StatementsWidgit Corporation's December 31 Balance SheetsAssets20122011Cash$ 72,000$ 65,000Accounts receivable439,000328,000Inventories894,000813,000 Total current assets$ 1,405,000$ 1,206,000Land and building238,000271,000Machinery132,000133,000Other fixed assets61,00057,000Total assets$ 1,836,000$ 1,667,000Liabilities and equityAccounts payable$ 432,000$ 409,500Accrued liabilities170,000162,000 Total current liabilities$ 602,000$ 571,500Long-term debt404,290258,898Common stock575,000575,000Retained earnings254,710261,602Total liabilities and equity$ 1,836,000$ 1,667,000Widgit Corporation's December 31 Income Statements20122011Sales$ 4,240,000$ 3,635,000Cost of goods sold3,680,0002,980,000Gross profit$ 560,000$ 655,000General admin. and selling expenses236,320213,550Depreciation159,000154,500Miscellaneous134,000127,000 EBT$ 30,680$ 159,950Taxes (40%)12,27263,980 Net income$ 18,408$ 95,970 HorizontalWidgit Corporation's December 31 Balance SheetsAssets20122011 Dr. Letsch: Dr. Letsch: Step 1: Set up your financial statements in this format.Dollar Change Dr. Letsch: Dr. Letsch: Determine the dollar amount of change between periods.Percentage Change Dr. Letsch: Dr. Letsch: Determine the percentage change by dividing the Dollar Change by the initial year data.Cash$ 72,000$ 65,0007,00010.8%Accounts receivable439,000328,000111,00033.8%Inventories894,000813,00081,00010.0% Total current assets$ 1,405,000$ 1,206,000199,00016.5%Land and building238,000271,000(33,000)-12.2%Machinery132,000133,000(1,000)-0.8%Other fixed assets61,00057,0004,0007.0%Total assets$ 1,836,000$ 1,667,000169,00010.1%Liabilities and equityAccounts payable$ 432,000$ 409,50022,5005.5%Accrued liabilities170,000162,0008,0004.9% Total current liabilities$ 602,000$ 571,50030,5005.3%Long-term debt404,290258,898145,39256.2%Common stock575,000575,00000.0%Retained earnings254,710261,602(6,892)-2.6%Total liabilities and equity$ 1,836,000$ 1,667,000169,00010.1%Widgit Corporation's December 31 Income Statements20122011Sales$ 4,240,000$ 3,635,000605,00016.6%Cost of goods sold3,680,0002,980,000700,00023.5%Gross profit$ 560,000$ 655,000(95,000)-14.5%General admin. and selling expenses236,320213,55022,77010.7%Depreciation159,000154,5004,5002.9%Miscellaneous134,000127,0007,0005.5% EBT$ 30,680$ 159,950(129,270)-80.8%Taxes (40%)12,27263,980(51,708)-80.8% Net income$ 18,408$ 95,970(77,562)-80.8% VerticalWidgit Corporation's December 31 Balance SheetsAssets2012Percent2011Percent Dr. Letsch: Dr. Letsch: Separate columns; add percent columns; calculate percentages based on total assets, total L&E, and total sales depending on the statement or part of statement analyzed.Cash$ 72,0003.9%$ 65,0003.9%Accounts receivable439,00023.9%328,00019.7%Inventories894,00048.7%813,00048.8% Total current assets$ 1,405,00076.5%$ 1,206,00072.3%Land and building238,00013.0%271,00016.3%Machinery132,0007.2%133,0008.0%Other fi.

