 1.6

Receivables turnover: Net credit Sales /receivables

$3,000,000 /400,000

= 7.5

Inventory Turnover: Cost of goods sold /average inventory

$1,800,000 /600,000

= 3.0

( TWO RATIOS: 0.5 MARKS)

profitability

Gross profit margin: Gross margin / net sales

$1,200,000 / 3,000,000

= 40% of sales

Net operating...