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Solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance.
Income Statement Year 2010
Net sales
$795
Cost of goods sold
660
Gross profit
135
Selling expenses
73.5
Depreciation
12
EBIT
49.5
Interest expense
4.5
EBT
45
Taxes (40%)
18
Net income
27
1. Calculate the following ratios AND interpret the result against the industry average:
Ratio
Your Answer
Industry Average
Your Interpretation(Good-Fair-Low-Poor)
Profit margin on sales
3%
Return on assets
9%
Receivable turnover
16X
Inventory turnover
10X
Fixed asset turnover
2X
Total asset turnover
3X
Current ratio
Quick ratio
1.5X
Times interest earned
7X
2. Analysis:
Give your interpretation of what the ratios calculations show and how the business can use this information to improve its performance. Justify all answers.
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