1. StatementsWidgit Corporation's December 31 Balance
SheetsAssets20122011Cash$ 72,000$ 65,000Accounts
receivable439,000328,000Inventories894,000813,000 Total
current assets$ 1,405,000$ 1,206,000Land and
building238,000271,000Machinery132,000133,000Other fixed
assets61,00057,000Total assets$ 1,836,000$
1,667,000Liabilities and equityAccounts payable$ 432,000$
409,500Accrued liabilities170,000162,000 Total current
liabilities$ 602,000$ 571,500Long-term
debt404,290258,898Common stock575,000575,000Retained
earnings254,710261,602Total liabilities and equity$
1,836,000$ 1,667,000Widgit Corporation's December 31
Income Statements20122011Sales$ 4,240,000$ 3,635,000Cost
of goods sold3,680,0002,980,000Gross profit$ 560,000$
655,000General admin. and selling
expenses236,320213,550Depreciation159,000154,500Miscellane
ous134,000127,000 EBT$ 30,680$ 159,950Taxes
(40%)12,27263,980 Net income$ 18,408$ 95,970
HorizontalWidgit Corporation's December 31 Balance
SheetsAssets20122011
Dr. Letsch: Dr. Letsch:
Step 1: Set up your financial statements in this format.Dollar
Change
Dr. Letsch: Dr. Letsch:
Determine the dollar amount of change between
periods.Percentage Change
Dr. Letsch: Dr. Letsch:
Determine the percentage change by dividing the Dollar Change
by the initial year data.Cash$ 72,000$
65,0007,00010.8%Accounts
receivable439,000328,000111,00033.8%Inventories894,000813,

2. 00081,00010.0% Total current assets$ 1,405,000$
1,206,000199,00016.5%Land and
building238,000271,000(33,000)-
12.2%Machinery132,000133,000(1,000)-0.8%Other fixed
assets61,00057,0004,0007.0%Total assets$ 1,836,000$
1,667,000169,00010.1%Liabilities and equityAccounts payable$
432,000$ 409,50022,5005.5%Accrued
liabilities170,000162,0008,0004.9% Total current liabilities$
602,000$ 571,50030,5005.3%Long-term
debt404,290258,898145,39256.2%Common
stock575,000575,00000.0%Retained
earnings254,710261,602(6,892)-2.6%Total liabilities and
equity$ 1,836,000$ 1,667,000169,00010.1%Widgit
Corporation's December 31 Income Statements20122011Sales$
4,240,000$ 3,635,000605,00016.6%Cost of goods
sold3,680,0002,980,000700,00023.5%Gross profit$ 560,000$
655,000(95,000)-14.5%General admin. and selling
expenses236,320213,55022,77010.7%Depreciation159,000154,5
004,5002.9%Miscellaneous134,000127,0007,0005.5% EBT$
30,680$ 159,950(129,270)-80.8%Taxes
(40%)12,27263,980(51,708)-80.8% Net income$ 18,408$
95,970(77,562)-80.8%
VerticalWidgit Corporation's December 31 Balance
SheetsAssets2012Percent2011Percent
Dr. Letsch: Dr. Letsch:
Separate columns; add percent columns; calculate percentages
based on total assets, total L&E, and total sales depending on
the statement or part of statement analyzed.Cash$
72,0003.9%$ 65,0003.9%Accounts
receivable439,00023.9%328,00019.7%Inventories894,00048.7%
813,00048.8% Total current assets$ 1,405,00076.5%$
1,206,00072.3%Land and
building238,00013.0%271,00016.3%Machinery132,0007.2%133
,0008.0%Other fixed assets61,0003.3%57,0003.4%Total assets$
1,836,000100.0%$ 1,667,000100.0%Liabilities and

