Amfac, Inc.

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Written Analysis of the Case

On

AMFAC, INC.

Submitted by:

Irnabel R. Canoy
Pauline Anne B. Ferrero
Jocel Louis Castorico

Submitted to:

Prof. Rosfe Corlae Badoy
Faculty-in-charge
BA 206 – Managerial Accounting

August 15, 2012

1. Current Ratio

Current Ratio = Current Assets___
Current Liabilities
= $ 86,000_
40,000
= 2.15

The current ratio indicates the solvency of the company. Given the current ratio of 2.15, it means that the company has 2.15 times more current assets than current liabilities.

2. Acid Test Ratio (Quick Ratio)

Acid Test Ratio = Cash + Marketable Securities + Current Receivable__
Current Liabilities
= 8,000 + 36,000
40,000
=44,000
40,000
= 1.10

The acid test ratio or quick ratio measures the company’s ability to meet current obligations based on the most liquid assets such as cash, marketable securities, and accounts receivable. The quick ratio of 1.10 indicates that the company has $ 1.10 in liquid assets for each $ 1.00 of current liabilities.

3. Debt-to-Equity Ratio

Debt – to-Equity Ratio = Total Liabilities _
Shareholders Equity
= 40,000 + 60,000 _
50,000 + 30,000 + 120,000
= 100,000 _
200,000
= 0.50 or 5 : 5

Debt-to-equity ratio compares the funds provided by creditors to the funds provided by shareholders. Debt equity ratio will increase as more debt is used. This will also increase the risk because the company will be incurring more fixed interest obligations.

This ratio indicates the proportionate of the external equities in relation to internal equities. The given ratio of 0.50 above indicates that external debts are 50% of shareholders funds. In other words, 50% the company’s resources are in the form of debt.

4. Accounts Receivable Turnover

ART= Sales _
Accounts Receivable
= 450,000 _
36,000
= 12.5 times

Accounts receivable turnover rate indicates the number of times that the company is able to convert a receivable into cash.

The turnover rate of 12.5 means that the company is able to convert into cash its receivables at an average of 12 times a year.

5. Inventory Turnover

Inventory Turnover = Cost of Goods Sold _ Average Inventory Balance
= 270,000 _
40,000
= 6.75 times

Inventory turnover indicates the number of times the inventories were acquired and sold during the period. Given an average of $ 1 invested in inventory, the company is able to turn it 6.75 times into sales.

6. Times Interest Earned

Times Interest Earned = Earnings before Interest Expense & Income Tax _
Interest Expense
= 51,000 _
6,000
= 8.5 times

Times interest earned measures the long-term ability of the company to pay interests.

7. Return on Assets

ROA = Net Income + [(investment expense)(1 – tax rate)] _
Average Total Assets
= 31,500 + [(6,000)(1 - .30)] _
½ (250,000 + 300,000)
= 31,500 + [(6,000)(0.70)] _
½ (550,000)
= 31,500 + 4,200 _
275,000
= 35,000 _
275,000
= (0.1298) 100
= 12.98 % or 13%
The return on assets rate indicates the return of income of each dollar/peso of asset. This measures the profitability of an investment on assets.

The company has an average of 13% return on assets for its investments during the year.

8. Return on Common Shares Equity

ROE (Common)= Net Income - Preferred Dividends _
Average Common Shareholders Equity

Book value = Total Stockholders Equity - preferred stock _
common shares outstanding...
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