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Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about \(900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to \)850,000.

The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.

2015

2016

2017

Current ratio

1.80

1.89

1.96

Acid-test (quick) ratio

1.04

0.99

0.87

Accounts receivable turnover

8.75

7.71

6.42

Inventory turnover

4.91

4.32

3.42

Debt to assets ratio

51.0%

46.0%

41.0%

Long-term debt to assets ratio

31.0%

27.0%

24.0%

Sales to fixed assets (fixed asset turnover)

1.58

1.69

1.79

Sales as a percent of 2015 sales

1.00

1.03

1.07

Gross margin percentage

36.0%

35.1%

34.6%

Net income to sales

6.9%

7.0%

7.2%

Return on assets

7.7%

7.7%

7.8%

Return on common stockholders’ equity

13.6%

13.1%

12.7%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

Instructions

a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.

Short Answer

Expert verified

Inventory turnover has decreased considerably during the previous three years, falling from 4.91 to 3.42.

Step by step solution

01

Meaning of Financial Statements

Financial management is the department interior and organization or trade that's concerned with cash flow, profitability, credits, costs, etc. in order to guarantee that the company has the resources essential to realize its trade targets and objectives.

02

Explaining the contributing factors for apparently divergent trend

The acid-test ratio is the current ratio with the subtraction of stock and prepaid costs(by and large inconsequential relative to stock) from current assets. Any disparity in drift between these two ratios would subsequently be subordinate to the inventory account.

Inventory turnover has declined strongly within the three-year period, from 4.91 to 3.42. Amid the same period, deals to settled resources have expanded, and total deals have expanded 7 percent.

The decline within the inventory turnover is subsequently not due to a decline in sales. The clear cause is that venture in stock has expanded at a quicker rate than deals, and this has accounted for the uniqueness between the acid-test and current ratios.

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Most popular questions from this chapter

An article in the financial press entitled “Important Information in Annual Reports This Year” noted that annual reports include a management’s discussion and analysis section. What would this section contain?

Cineplex Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. The following information relating to each segment is available for 2018.

A

B

C

D

E

Sales revenue

\(40,000

\)75,000

\(580,000

\)35,000

\(55,000

Cost of goods sold

19,000

50,000

270,000

19,000

30,000

Operating expenses

10,000

40,000

235,000

12,000

18,000

Total expenses

29,000

90,000

505,000

31,000

48,000

Operating profit (loss)

\)11,000

\((15,000)

\)75,000

\(4,000

\)7,000

Identifiable assets

\(35,000

\)80,000

\(500,000

\)65,000

\(50,000

Sales of segments B and C included intersegment sales of \)20,000 and $100,000, respectively.

Instructions

(a) Determine which of the segments are reportable based on the:

3) Identifiable assets test.

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment

Total Revenue

Operating Profit (Loss)

Identifiable Assets

W

\( 60,000

15,000

\)167,000

X

10,000

3,000

83,000

Y

23,000

(2,000)

21,000

Z

9,000

1,000

19,000

\(102,000

\)17,000

$290,000

Instructions

Determine which of the operating segments are reportable based on the:

a) Revenue test.

What is the relationship of the asset turnover to the return on assets?

Snider Corporation, a publicly-traded company, is preparing the interim financial data which it will issue to its shareholders at the end of the first quarter of the 2017–2018 fiscal year. Snider’s financial accounting department has compiled the following summarized revenue and expense data for the first quarter of the year.

Sales revenue \(60,000,000

Cost of goods sold 36,000,000

Variable selling expenses 1,000,000

Fixed selling expenses 3,000,000

Included in the fixed selling expenses was the single lump-sum payment of \)2,000,000 for television advertisements for the entire year.

Instructions

a) Snider Corporation must issue its quarterly financial statements in accordance with IFRS regarding interim financial reporting.

  1. Explain whether Snider should report its operating results for the quarter as if the quarter were a separate reporting period in and of itself, or as if the quarter were an integral part of the annual reporting period.
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