Ratio Analysis

Question 1

Inventory turnover increased from 8 to 12

Answer 1

larger percentage of sales in the last month leads a lower ending inventory,

thus increasing the inventory turnover ratio since the denominator of the fraction becomes smaller

Question 2

Return on equity dropped from .8 to .5

Answer 2

retention of profits increases the shareholders’ equity, thereby decreasing the ratio

Question 3

Current Ratio dropped from 2 to 1.4

Answer 3

long-term debt becoming current

Question 4

Decrease in Gross Margin from 28% to 24%

Answer 4

inability to pass on increases in costs will decrease the gross margin because cost of goods sold as a percentage of sales will increase

Question 5

Decrease in Debt to Equity Ratio

Answer 5

Principal LT Debt payment or profit increases the total equity and thereby increases the denominator of the debt to equity ratio.

Question 6

Decrease in quick Ratio

Answer 6

the increase in current debt increases the denominator of the quick ratio and thereby decreases the ratio.

Question 7

Increase in Days sales in A/R

Answer 7

Larger % of sales happened in the last month than from prior year

Question 8

Decrease in Operating Profit Margin

Answer 8

Operating expenses increased at a higher rate then sales revenue

Question 9

Debt to equity decreased

Answer 9

Capital stock was issued

Question 10

Gross profit percentage decreased

Answer 10

Manufacturing costs decreased less than sales decreased during the year

Question 11

Days sales in A/R Increase

Answer 11

Fraudulent sales being recorded