3. equityAccounts payable$ 432,00023.5%$
409,50024.6%Accrued liabilities170,0009.3%162,0009.7%
Total current liabilities$ 602,00032.8%$ 571,50034.3%Long-
term debt404,29022.0%258,89815.5%Common
stock575,00031.3%575,00034.5%Retained
earnings254,71013.9%261,60215.7%Total liabilities and
equity$ 1,836,000100.0%$ 1,667,000100.0%Widgit
Corporation's December 31 Income
Statements2012Percent2011PercentSales$ 4,240,000100.0%$
3,635,000100.0%Cost of goods
sold3,680,00086.8%2,980,00082.0%Gross profit$
560,00013.2%$ 655,00018.0%General admin. and selling
expenses236,3205.6%213,5505.9%Depreciation159,0003.8%154
,5004.3%Miscellaneous134,0003.2%127,0003.5% EBT$
30,6800.7%$ 159,9504.4%Taxes (40%)12,2720.3%63,9801.8%
Net income$ 18,4080.4%$ 95,9702.6%
RatiosWidgit Corporation's December 31 Balance
SheetsAssets20122011Cash$ 72,000$ 65,000Accounts
receivable439,000328,000Inventories894,000813,000 Total
current assets$ 1,405,000$ 1,206,000Land and
building238,000271,000Machinery132,000133,000Other fixed
assets61,00057,000Total assets$ 1,836,000$
1,667,000Liabilities and equityAccounts payable$ 432,000$
409,500Accrued liabilities170,000162,000 Total current
liabilities$ 602,000$ 571,500Long-term
debt404,290258,898Common stock575,000575,000Retained
earnings254,710261,602Total liabilities and equity$
1,836,000$ 1,667,000Widgit Corporation's December 31
Income Statements20122011Sales$ 4,240,000$ 3,635,000Cost
of goods sold3,680,0002,980,000Gross profit$ 560,000$
655,000General admin. and selling
expenses236,320213,550Depreciation159,000154,500Miscellane
ous134,000127,000 EBT$ 30,680$ 159,950Taxes
(40%)12,27263,980 Net income$ 18,408$ 95,970Per-Share
Data20122011Cash comon dividends/share$0.50$2.25Market
price (average)$5.00$24.00Number of shares

4. outstanding21,00020,000Interest Expense in GASabove$
2,000$ 5,000Once we have this information set, we can
calculate the necessary ratios for this analysis.Ratio
Analysis20122011Industry Avg
Dr. Letsch: Dr. Letsch:
Use industry average from public companies or private
companies from Hoovers from your online library. You also can
use a benchmark number from a specific competitor if you feel
this is better.Calculation for 2012 Liquidity Ratios Current
ratio2.332.112.8=D7/D16 Quick
Acid0.850.691.0=(D4+D5)/D16 Receivables
turnover11.0611.089.0=D24/((D5+E5)/2) - for 2011 I just used
2011 since I did not have 2010 to average Days sales
outstanding33.0132.9432=365/D45 Inventory
turnover4.313.677.0=D25/((D6+E6)/2) - for 2011 I just used
2011 since I did not have 2010 to average Days in
inventory84.6599.58100=365/D47 Asset Management Fixed
assets turnover9.847.8913.0=D24/(D8+D9+D10) Total assets
turnover2.312.182.6=D24/D11 Profitability Profit margin on
sales0.43%2.64%3.5%=D32/D24 Asset
Turnover242.08%218.06%=D24/((D11+E11)/2) Return on
assets1.05%5.76%4.2%=D32/((D11+E11)/2) Return on
equity4.44%11.47%18.2%=D32/((D18+D19)/2) Earnings Per
Share-EPS0.884.806.0=D32/D37 P/E
ratio5.705.006.0=D36/D57 Payout Ratio0.570.476.0=D36/D57
Solvency Ratios Debt
ratio54.81%49.81%50.0%=(D16+D17)/D11 Times Interest
Earned16.3432.9918.00=(D30+D38)/D38
Text Analysisa. Assess Widgit's liquidity position, and
determine how it compares with peers and how the liquidity
position has changed over time.Widgit's liquidity position has
improved from 2011 to 2012; however, its current ratio is
stillbelow the industry average of 2.8. b. Assess Widgit's
asset management position, and determine how it compares with
peers andhow its asset management efficiency has changed over

