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AVERAGE GOODS IN
PROCESS INVENTORY
RAW MATERIALS TURNOVER RAW MATERIALS USED Number of times raw materials
inventory was used and replenished
AVERAGE RAW MATERIALS during the period.
INVENTORY
BOOK VALUE PER SHARE OF ORDINARY SHAREHOLDERS Measures recoverable amount in the
ORDINARY SHARES EQUITY event of liquidation if assets are
realized at their book values.
NO. OF OUTSTANDING
ORDINARY SHARES
TIMES INTEREST EARNED OPERATING INCOME Measures how many times interest
expense is covered by operating
INTEREST EXPENSE profit.
TIMES PREFERRED NET INCOME AFTER TAXES Indicates ability to provide dividends
DIVIDEND REQUIREMENT for preference shareholders.
EARNED PREFERRED DIVIDENDS
REQUIREMENT
TIMES FIXED CHARGES NET INCOME BEFORE TAXES Measures coverage capability more
EARNED + FIXED CHARGES broadly than times interest earned
by including other fixed charges.
FIXED CHARGES
CASH FLOW MARGIN CASH FLOW FOR OPERATING Measures ability to the firm to
ACTIVITIES translate sales to cash.
NET SALES
EARNINGS PER SHARE NET INCOME PREFERENCE Peso return on each ordinary share.
DIVIDENDS Indicative of ability to pay dividends.
MRJM Company
Statement of Financial Position
December 31, 2014 and 2015
2015
2014
Assets
Current Assets
Cash P 25,000 P
22,500
Marketable Securities 23,480
26, 430
Accounts Receivable 35,768
34,678
Allowance for Doubtful Accounts (768)
(678)
Inventories 57,800
49,920
Prepaid Expenses 3,000
5,,000
Total Current Assets P 144,280 P
137,850
Equity
Ordinary Shares, par value P1, authorized 10,000,000 P 30,000 P
35,000
shares; issued 3,000,000 shares in 2015 and 3,500,000
shares in 2014
Additional paid-in capital 9,300 4,560
Retained Earnings 54,200
48,250
Total Equity P 93,500 P
87,810
MRJM Company
Income Statements and Retained Earnings
December 31, 2014 and 2015
2015 2014
Net Sales P 250,000 P 155,000
Cost of goods sold 98,000
65,000
Gross profit 152,000 90,000
Profit Margin
*Shows the relationship between sales and the cost of products sold, measures the ability of a
company both to control costs and inventories or manufacturing of products and to pass along
price increases through sales to customers.
*MRJM Company gross profit margin has been stable.
*Stability considered a positive sign even if the company had to offer probably discounted items
to attract customers or feature sale to hasten up inventory turnover.
*Two ratios that measure the overall efficiency of the firm in managing its total investment in
assets and generating return to shareholders.
*The Ratio indicates the amount of profit earned relative to the level of investment in total assets
and investment of common shareholders.
*If the current year is higher than the last year indicates a successful use of financial leverage
although borrowing increased. The firm has generated sufficient operating returns to more than
cover the interest payments on borrowed funds.
Current Ratio
*Measure of a short term debt paying ability. Its significance could be best evaluated by
comparing this with industry competitors or the companys trend of liquidity over a longer
period.
*A declining ratio could indicate a deteriorating financial condition or it might be the result of
paring of obsolete inventories or other stagnant current assets. An increasing ratio might be the
result of an unwise stock piling of inventory or it might indicate an improving financial situation.
*The liquidity of the assets may vary considerably from the date on which the statement of
financial position is prepared. Furthermore, it could have a relatively high current ratio but not be
able to meet the demands for cash because the accounts receivable are of inferior quality or the
inventory is saleable only at discounted price.
Quick Ratio
*Companys test of ability to meet its short-term debts.
*Designed to measure how well a company can meet its obligations without having to liquidate
or depend too heavily on is inventory. Since inventory is not an immediate source of cash and
may not even saleable in times of economic stress, it is generally felt that to be properly
protected, each peso of liabilities should be backed by at least P1 of quick assets.
*The acid test ratio must also be examined in relation to other firms in the same industry.
Debt to Total Assets
*Measures the proportion of all assets that are financed with debt.
*The use of debt involves risk because debt carries a fixed obligation in the form of interest
charges and principal repayment. Failure to satisfy the fixed charges associated with debt will
ultimately result in the bankruptcy. Too much debt would pose difficulty in obtaining additional
debt financing when needed or that credit is available only at extremely high rates of interest
and most onerous terms.
*Generally, the higher the proportion of debt, the greater risk because creditors must be satisfied
before owners in the event of bankruptcy.
*The more times a company can cover its annual interest expense from operating earnings, the
better off will be the firms investors.
*The ratio is particularly important for firms that operate extensively with leasing arrangements,
whether operating leases or capital leases.