HARAMAYA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

POST GRADUATE DIRECTORATE

PROGRAM: MBA

Assignment 1 of Accounting For Decision Making

Name: ID No.

YASIN AHMED PGP/ 684/15

SUBMITTED TO: Mr. Wandimageng Biru (Ass. Prof.)

March, 2023

Haramaya
Compute the following ratio for both companies in 2021 fiscal years

1.The following information relates to the Blue Company and Red supermarket, Inc. for their 2020 and
2021 fiscal years (in millions). Using the following data, answer the question below;

BLUE COMPANY
SELECTED FINANCIAL INFORMATION
(Amount in millions, except per share amounts)
January 21 February 2,
2021 2020

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 1. Current ratio

Current Ratio FOR BLUE COMPANY CR for RED SUPERMARKET .INC

current assets 7206 current assets 1055

1 Current Ratio = current = = 0.94 CR= current = = 1.54
liabilities 7629 liabilities 684

2. Quick Ratio

for BLUE COMPANY for RED SUPERMARKET .INC

CURRENT ASSET−INVENTORIES CURRENT ASSET−INVENTORIES

QR = QR =
CURRENT LIABILITIES CURRENT LIABILITIES

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 7206−6459 1056−311
= = 0.098 = = 1.08
7629 684

3. Cash Ratio

Cash Ratio FOR BLUE COMPANY Cash Ratio FOR RED SUPERMARKET

cash and cash equivalent cash and cash equivalent

Cash Ratio = 𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 =
current liabilities current liabilities

Or

Cash + Marketable Securities

Cash Ratio = , but we haven’t cash and Marketable securities. Cash and
current liabilities

marketable securities most liquid assets of current assets. We have only total current assets. Current
assets are liquid assets, meaning they can quickly be sold for cash without losing much value. Then we
can use total current assets as cash.

Cash Ratio FOR BLUE COMPANY Cash Ratio FOR RED SUPERMARKET

total current assets total current aseets

Cash Ratio = 𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 =
current liabilities current liabilities

7206 1055
= 0.94 = 1.54
7629 684

4. Debt Ratio

For BLUE COMPANY FOR RED SUPER MARKET .INC

Total liabilites Total liabilities
DR = DR =
Total assets Total assets

17940 1742
= = 0.77 = = 0.46
23211 3783

5. Debt-to-equity (D/E) Ratio

for BLUE COMPANY for RED SUPERMARKET .INC

Total liability TOTAL LIABILITY

D/E RATIO = Stock holders equity D/E RATIO = STOCK HOLDERS EQUITY

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 17940 1742
= = 3.40 𝐷𝐸/𝑅𝐴𝑇𝐼𝑂 = = 0.85
5271 684

6. Equity multiple Ratio

for BLUE COMPANY for SUPERMARKET .INC

Total asset Total asset

EMR = Stockholders equity EMR = Stockholders equity

23,211 3783
= = 4.40 = 2041 = 1.85
5271

7. Times Interest Earned (TIE) Ratio

FOR BLUE COMPANY FOR SUPERMARKET .INC

before income tax expense CURRENT ASSET−INVENTORIES

TIE Ratio = QR =
interest CURRENT LIABILITIES

8. Inventory Turnover Ratio

FOR BLUE COMPANY FOR SUPERMARKET .INC

COST OF GOOD SPLD COST OF GOOD SOLD

ITO = INVENTORY BALANCE QR = INVENTORY BALANCE

58564 5277
= = 9.06 𝐼𝑇𝑂 = = 16.96
6459 311

9. Inventory Turn Over In Days

FOR BLUE COMPANY FOR SUPERMARKET .INC

365 365
ITO in days = ITO ITO in days = 𝐼𝑇𝑂

365 365
= 9,06 = 40.28 = 16,96 = 21.52

OR

Inventory ×365
ITO indays = cost of good sold

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 6459×365 311×365
= = 40.2 = = 21.5
58564 5277

10. Receivable Turnover (RTO)

for BLUE COMPANY for SUPERMARKET .INC

Revenue Revenue
RTO = RTO = account receivables = 8032
Account receivables

Account receivable is one of the most liquid current assets converted into cash in short period of
time like three months. But we have not given account receivable. In place of account receivable
we have use total current assets.

for BLUE COMPANY for SUPERMARKET .INC

Revenue Revenue 8032

RTO = RTO = = 1055 = 7.6
Account receivables Account receivables

76000
= =10.55
7206

11.Total asset turnover (TATO)

for BLUE COMPANY for SUPERMARKET .INC

Sales(revenue) Sales
TATO = TATO =
Total Asset Total asset

7600 8032
= 23211 = 3.27 = 3783 = 2.12

12. Fixed Asset Turnover (FATO)

for BLUE COMPANY for SUPERMARKET .INC

Sales (revenue) Sales

FATO = TATO = Total asset
Fixed Asset

sales (revenue) sales (revenue) 8032

= 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠 =1898= 0.61

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 76000
= 13161 (property and equipment, net of deprecation)

= 5.77

13. Gross Profit Margin

for blue company for supermarket .INC

Gross profit Gross profit

GPFM = GPM =
sales revenue

sales(revenue) sales(revenue)
= 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠

17436 2754
= 76000 = 0.229 = 0.23 = 8032=0.34

14. Net Profit Margin

for blue company for supermarket .INC

Net income 𝑁𝐼 𝑁𝐼
𝑁𝑃𝑀 = NPM = sales = Revenue
sales

Net earning Net earning

= =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
1249 147
= 76000 = 0.016 or 1.6% = 8032 = 0.018

