Rosewise is a wholesale distributer of professional equipment and supplies. The company sales have averaged about. $900 000 annually for the 3-year period 2016-2018. The firm’s total assets at the end of 2018 amounted to $850 000. The president of Rosewise Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the Board of Directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2016-2018.
Current ratio
Acid-test (quick) ratio
Accounts receivable turn over
Inventory turnover
Percent of total debt to total asset
Percent of long-term debt to total assets Sales to fixed assets (fixed assets turnover) Sales as a percentage of 2000 sales
Gross margin percentage
Net income to sales
Return to total assets
Return on stockholders equity
2016 2017 2018
1.80 1.89 1.96 1.04 0.99 0.87 8.75 7.71 6.42 4.91 4.32 3.42 51% 46% 41% 31% 27% 24% 1.58 1.69 1.79 1.00 1.03 1.07 36.0 35.1 34.6 6.9% 7.0% 7.2% 7.7% 7.7% 7.8% 13.6% 13.1% 12.7%
In preparation of the report, the controller has decided first to examine the financial ratios independently of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
1. The current ratio is increasing while the acid-test (quick0 ratio is decreasing. Required: Using the ratios provided, identify and explain the contributing factor(s) for the apparently divergent trend.
2. In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2016-2018 period.
3. Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investments in plant and equipment.

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