Financial Statement Analysis and Ratio Analysis for MBA 520 Module Two

This assignment provides a detailed analysis of XYZ's financial statements, including calculations for current and quick ratios, inventory turnover, days sales outstanding, and various profitability ratios such as operating margin, profit margin, BEP, ROA, and ROE. It further delves into the price/earnings ratio and market/book ratio. The solution utilizes the DuPont equation to provide an overview of XYZ's financial condition, highlighting the relationships between net profit margin, total asset turnover, and equity multiplier. Additionally, the assignment explores how changes in days sales outstanding (DSO) can impact the stock price and provides a rationale for the importance of these financial ratios in assessing a firm's performance and financial stability.

Running head: MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Financial statement analysis worksheet
Name of the student
Name of the University
Author note
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

1MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Table of Contents
Answer 2:.........................................................................................................................................2
Answer 3:.........................................................................................................................................4
Answer 4:.........................................................................................................................................5
Answer 5:.........................................................................................................................................6
Answer 6:.........................................................................................................................................7
Answer 7:.........................................................................................................................................9
Answer 8:.......................................................................................................................................10
Reference:......................................................................................................................................11
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

2MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
1. Calculate XYZ’s 2013 current and quick ratios based on the projected balance sheet and
income statement data.
Answer 1:
Current ratio is calculated through dividing the current assets with current liabilities. According
to the given information current ratio is as follows:
(Total Current Assets ÷ Total Current Liabilities)
($2,680,112÷$1,114,800)
= 2.4
Therefore, Current Ratio of XYZ of 2013 is 2.4
Quick ratio is calculated through dividing the quick assets with current liabilities. Considering
the given data, quick ratio is as follows:
[(Total Current Assets – Inventories) ÷ (Total Current Liabilities)]
= [($2,680,112 - $1,716,480) ÷ ($1,114,800)]
= [$963,632 ÷ $1,114,800]
= .86
Therefore, quick ratio of XYZ of 2013 is .86
2. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover,
and total assets turnover.
Answer 2:
Inventory Turnover Ratio is calculated through dividing the Cost of Goods sold with the Average
Inventory. Considering the given data, Inventory Turnover Ratio of 2013 of XYZ is as follow:
Cost of Goods Sold in 2013 ÷ Average Inventory
= [Cost of Goods Sold in 2013 ÷ {(Inventories of 2013 + Inventories of 2012) ÷ 2}]
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

3MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
= [$5,875,992 ÷ {($1,716,480 + $1,287,360) ÷ 2}]
= $5,875,992 ÷ $1,501,920
= 3.91
Therefore, Inventory Turnover Ratio is 3.91
Days Sales Outstanding is calculated through dividing the Account Receivable with the sales of
one year, multiplied with 365. Considering the given data Days Sales Outstanding is as follows:
Accounts receivable ÷ (sales x 365)
= $878,000 ÷ ($7,035,600 x 365)
= 45.55
Therefore, Days Sales Outstanding of XYZ is 45.55 days.
Fixed Assets Turnover is calculated through dividing the Sales value with the Average Net Fixed
Assets. Taking the given data into consideration, Fixed Assets Turnover is as follow:
Sales of 2013 ÷ Average Net Fixed Assets
= [Sales of 2013 ÷ {(Net Fixed Assets of 2013 + Net Fixed Assets of 2012) ÷ 2}]
= [$7,035,600 ÷ ($817,040 + $939,790) ÷ 2]
= $7,035,600 ÷ 878,415
= 8.01
Therefore, Fixed Assets Turnover is 8.01for XYZ during 2013.
Total Assets Turnover is calculated through dividing the total sales with the Average Total Fixed
Assets. Considering the given financial statement, Total Assets Turnover of the firm of 2013 is
as follows:
Sales of 2013 ÷ Average Net Fixed Assets
= [Sales of 2013 ÷ {(Total Assets of 2013 + Total Assets of 2012) ÷ 2}]
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

4MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
= [$7,035,600 ÷ ($3,497,152 + $2,866,592) ÷ 2]
= $7,035,600 ÷ 3,181,872
= 2.21
Therefore, Total Assets Turnover of the firm of 2013 is 2.21.
3. Calculate the 2013 debt-to-assets and times-interest-earned ratios.
Answer 3:
Debt-to-Assets of the XYZ firm can be calculated through dividing the Total Debt with the Total
Assets. Considering the given data, Debt-to-Assets ratio is as follow:
Total Debt of 2013 ÷ Total Assets of 2013
= $1,544,800 ÷ $3,497,152
= 0.44
Therefore, Debt-to-Assets of the XYZ firm of 2013 is 0.44
Times-Interest-Earned Ratios is calculated through dividing the EBIT of XYZ of 2013 with the
Interest Expense. According to the given data, Times-Interest-Earned Ratios are as follows:
EBIT of 2013 ÷ Interest Expense
= 492,648 ÷ 70,008
= 7.04
Therefore, Times-Interest-Earned Ratios of the XYZ firm of 2013 is 7.04
4. Calculate the 2013 operating margin, profit margin, basic earning power (BEP), return on
assets (ROA), and return on equity (ROE).
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

5MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Answer 4:
Operating Margin is calculated through dividing the Gross Profit of the XYZ with the Sales of
the same year and multiplying the same with 100. Considering the given data, Operating margin
is as follow:
(Gross Profit of 2013 of XYZ ÷ Sales of 2013 of XYZ) x 100
= [(Sales – Cost of Goods Sold) ÷ Sales] x 100
= [(7,035,600 – 5,875,992) ÷ 7,035,600] x 100
= [1,159,608 ÷ 7,035,600] x 100
= 0.1648 x 100
= 16.48%
Therefore, Operating Margin is 16.48%
Profit Margin is calculated through dividing the Net Profit of the XYZ with the Sales of the same
year and multiplying the same with 100. Considering the given data, Profit Margin is as follow:
(Net Profit of 2013 of XYZ ÷ Sales of 2013 of XYZ) x 100
= [253,584 ÷ 7,035,600] x 100
= 0.036 x 100
= 3.6%
Therefore, Profit Margin is 3.6%
Basic Earning Power (BEP) is calculated through dividing the EBIT of the XYZ of 2013 with the
Total Assets of the firm during 2013. Considering the given data, BEP is as follow:
EBIT of XYZ of 2013 ÷ Total Assets of the firm during 2013
= 492,648 ÷ 3,497,152
= 0.14
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

6MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Therefore, BEP of XYZ is 0.14
Return on Assets (ROA) is calculated through dividing the Net Profit of the XYZ of 2013 with
the Total Assets of the firm during 2013. Considering the given data, ROA is as follow:
Net Profit of XYZ of 2013 ÷ Total Assets of the firm during 2013
= 253,584 ÷ 3,497,152
= 0.072
Therefore, ROA of XYZ is 0.072
Return on Equity (ROE) is calculated through dividing the Net Profit of the XYZ of 2013 with
the Equity of the firm during 2013. Considering the given data, ROA is as follow:
Net Profit of XYZ of 2013 ÷ Equity of the firm during 2013
= 253,584 ÷ 1,721,176
= 0.147
Therefore, ROE of XYZ is 0.147
5. Calculate the 2013 price/earnings ratio, and market/book ratio.
Answer 5:
Price/Earning Ratio of 2013 of XYZ can be calculated through dividing the Stock Price of the
firm during 2013 with the EPS. Considering the given values of the firm, Price/Earning is as
follows:
Stock Price ÷ EPS
= 12.17 ÷ 1.014
= 12
Therefore, Price/Earning of XYZ during 2013 is 12
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

7MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Market/Book Ratio of 2013 of XYZ can be calculated through dividing the Stock Price of the
firm during 2013 with the BVPS. Considering the given values of the firm, Price/Book Ratio is
as follows:
Stock Price ÷ BVPS
= 12.17 ÷ 7.809
= 1.55
Therefore, Market/Book Ratio of XYZ during 2013 is 1.55
6. Use the extended DuPont equation to provide a summary and overview of XYZ’s financial
condition as projected for 2013.
Answer 6:
DuPont analysis can be calculated through multiplying the Net Profit Margin (NPM) with Total
asset turnover ratio (TATR) and Equity Multiplier (EM).
NPM = Net income ÷ Sales
= 253,584 ÷ 7,035,600
= 0.036
TATR = Sales ÷ Total Assets
= 7,035,600 ÷ 3,497,152
= 2.012
EM = 1 + (Total Debt ÷ Total Common Equity)
= 1 + (1,544,800 ÷ 1,952,352)
= 1 + 0.7912
= 1.791
Therefore, ROE = NPM x TATR x EM
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

8MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
= 0.036 x 2.012 x 1.791
= 12.97%
Extended DuPont can be calculated though multiplying the (Net Income ÷ EBIT) with the (EBT
÷ Sales) and (EBIT ÷ EBT).
Net Income ÷ EBIT = 253,584 ÷ 492,648
= 0.5147
EBT ÷ Sales = 492,648 ÷ 422,640
= 1.1656
EBIT ÷ EBT = 422,640 ÷ 7,035,600
= 0.06
Thus, NPM = 0.1547 x 0.06 x 1.1656
= 0.036
Therefore, new NPM is 0.036
According to the extended analysis, it can be perceived that financial performance of the
XYZ firm is fine. Besides this, calculated ratios highlight that the firm has fine financial
condition and enhanced its performance over time. Moreover, good NPM showcase that
expense of the firm are under control and with the debt utilization the firm is able to
provide superior performance (Arora & Soni, 2015).
7. Use the following simplified 2013 balance sheet to show, in general terms, how an
improvement in the DSO would tend to affect the stock price. For example, if the company could
improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day
industry average without affecting sales, how would that change “ripple through” the financial
statements (shown in thousands below) and influence the stock price?
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

9MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Accounts receivable $878 Debt $1,545
Other current assets 1,802
Net fixed assets 817 Equity 1,952
Total assets $3,497 Liabilities plus equity $3,497
First, we need to calculate XYZ’s daily sales.
Daily sales = Sales / 365
Daily sales = $7,035,600 / 365
Daily sales = $19,275.62
Target A/R = Daily sales × Target DSO
Target A/R = $19,276 × 32
Target A/R = $616,820
Freed-up cash = old A/R – new A/R
Freed-up cash = $878,000 – $616,820
Freed-up cash = $261,180
Answer 7:
With reduction in DSO, it can be traced that the firm is performing well in order to
enhance the cash position of the organization. Besides this, it will highlight increase in the stock
price on behalf of the firm.
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

10MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Now, according to the given information, if the DSO increases to 45 days, then the firm
will be worse off. Performance of the firm will be below average compared to the market
average and besides this it can also be envisaged that the firm is not trying enough to reduce the
DSO of the firm. It will further result in reduced profit as well as stock price will be reduced
eventually.
8. Provide a brief summary or rationale of how these ratios are used, and why they are important.
Answer 8:
All the key indicators calculated here, are beneficial to assess the performance of a
firm. Using these key instruments XYZ firm will be able to trace its production and
amount of money return for further investment. With the help of the current ratio,
liquidity of a firm can be judged and besides this it can aid to trace the ability to pay short-
term liabilities with their short-term assets (Tayeh, Al-Jarrah & Tarhini, 2015). On the
other hand quick ratio is one of the liquidity ratios that help to sieve the current ratio
through assessing the liquid current assets with current liabilities (Ogiela & Ogiela, 2015).
Assets number and inventory are key indicators of a firm to portray its stock position.
Besides this, it also highlights whether the firm has excess inventory, which has high
liability and may lead to frozen cash (Vernimmen et al., 2014). In addition to this these
instrumental ratios will guide the firm whether it needs price reduction with aging
inventory. With the Times-Interest-Earned Ratios the firm can assess its proportionate
income, which is required to cover the future interest expenses. Thus, using this the firm
can make it financially stable and sustainable.
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.

11MBA 520 MODULE TWO FINANCIAL STATEMENT ANALYSIS WORKSHEET
Reference:
Arora, A., & Soni, T. K. (2015). Financial performance of socially responsible firms: A Comparative Study
of MNCs and Non-MNCs.
Ogiela, L., & Ogiela, M. R. (2015). Management information systems. In Ubiquitous Computing
Application and Wireless Sensor (pp. 449-456). Springer, Dordrecht.
Tayeh, M., Al-Jarrah, I. M., & Tarhini, A. (2015). Accounting vs. market-based measures of firm
performance related to information technology investments.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and
practice. John Wiley & Sons.
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning.