Current ratio is the ratio which represents proportion of current assets and current liabilities. Company’s liquidity is considered by it.
Acid test ratio:
Acid test ratio is a ratio which represents capability of a company to pay off its current obligations out of its cash or quick assets
Capacity of a company to efficiently publishes credits and timely collection of funds from its vendors is shown by accounts receivable turnover. .
Inventory turnover:
Frequency of a company’s inventory sold or returned is shown by inventory turnover.
Day’s sales in inventory:
Day’s sales inventory shows the average number of days the company not sells its inventory.
Day’s sales uncollected:
Day’s sales uncollected shows number of days a company takes to collect its accounts receivables
Profit margin ratio:
Profit margin ratio shows proportion of net income in terms of sales. Earning capability is measured by this ratio.
Total assets turnover ratio:
Total assets turnover ratio represents portion of a company’s revenue in terms of its value of total assets.
Return on total assets ratio:
Company’s earnings made through its net assets is known as return on total assets ratio.
Return on common
Return on common stockholder’s equity displays returns received on stockholder’s equity for a certain period of time.
Price earnings ratio:
Price earnings ratio shows the proportion of market value per share and earnings per share of the company.
Dividend yield:
Dividend yield is the portion of a current share price of the company which is earned or to be distributed.
1.
To compute: (a) current ratio, (b) acid test ratio ,(c) accounts receivable turnover ( d) inventory turnover (e) day’s sales in inventory (f) day’s sales uncollected of B Company and K Company.
Explanation of Solution
(a)
Formula to calculate current ratio is,
Current ratio of B Company:
Given info,
Current assets are $155,440
Current liabilities are $61,340
Substitute $155,440 for current assets and $61,340 for current liabilities.
Thus current ratio is 2.53 .
Working notes:
Likewise, current ratio of K Company:
Thus, current ratio is 2.55.
(b)
Formula to calculate acid test ratio is,
Acid test ratio of B Company:
Given info,
Cash is $19,500.
Accounts receivables are $37,400
Current liabilities are $61,340.
Substitute $19,500 for cash, $37,400 for accounts receivable and $61,340 for current liabilities.
Thus, acid test ratio is 0.93
Likewise, acid test ratio of K Company:
Thus, acid test ratio is 0.98.
(c)
Formula to calculate accounts receivable turnover is,
Accounts receivable turnover of B Company:
Given info,
Net sales are $770,000.
Accounts receivable is 37,400.
Substitute $770,000 for net sales and $37,400 for accounts receivable.
Thus, accounts receivable turnover is 20.59.
Likewise, accounts receivable turnover of K Company:
Thus, accounts receivable turnover is 15.33.
(d)
Formula to calculate inventory turnover is,
Inventory turnover of B Company
Given info,
Cost of goods sold is $585,100.
Inventory is $84,440
Substitute $585,100 for cost of goods sold and $84,440.
Thus, inventory turnover is 6.93.
Likewise, inventory turnover of K Company:
Thus, inventory turnover is 4.77
(e)
Formula to calculate day’s sales in inventory is,
Day’s sales in inventory of B Company
Given info,
Inventory at the end of the year is $84,440
Cost of goods sold is $585,100
Substitute $585,100 for cost of goods sold and $84,440 for inventory at the end of the year.
Thus, day’s sales inventory is 36 day
Likewise, day’s sales in inventory of K Company:
Thus, inventory turnover is 76.46 days
(f)
Formula to calculate day’s sales uncollected is,
Day’s sales uncollected of B Company
Given info,
Accounts receivable is $37,400.
Net sales are $770,000.
Substitute $37,400 for accounts receivable and $770,000 for net sales.
Thus, day’s sales uncollected are 17.73 days .
Likewise, day’s sales uncollected of K Company:
Thus, day’s sales uncollected is 23.80 days
2.
To compute: (a) profit margin ratio (b) total assets turnover ratio ,(c) return on total assets ratio (d) return on common stockholder’s equity (e) price earnings ratio (f) dividend yields of B Company and K Company.
2.
Explanation of Solution
(a)
Formula to calculate Profit margin ratio is,
Profit margin ratio of B Company
Given info,
Net income is $162,200.
Net sales are $770,000.
Substitute $162,200for net income and $770,000for net sales.
Thus, profit margin ratio is 21.06%.
Likewise, profit margin ratio of K Company:
Thus, profit margin ratio is 24%.
(b)
Formula to calculate total assets turnover ratio is,
Total assets turnover ratio of B Company
Given info,
Net sales are $770,000.
Assets in the beginning of the year are $398,000.
Assets at the end of the year are $445,440.
Substitute $770,000for net sales and $398,000for assets in the beginning of the year and $445,440 at the end of the year.
Thus, total assets turnover ratio is 1.83.
Likewise, total assets turnover ratio of K Company:
Thus, total assets turnover ratio is 1.90
(c)
Formula to calculate return on total assets ratio is,
Return on total assets ratio of B Company
Given info,
Net income is $162,200.
Assets in the beginning of the year are $398,000.
Assets at the end of the year are $445,440.
Substitute $162,200 for net income and $398,000for assets in the beginning of the year and $445,440at the end of the year.
Thus, return on total assets ratio is 0.38
Likewise, return on total assets ratio of K Company:
Thus, return on total assets ratio is 0.45
(d)
Formula to calculate return on common stockholder’s equity is,
Return on common stockholder’s equity of B Company
Given info,
Net income is $162,200.
Common stock in the beginning of the year is $180,000.
Common stock at the end of the year is $180,000.
Substitute $162,200 for net income and $180,000 for common stock in the beginning of the year and $180,000 at the end of the year.
Thus, return on common stockholder’s equity is 90.11%.
Likewise, return on common stockholder’s equity of K Company:
Thus, return on common stockholder’s equity is 102.14%.
(e)
Formula to calculate price earnings ratio is,
Price earnings ratio of B Company
Given info,
Market value per share is $75.
Earning per share is $4.51.
Substitute $75 for market value per share and $4.51 for earnings per share.
Thus, price earning ratio is 16.63.
Likewise, price earning ratio of K Company:
Thus, price earning ratio is 14.68.
(f) Formula to calculate dividend yield is,
Dividend yield of B Company
Given info,
Cash dividend per share is $3.81.
Market price per share is $75.
Substitute $75 for market price per share and $3.81 for annual cash dividend per share.
Thus, dividend yield is 0.051.
Likewise, dividend yield of K Company:
Thus, dividend yield is 0.052.
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Chapter 13 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
- RATIO ANALYSIS The Corrigan Corporations 2015 and 2016 financial statements follow, along with some industry average ratios. a. Assess Corrigans liquidity position, and determine how it compares with peers and how the liquidity position has changed over time. b. Assess Corrigans asset management position, and determine how it compares with peers and how its asset management efficiency has changed over time. c. Assess Corrigans debt management position, and determine how it compares with peers and how its debt management has changed over time. d. Assess Corrigans profitability ratios, and determine how they compare with peers and how its profitability position has changed over time. e. Assess Corrigans market value ratios, and determine how its valuation compares with peers and how it has changed over time. f. Calculate Corrigans ROE as well as the industry average KOE, using the DuPont equation. From this analysis, how does Corrigans financial position compare with the industry average numbers? g. What do you think would happen to its ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts. Corrigan Corporation: Balance Sheets as of December 31 2016 2015 Cash 72,000 65,000 Accounts receivable 439,000 328,000 Inventories 894,000 813,000 Total current assets 1,405,000 1,206,000 Land and building 238,000 271,000 Machinery 132,000 133,000 Other fixed assets 61,000 57,000 Total assets 1,836,000 1,667,000 Accounts payable 80,000 72,708 Accrued liabilities 45,010 40,880 Notes payable 476,990 457,912 Total current liabilities 602,000 571,500 Long-term debt 404,290 258,898 Common stock 575,000 575,000 Retained earnings 254,710 261,602 Total liabilities and equity 1,836,000 1,667,000 Corrigan Corporation: Income Statements for Years Ending December 31 2016 2015 Sales 4,240,000 3,635,000 Cost of goods sold 3,680,000 2,980,000 Cross operating profit 560,000 655,000 General administrative and selling expenses 303,320 297,550 Depreciation 159,000 154,500 EBIT 97,680 202,950 Interest 67,000 43,000 Earnings before taxes (EBT) 30,680 159,950 Taxes (40%) 12,272 63,980 Net income 18,408 95,970 Per-Share Data 2016 2015 EPS 0.80 4.17 Cash dividends 1.10 0.95 Market price (average) 12.34 23.57 P/E ratio 15.42 5.65 Number of shares outstanding 23,000 23,000 Industry Financial Ratiosa 2016 Current ratio 2.7 Inventory turnoverb 7.0 Days sales outstandingc 32.0 days Fixed assets turnoverb 13.0 Total assets turnoverb 2.6 Return on assets 9.1% Return on equity 18.2% Return on invested capital 14.5% Profit margin 3.5% Debt-to-capital ratio 50.0% P/E ratio 6.0 aIndustry average ratios have been constant for the past 4 years. bbased on year-end balance sheet figures. cCalculation is based on a 365-day year.arrow_forwardRATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barrys strengths and weaknesses as revealed by your analysis. d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2016. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.) Ratio Barry Industry Average Current ----- 2.0 Quick ----- 13 Days sales outstandinga ----- 35 days Inventory turnover ----- 6.7 Total assets turnover ----- 3.0 Profit margin ----- 1.2% ROA ------ 3.6% ROE ----- 9.0% ROIC ----- 73% TIE ----- 3.0 Debt/Total capital ----- 47.0% aCalculation is based on a 365-day year.arrow_forwardRATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barrys strengths and weaknesses as revealed by your analysis. d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2015. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.) Barry Computer Company: Balance Sheet as of December 31, 2015 (in Thousands) Cash 77,500 Accounts payable 129,000 Receivables 336,000 Other current liabilities 117,000 Inventories 241,500 Notes payable to bank 84,000 Total current assets 655,000 Total current liabilities 330,000 Long-term debt 256,500 Net fixed assets 292,500 Common equity 361,000 Total assets 947,500 Total liabilities and equity 947,500 Barry Computer Company: Income Statement for Year Ended December 31, 2015 (in Thousands) Sales 1,607,500 Cost of goods sold Materials 717,000 Labor 453,000 Heat, light, and power 68,000 Indirect labor 113,000 Depreciation 41,500 1,392,500 Gross profit 215,000 Selling expenses 115,000 General and administrative expenses 30,000 Earnings before interest and taxes (EBIT) 70,000 Interest expense 24,500 Earnings before taxes (EBT) 45,500 Federal and state income taxes (40%) 18,200 Net income 27,300 Ratio Barry Industry Average Current _____ 2.0 Quick _____ 1.3 Days sales outstandinga _____ 35 days Inventory turnover _____ 6.7 aCalculation is based on a 365-day year Total assets turnover _____ 3.0 Profit margin _____ 1.20% ROA _____ 0 ROE _____ 9.00% ROIC _____ 0 TIE _____ 3.0 Debt/Total capital _____ 47.00%arrow_forward
- RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barrys strengths and weaknesses as revealed by your analysis. d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.) Barry Computer Company: Balance Sheet as of December 31, 2014 (in Thousands) Cash 77,500 Accounts payable 129,000 Receivables 336,000 Other current liabilities 117,000 Inventories 241,500 Notes payable to bank 84,000 Total current assets 655,000 Total current liabilities 330,000 Long-term debt 256,500 Net fixed assets 292,500 Common equity 361,000 Total assets 947,500 Total liabilities and equity 947,500 Barry Computer Company: Income Statement for Year Ended December 31, 2014 (in Thousands) Sales 1,607,500 Cost of goods sold Materials 717,000 Labor 453,000 Heat, light, and power 68,000 Indirect labor 113,000 Depredation 41,500 1,392,500 Gross profit 215,000 Selling expenses 115,000 General and administrative expenses 30,00 Earnings before interest and taxes (EBIT) 70,000 Interest expense 24,500 Earnings before taxes (EBT) 45,500 Federal and state income taxes (40%) 18,200 Net income 27,300 Ratio Barry Industry Average Current ___ 2.0x Quick ___ 1.3x Days sales outstandinga ___ 35 days Inventory turnover ___ 6.7x Total assets turnover ___ 3.0x Profit margin ___ 12% aCalculation is based on a 365 day year. Ratio Barry Industry Average ROA ___ 3.6% ROE ___ 9.0% ROIC ___ 7.5% TIE ___ 3.0x Debt/Total capital ___ 47.0%arrow_forwardLiquidity Ratios NWAs financial statements contain the following information: Note: Round answers to two decimal places. Required: 1. What is its current ratio? 2. What is its quick ratio? 3. What is its cash ratio? 4. Discuss NWAs liquidity using these ratios.arrow_forwardSales transactions Using transactions listed in P4-2, indicate the effects of each transaction on the liquidity metric working capital and profitability metric gross profit percent. Indicate the gross profit percent for each sale (rounding to one decimal place) in parentheses next to the effect of the sale on the company’s ability to attain an overall gross profit percent of 30%.arrow_forward
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