Chapter 13, Problem 4PSA

Selected year-end and financial statement of Cobalt Corporation follow. (All sales were on credit; Selected balance sheet amount at December 31, 2014, inventory,$48,900, total assets &189,400; common stock &90,000; and retrained earning, $22,748.)

Required

Compute the following; (1) current ratio, (2) acid-test ratio, (3) days* sales uncollected, (4) inventory turnover, (5) days* sales in inventory, (6) debt-to-equality ratio, (7) times interest earning, (8) profit margin ratio, (9) total asset turnover, (10) return on total assets, and (11) return on common stockholders* equality.

Round to one decimal places; for part 6, round to two decimals.

To determine

(1)

Introduction:

Liquidity or short-term ratios determines the ability of a firm to pay its current obligations. A good liquidity ration states that the company has liquid assets which can be easily convertible into cash. It includes current ratio, quick ratio etc.

To calculate:

Current ratio.

Answer to Problem 4PSA

Current ratio is 3.62:1

Explanation of Solution

$\text{Current ratio=}\frac{Current\text{ Asset}}{Current\text{ Liabilities}}$

$\begin{array}{l}CurrentAssets=Cash+Short-TermInvestments+AccountsReceivable+NotesReceivable+\\ MerchandiseInventory+PrepaidExpenses\end{array}$

$CurrentAssets=\$10,000+\$8,400+\$29,200+4,500+\$32,150+\$2,650$

= $86,900

$CurrentLiabilities=AccountsPayable+AccruedWagesPayable+IncomeTaxesPayable$

$CurrentLiabilities=\$17,500+\$3,200+\$3,300$

= $24,000

$Currentratio=\frac{\$86,900}{\$24,000}$

= 3.62:1

To determine

(2)

Introduction:

Liquidity or short-term ratios determines the ability of a firm to pay its current obligations. A good liquidity ration states that the company has liquid assets which can be easily convertible into cash. It includes current ratio, quick ratio etc.

To calculate:

Acid-test ratio.

Answer to Problem 4PSA

Acid-test ratio is 2.2:1

Explanation of Solution

$Acid-testratio=\frac{Currentassets-inventory}{CurrentLiabilities}$

$= \frac{\$86,900-\$32,150}{\$24,000}$

$= \frac{\$54,750}{\$24,000}$

= 2.2:1

To determine

(3)

Introduction:

Days sales uncollected ratio helps the creditors and investors to measure the time in which company collects its account receivable.

To calculate:

Days sales uncollected.

Answer to Problem 4PSA

Days sales uncollected = 24 days

Explanation of Solution

$Dayssalesuncollected=\frac{AccountsReceivable}{NetSales}\times 365$

$=\frac{\$29,200}{\$448,600}\times 365$

= 24 days

To determine

(4)

Introduction:

Inventory turnover ratio measures how many times inventory is sold during a period.

To calculate:

Inventory turnover ratio.

Answer to Problem 4PSA

Inventory-turnover ratio is 7.3 times.

Explanation of Solution

$Inventoryturnover=\frac{CostofGoodsSold}{AverageInventory}$

$Averageinventory=\frac{Beginningbalance\left(\$48,900\right)+Endingbalance\left(\$32,150\right)}{2}$

= $40,525

$Inventory-turnover\text{ ratio}=\frac{\$297,250}{\$40,525}$

= 7.3 times

To determine

(5)

Introduction:

Days sales in inventory calculates the time period which company takes to convert its inventory into sales.

To calculate:

Days sales in inventory.

Answer to Problem 4PSA

Days sales in inventory = 50 days

Explanation of Solution

$Dayssalesininventory=\frac{Averageinventory}{C.O.G.S}\times 365$

$=\frac{\$40,525}{\$297,240}\times 365$

= 50 days.

To determine

(6)

Introduction:

Debt-equity ratio measures the proportion of debt and equity in the capital structure.

To calculate:

Debt to equity ratio.

Answer to Problem 4PSA

Debt to equity ratio is 1.7:1

Explanation of Solution

$Debt-to-equityratio=\frac{Totalliabilities}{Totalequity}$

$\begin{array}{l}Liabilities=Accountspayable+Accruedwagespayable+Incometaxespayable+\\ Longtermnotepayable\end{array}$

$=\$17,500+\$3,200+\$3,300+63,400$

= $87,400:

$Equity=Commonstock+Retainedearnings$

$=\$90,000+\$62,800$

= $152,800

$=\frac{\$152,800}{\$87,400}$

= 1.7:1

To determine

(7)

Introduction:

Time interest earned ratio measures the amount of income that will be required for for covering the interest expenses in the future.

To calculate:

Time interest earned.

Answer to Problem 4PSA

Time interest earned= 11.8

Explanation of Solution

$Timesinterestearned=\frac{EarningsBeforeIncomeTax}{InterestExpense}$

$\text{=} \frac{\$48,650}{\$4,100}$

= 11.8

To determine

(8)

Introduction:

Profit margin ratio is calculated by dividing net income by the net sales.

To calculate:

Profit margin ratio.

Answer to Problem 4PSA

Profit margin ratio is 6.4%

Explanation of Solution

$Profitmarginratio=\frac{Netincome}{Netsales}$

$=\frac{\$29,052}{\$448,600}$

= 6.4%

To determine

(9)

Introduction:

Asset turnover ratio calculates the ability of a company to generate sales with the total assets.

To calculate:

Asset-turnover ratio.

Answer to Problem 4PSA

Asset-turnover ratio = 1.8

Explanation of Solution

$Totalassetturnover=\frac{Netsales}{Totalassets}$

$=\frac{\$448,600}{\$240,200}$

= 1.8:

To determine

(10)

Introduction:

Return on total asset is a ratio that calculated by dividing earning before income tax by total assets.

To calculate:

Return on total asset.

Answer to Problem 4PSA

Return on total asset is $0.18

Explanation of Solution

$Returnontotalassets=\frac{Earningsbeforeinterestandtaxes}{Totalassets}$

$=\frac{\$44,550}{\$240,200}$

= $0.18

$EBIT=\$48,650-\$4,100$

= $44,550

To determine

(11)

Introduction:

Return on common stockholder’s equity is calculated by dividing net income by shareholder’s equity. It helps in measuring the financial performance of a company.

To calculate:

Return on common stockholder’s equity.

Answer to Problem 4PSA

Return on common stockholder’s equity is $0.19

Explanation of Solution

$Returnoncommonstockholders\text{'}equity=\frac{Netincome}{Stockholders\text{'}equity}$

$=\frac{\$29,052}{\$152,800}$

= $0.19: