Appendix I
Review Exercise Solutions
433
It has a positive 40.36%
return on equity
which is a good for investors, and as always, shareholders
could look elsewhere for a better return. Shareholders like to see a return that is as good or better
than they could have received by investing elsewhere. In terms of profitability, the company is
doing well.
Basil’s Bakery has an
inventory turnover ratio
of 8.98 which represents the number of times that
the company sold its entire inventory within the year. Bakeries should have a higher turnover ratio
because some of the input products they use can expire, such as milk and eggs. Once items are
baked, they have a short shelf life as well.
The company has an
inventory days on hand ratio
of 40.65 days.This indicates that the inventory
is sold rather slowly. This paired with the inventory turnover ratio, shows that the Bakery could be
selling inventory faster. This is a point of concern. In terms of operations management, inventory
must be addressed immediately. Inventory should be turning over more quickly to ensure that the
bakery is not throwing out expired products. A turnaround in operations management could mean
more success in profitability and liquidity.
The bakery has a
debt-to-equity ratio
of 40.12% indicating that the total debt is significantly
comparable to equity. Recall that it is not healthy for a business to borrow too much relative
to what it is worth. This is because there is a cost of debt in the form of interest. The bakery
could improve the debt-to-equity ratio by trying to make more profit by increasing revenues and
decreasing costs. This would ultimately lead to increased equity for the business. As a form of
leverage, the business could improve.
Review Exercise 2
Operating activities are those necessary to run the daily operations of the business.This section of
the cash flow statement tracks the movement of cash within a business on the basis of day-to-day
activities.
Investing activities include any exchange of cash related to the long-term financial investments
or capital assets of the business.The purchase of these assets can be thought of as the business
investing in itself because the assets usually result in increased operations.
Financing activities are any payments or receipts of cash that relate to changes in either long-
term debt or shareholders’ equity.This section of the cash flow statement tracks the movement
of cash within a business based on the way a company receives money from those providing
financing and pays it back.
