Using Pamplin Inc.'s financial statements shown on the following pages: ...

Question

Using Pamplin Inc.'s financial statements shown on the following pages:

Pamplin Inc. Income Statement For Years Ending 12/31/2015 and 12/31/2016

		2015		2016
Sales (all credit)		$1,200		$1,450
Cost of goods sold		700		850
Gross profit		$ 500		$ 600
Operating expenses	30		40
Depreciation	220	250	200	240
Operating income		$ 250		$ 360
Interest expense		50		64
Net income before taxes		$ 200		$ 296
Taxes (40%)		80		118
Net income		$ 120		$ 178

Pamplin Inc. Balance Sheet At 12/31/2015 and 12/31/2016

Assets
	2015	2016
Cash	$ 200	$ 150
Accounts receivable	450	425
Inventory	550	625
Current assets	$1,200	$1,200
Plant and equipment	$2,200	$2,600
Less: accumulated depreciation	(1,000)	(1,200)
Net plant and equipment	$1,200	$1,400
Total assets	$2,400	$2,600
Liabilities and Owners' Equity
	2015	2016
Accounts payable	$ 200	$ 150
Notes payable—current (9%)	0	150
Current liabilities	$ 200	$ 300
Bonds (8¹/₃% interest)	$ 600	$ 600
Owners' equity
Common stock	$ 300	$ 300
Paid in capital	600	600
Retained earnings	700	800
Total owners' equity	$1,600	$1,700
Total liabilities and owners' equity	$2,400	$2,600

1. Compute the following ratios for both 2015 and 2016.

INDUSTRY NORMS
Current ratio	1.5 : 1
Inventory turnover	3 x
Total asset turnover	1 x
Operating profit margin	18%
Operating income return on investment	18%
Debt ratio	60%
Average collection period	100 days
Fixed asset turnover	1.5 :1
Return on equity	15%

1. How liquid is the firm?
2. Is management generating adequate operating profit on the firm's assets?
3. How is the firm financing its assets?
4. Are the common stockholders receiving a good return on their investment?

005_4i2sazo-nisd23om.docx

Robert · Accepted Answer

1 
Answer B.
Firm has current ratio is 6:1 in 2015 and 4:1 in 2016 and quick ratio is 3.25 in 2015 and 1.92 
in 2016. As per compare to industry norms company has very good amount of liquidity in 2015 and 
2016. Industry required to be 1.5 times higher current assets as compare to current liabilities 
however, company is 6 and 4 time higher than it current liabilities in 2015 and 2016.

Using Pamplin Inc.'s financial statements shown on the following pages: Pamplin Inc. Income Statement For Years Ending 12/31/2015 and 12/31/2016 2015 2016 Sales (all credit) $1,200 $1,450 Cost of...

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