5. time.Widgit's inventory turnover, fixed assets turnover, and
total assets turnover have improved from 2011 to 2012;
however, they are still below industry averages. The firm's
days sales outstanding ratiohas increased from 2011 to 2012--
which is bad. In 2011, its DSO was close to the industry
average.In 2012, 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
uncollectiblereceivables, this will make its current ratio look
worse than what was calculated above.c. Assess Widgit's debt
management position, and determine how it compares with
peers and how itsdebt management has changed over
time.Widgit's debt ratio has increased from 2011 to 2012, which
is bad. In 2011, its debt ratio was rightat the industry average,
but in 2012 it is higher than the industry average. Given its
weak current andasset management ratios, the firm should
strengthen its balance sheet by paying down liabilities.d.
Assess Widgit's profitability ratios, and determine how they
compare with peers and how itsprofitability position has
changed over time.Widgit's profitability ratios have declined
substantially from 2011 to 2012, and they are
substantiallybelow the industry averages. Widgit needs to
reduce its costs, increase sales, or both.e. Assess Widgit's
market value ratios, and determine how its valuation compares
with peersand how it has changed over time.Widgit's P/E ratio
has increased from 2011 to 2012, but only because its net
income has declined significantly from the prior year. Its P/CF
ratio has declined from the prior year and is well belowthe
industry average. These ratios reflect the same information as
Widgit's profitability ratios.Widgit needs to reduce costs to
increase profit, lower its debt ratio, increase sales, and
improveits asset management.There should be text descriptive
analysis for every material ratio. You should compare against
time (yourself or benchmark) or against the benchmark/indusry
ratios.

6. Case study question 7.2: General Machinery Ltd
General Machinery manufactures computer numerical control
(CNC) equipment for its customers who use the equipment in
the manufacture of electronic circuit boards. Ratios have been
calculated from annual reports for the last five years and are
shown in Table 7.19. The Statement of Cash Flows is shown
in Table 7.20.
TABLE 7.19Ratios.
2014
2013
2012
2011
2010
ROI
5.0%
3.2%
3.6%
6.2%
5.8%
ROCE
9.2%
7.1%
6.2%
7.6%
6.4%
Operating margin
16.8%
13.9%
12.6%
15.7%
14.1%
Gross margin
70.0%
71.0%
72.0%

7. 74.0%
75.0%
Overhead to sales
53.2%
57.1%
59.4%
58.3%
60.9%
Sales growth
11.4%
9.4%
6.7%
9.1%
Working capital
198%
360%
340%
368%
326%
Acid test
135%
287%
270%
275%
243%
Gearing
42.0%
40.5%
38.6%
36.5%
37.4%
Interest cover
182%
162%
202%

8. 376%
517%
Asset turnover
48%
46%
44%
44%
41%
Days’ sales outstanding
60
63
68
70
73
Inventory turn
3.3
3.1
2.8
2.2
2.3
Days’ purchases outstanding
78
88
102
105
111
Dividend per share
$0.036
$0.027
$0.025
$0.036
$0.036
Dividend payout ratio
48.4%
57.9%
49.0%

9. 41.4%
45.7%
Dividend yield
3.0%
2.5%
2.5%
4.5%
5.6%
EPS
$0.075
$0.047
$0.052
$0.088
$0.080
P/E ratio
16.0
23.4
19.3
9.1
8.2
General Machinery’s Statement of Cash Flows is also shown for
the last few years (Table 7.20).
TABLE 7.20Statement of Cash Flows.
2014
2013
2012
2011
Cash flow from operating activities
Cash receipts
772,000
700,000

10. 635,000
595,000
Cash payments
−628,000
−601,000
−537,200
−503,000
Interest paid
−72,000
−60,000
−40,000
−25,000
Income tax paid
−17,700
−11,100
−12,240
−20,700
Net cash from operating activities
54,300
27,900
45,560
46,300
Cash flow from investing activities
Payments for property, plant & equipment
−200,000
−50,000
−50,000
−
Net cash used in investing activities
−200,000
−50,000
−50,000

11. −
Cash flow from financing activities
Proceeds from borrowings
50,000
50,000
50,000
−
Dividends paid
−20,000
−15,000
−14,000
−20,000
Net cash from/used in financing activities
30,000
35,000
36,000
−20,000
Net increase/(decrease) in cash
−115,700
12,900
31,560
26,300
Cash at beginning of year
135,700
122,800
91,240
64,940
Cash at end of year
20,000
135,700
122,800
91,240

