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Chapter 2 Spreadsheet Problem
Financial Statement Analysis
The problem requires you to use File C02 on the computer problem spreadsheet.
Cary Corporation’s forecasted financial statements for next year follow, along with industry average
ratios.
a. Compare Cary’s forecasted ratios with the industry average data, and comment briefly on Cary’s
projected strengths and weaknesses.
Cary Corporation: Forecasted Balance Sheet as of December 31
Cash $ 72,000 Accounts and notes payable $ 432,000
Accounts receivable 439,000 Accruals 170,000
Inventories 894,000 Total current liabilities $ 602,000
Cary Corporation: Forecasted Income Statement
Sales $4,290,000
Cost of goods sold (3,580,000)
Gross operating profit $ 710,000
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Earnings before taxes (EBT) $ 180,680
Taxes (40%) ( 72,272)
Net income $ 108,408
Number of shares outstanding 23,000
Per-Share Data
EPS $ 4.71
Industry Financial Ratiosa
Quick ratio 1.0×
Current ratio 2.7
Inventory turnoverb 5.8×
Return on assets 9.1%
Return on equity 18.2%
Debt ratio 50.0%
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b. What do you think would happen to Cary’s ratios if the company initiated cost-cutting measures that
c. Suppose Cary Corporation is considering installing a new computer system that would provide
tighter control of inventories, accounts receivable, and accounts payable. If the new system is
installed, the following data are projected (rather than the data given earlier) for the indicated
balance sheet and income statement accounts:
Accounts receivable $ 395,000
Inventories $ 700,000
How do these changes affect the projected ratios and the comparison with the industry averages?
(Note that any changes to the income statement will change the amount of retained earnings;
therefore, the model is set up to calculate next year’s retained earnings as this year’s retained
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e. If the new computer system were less efficient than Cary’s management had estimated and caused
the cost of goods sold to increase by $125,000 from the projections in part (a), what effect would it
have on the company’s financial position?