15. Return Asset (ROA) Ratio

for BLUE COMPANY for RED SUPERMARKET .INC

NI Net earning 𝑁𝑒𝑡 𝑒𝑎𝑟𝑛𝑖𝑛𝑔

𝑅𝑂𝐴 = Total asset = ROA =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 Total asset

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 Net earning Net earning
= =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
1249 147
= 23211 = 0.053 or 5.3% = 3783 = 0.038 𝑜𝑟 3.8%

16. Return of Equity (ROE)

for BLUE COMPANY for RED SUPERMARKET .INC

Net income 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑅𝑂𝐸 = Stockholders Equity ROE = Stockholders equity

1249 147
= 5271 = 0.237or 23.7% = 0.072 𝑜𝑟 7.2%
2041

(B). Using your answer for Requirement "A," identify the strengths and weaknesses of both
companies and explain which ratio(s) you used to reach your conclusion. Moreover, what you
will recommend for both companies?

Financial analysis is used to identify the financial strengths and weaknesses of the enterprise. From our
calculated ratio analysis of BLUE COMPANY and RED SUPERMARKET. INC we can identify
the weakness and strength of both company.

Strength of BLUE COMPANY

• BLUE COMPANY is a more liquid than RED SUPERMARKET. INC

• BLUE COMPANY are more profitable, because it record a higher percentage by using a
its net income and total assets.
• BLUE COMPANY is more efficient at using its assets than the RED
SUPERMARKET.INC.

Weakness of BLUE COMPANY

• Not efficient because have high (77%) debt ratio which is not betters

Strength of RED SUPERMARKET.INC

• Manage its debt efficient because it have record lower debt ratio is better
• RED SUPERMARKET. INC is a more liquid than BLUE COMPANY

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Weakness of RED SUPERMARKET.INC.

• Is not a more liquid because it have current ratio smaller than the standard
• are not more profitable because it record a small percentage by using a its net income and
total assets.

(C). Based on your analysis, which company is able to manage its debt load efficiently, which in
turn enhances its creditworthiness? Explain your answer and identify which of the ratio(s) from
Requirement “A” you used to reach your conclusion.

RED SUPERMARKET. INC company is an efficient company. To identify which company is

efficient we use the debt ratio. A debt ratio is a financial ratio that measures the size of the
company leverage. It is an expression of the relationship between a company’s total debt and its
assets. It is a measurement for the ability of a company to pay its debts. It was is defined as the
ratio between the total debt and the total assets, expressed as a decimal or a percentage. The
BLUE COMPANY have 0.77 or 77% debt ratio, while RED SUPERMARKET. INC have 0.46
(46%) of debt ratio. A lower debt ratio is better. A lower ratio is better than a higher one. Then
the RED SUPERMARKET. INC is able to manage debt load efficiently than the BLUE
COMPANY.

(D). Based on your analysis, which company appears to be more liquid? Explain your answer
and identify which of the ratio(s) from Requirement “A” you used to reach your conclusion.

RED SUPERMARKET. INC is a more liquid than BLUE COMPANY. To identify the liquidity
company we have to use current ratio. Current ratio is a financial ratio that measures liquidity by
dividing current assets by current liabilities. It shows how well a company can pay off its short-
term debts with its available resources. A higher ratio is desirable because it indicates a higher
level of liquidity. RED SUPERMARKET.INC have current ratio of 1.54 which was greater than
the standard, while BLUE COMPANY have 0.94 which was less than the standard. To be
desirable current ratio should be greater than or equal to the standard. From our result we
conclude that the RED SUPERMARKET.INC is more liquidity than the BLUE COMPANY.

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(E). Based on your analysis, which company appears to be more profitable? Explain your answer
and identify which of the ratio(s) from Requirement “A” you used to reach your conclusion.

Blue company are more profitable. To identify which company is more profitable we use Return
on Asset Ratio. Return on Assets (ROA) measures the amount of profit generated on investments
in assets. It refers to financial ratio that indicates how profitable a company is in relation to its
total assets. BLUE COMPANY generated about 0.053 or 5.3% cents in the form of net income
(net earnings) out of each birr it invested in its total assets during the year while RED SUPER
MARKET.INC generates 0.038 𝑜𝑟 3.8%. BLUE COMPANY record a higher percentage by
using a its net income and total assets. A higher return o asset means a company is more
profitable to generate profits.

(F). Based on your analysis, which company appears to be the more efficient at using its assets?
Explain your answer and identify which of the ratio(s) from Requirement “A” you used to reach
your conclusion.

A BLUE COMPANY are appear to be the more efficient than RED SUPERMARKET.INC. To
identify which company is more efficient we have used total Assets Turn over (TATO) ratio
which measures the efficiency of how well a company’s uses assets to produce sales. A company
with a high total asset turnover ratio can operate with fewer assets than a less efficient
competitor, and so requires less debt and equity to operate. Then, firm of higher ratio is
favorable, as it indicates a more efficient use of assets. BLUE COMPANY has total Assets Turn
over (TATO) ratio of 3.27, while RED SUPERMARKET.INC has 2.12. BLUE COMPANY has
a higher value of total asset turnover ratio than RED SUPERMARKET.INC. Then, BLUE
COMPANY is more efficient at using its assets than the RED SUPERMARKET.INC.