12. 1. Discuss the major issues facing the company.
2. Recommend what actions the company should take to
improve its overall performance, addressing each of
profitability, liquidity, gearing, activity, and shareholder return
measures.
3. In what way does the Statement of Cash Flows help you to
interpret the ratios and financial performance of the company?
GENERAL MACHINERY LIMITED CASE STUDY 4
General Machinery Limited Case Study
Name
Institution
Date
Running head: GENERAL MACHINERY LIMITED CASE
STUDY 1
The major issues facing the company
The well-being of General Machinery Limited is being
compromised by the various issues it is facing. One of the major
issues that the company is facing is the presence of regulations
that are unfavorable to the company’s operations. All activities

13. have to be conducted using formal ways, an aspect that that
affects efficiency. For instance, employees do not have the
liberty of managing their wastes as they have to consult their
leaders. The skills gap is the other major challenge affecting the
effectiveness of the company. The company’s aging workforce
is retiring leaving behind staff members that are inexperienced
and lack the ideal skills. These conditions have led to the
company losing its competitive advantage in the market.
The actions the company should take to improve its overall
performance, addressing each of profitability, liquidity, gearing,
activity, and shareholder return measures
General Machinery Limited lacks a defined direction due
to lack of goals and objectives. It cannot tell what it needs
based on lack of clearly-defined objectives. With the latter in
place, the company would be in a position to track its
performance. The viewpoint is likely to enable the firm improve
its overall performance.
How the Statement of Cash Flows help you to interpret the
ratios and financial performance of the company?
Cash flows play a vital role in the interpretation of
companies’ financial performance and ratios. The cash flow
statements of General Machinery Limited have enabled me to
know the amount of money the firm gets from operations and
investments. This interpretation puts me in a great position to
understand whether I should purchase the company’s stocks or
not.
The information does ratio analysis provide for meeting the
requirements of the case questions
The financial ratios provide investors with vital
information about the company they intend to invest in. In the
case of General Machinery Limited, they enable individuals to
tell the firm’s ability to pay their debts. The facts presented in
the case allow persons who have interests in the company to
know its financial strength, thus able to predict its future well-
being.
The ratios are the most important, and which ones are of limited

14. value? Justify your choices for the scenario
The ratios that are most important to a business entity are
the return on equity and the return on assets (ROA). These
ratios allow firms to know whether their income conforms to the
amount of resources at their disposal. For instance, the ROA
enables companies to determine whether they are utilizing their
resources efficiently (Damodaran, 2001). On the other hand, the
ratios that are of limited value are the price to sales and price to
earnings ratios. The reason why they are limited is that they are
majorly determined by external factors. Therefore, General
Machinery Limited cannot rely on them to grow its revenues.
Why we should compare
a. The current year ratios with the prior year ratios- This
comparison enables the management team to tell whether the
company has experienced growth over the past year. It allows
the company to evaluate its position in the market in relation to
its competitors, thus able to tell the competitive mechanisms it
needs to implement to stay ahead of its rivals.
b. The ratios of competitors in the same industry or some other
benchmark- Analyzing the ratios of competitors in the same
industry plays a vital role when it comes to making investment
decisions. The analysis enables investors to evaluate the
financial health of firms in the industry, thus able to tell the one
that meets their needs and expectations.
The other computations used in ratio analysis, what else is
necessary to properly analyze a company for investment
Besides ratio analysis, the other computation needed to
analyze the company’s investment opportunities is the
fundamental analysis (Damodaran, 2001). Under this approach,
the assets, liabilities, and its overall well-being of companies
are examined. The outcome of the scrutiny of the above-
mentioned aspects is then compared to market conditions, such
as the inflation rates and the exchange rate in the currency
market. The comparison allows investors to tell if their
company has sufficient resources to survive in the market.

15. References
Damodaran, A. (2001). Investment valuation: Tools and
techniques for determining the value of any asset. New York:
Wiley.