Chapter 3 Mini Case Essay

Words: 2768
Pages: 12

Donna Jamison was brought in as assistant to Fred Camp, Computron’s chairman, who had the task of getting the company back into a sound financial position. Computron’s 2009 and 2010 balance sheets and income statements, together with projections for 2011, are shown in the following tables. The tables also show the 2009 and 2010 financial ratios, along with industry average data. The 2011 projected financial statement data represent Jamison’s and Campo’s best guess for 2011 results, assuming that some new financing is arranged to get the company “over the hump.”

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?

Financial statement ratio analysis involves comparing a firm's performance with that of
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As the cash and short-term investments increase in 2011, the quick ratio will increase.

Managers, lenders, and stockholders all use the ratios differently. Managers use financial analysis to identify situations needing attention. Bankers use financial analysis to determine whether a company is creditworthy, and stockholders use financial analysis to help predict future earnings, dividends, and free cash flow (Ehrhardt, 2010).

c. Calculate the 2011 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron’s utilization of assets stack up against that of other firms in its industry?

2011 Inventory Turnover = SalesInventories = $7,035,6001,716,480 = 4.10
Industry Average = 6.1

2011 Days Sales Outstanding = ReceivablesAnnual Sales365 = $878,00019,275.62 = 45.55
Industry Average = 32.0

2011 Fixed Assets Turnover = SalesNet Fixed Assets = $7,035,600$836,840 = 8.41
Industry Average = 7.0

2011 Total Assets Turnover = SalesTotal Assets = $7,035,600$3,516,952 = 2.00
Industry Average = 2.5

Computron’s ability to sell and replace inventory over a period of time is lower than the industry’s average. This indicates Computron is experiencing poor sales and therefore results in excess inventory (Inventory Turnover, 2013).

Days Sales Outstanding measures the average number of days a company takes to collect revenue after a sale has been made. The lower the number indicated