Chapter 4. Solution to End-of-Chapter Comprehensive/Spreadsheet Problem
Corrigan Corporation's December 31 Balance Sheets
Assets 2011 2010
Cash $72,000 $65,000
Accounts receivable 439,000 328,000
Inventories 894,000 813,000
Total current assets $1,405,000 $1,206,000
Land and building 238,000 271,000
Machinery 132,000 133,000
Other fixed assets 61,000 57,000
Total assets $1,836,000 $1,667,000
Liabilities and equity
Accounts and notes payable $432,000 $409,500
Accrued liabilities 170,000 162,000
Total current liabilities $602,000 ...view middle of the document...
Fixed assets turnoverb 9.84 7.89 13.0
Total assets turnoverb 2.31 2.18 2.6
Return on assets 1.00% 5.76% 9.1%
Return on equity 2.22% 11.47% 18.2%
Profit margin 0.43% 2.64% 3.5%
Debt-to-assets ratio 54.81% 49.81% 50.0%
P/E ratio 15.43 5.65 6.0
Price/cash flow ratio 1.60 2.16 3.5
a Industry average ratios have been constant for the past 4 years.
b Based on year-end balance sheet figures.
c Calculation is based on a 365-day year.
a. Assess Corrigan's liquidity position and determine how it compares with peers and how the liquidity
position has changed over time.
Corrigan's liquidity position has improved from 2010 to 2011; however, its current ratio is still
below the industry average of 2.7.
b. Assess Corrigan's asset management position and determine how it compares with peers and
how its asset management efficiency has changed over time.
Corrigan's inventory turnover, fixed assets turnover, and total assets turnover have improved from
2010 to 2011; however, they are still below industry averages. The firm's days sales outstanding ratio
has increased from 2010 to 2011--which is bad. In 2010, its DSO was close to the industry average.
In 2011, its DSO is somewhat higher. If the firm's credit policy has not changed, it needs to
look at its receivables and determine whether it has any uncollectibles. If it does have uncollectible
receivables, this will make its current ratio look worse than what was calculated above.
c. Assess Corrigan's debt management position and determine how it compares with peers and how its
debt management has changed over time.
Corrigan's debt ratio has increased from 2010 to 2011, which is bad. In 2010, its debt ratio was right
at the industry average, but in 2011 it is higher than the industry average. Given its weak current and
asset management ratios, the firm should strengthen its balance sheet by paying down liabilities.
d. Assess Corrigan's profitability ratios and determine how they compare with peers and how its
profitability position has changed over time.
Corrigan's profitability ratios have declined substantially from 2010 to 2011, and they are substantially
below the industry averages. Corrigan needs to reduce its costs, increase sales, or...