Current ratio is the ratio which is used to measure a company’s liquidity and it considers current assets and current liabilities.
Acid test ratio:
Acid test ratio is a ratio which is measures the ability of a company to pay off its current obligations out of near cash or quick assets.
Ability of a company to efficiently issue credits to its customers or vendors and timely collection of funds from them 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 selling its inventory or holding it before selling.
Day’s sales uncollected:
Day’s sales uncollected imply how much days a company takes to collect its accounts receivables.
Profit margin ratio:
Profit margin ratio shows net income as a percent of sales. This ratio reflects a company’s ability of earning.
Total assets turnover ratio:
Total assets turnover ratio is the measurement of a company’s revenue or sales to its value of total assets.
Return on total assets ratio:
Measurement of a company’s earnings against 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 F Company and B Company.
Explanation of Solution
(a)
Formula to calculate current ratio is,
F Company
Given info,
Current assets are $205,200.
Current liabilities are $90,500.
Substitute $205,200 for current assets and $90,500 for current liabilities.
Thus, current ratio is 2.27 .
Working notes:
Calculation of current assets,
B Company
Thus, current ratio is 2.15.
(b)
Formula to calculate acid test ratio is,
F Company:
Given,
Cash is $20,000.
Accounts receivables are $77,100
Current liabilities are $90,500.
Substitute $20,000 for cash, $77,100 for accounts receivable and $90,500 for current liabilities.
Thus, acid test ratio is 1.07
B Company:
Thus, acid test ratio is 1.10.
(c)
Formula to calculate accounts receivable turnover is,
F Company
Given,
Net sales are $393,600.
Accounts receivable in the beginning of the year is $72,200.
Accounts receivable at the end of the year is $77,100.
Substitute $393,600 for net sales and $72,200 for accounts receivable in the beginning of the year and $77,100 at the end of the year.
Thus, accounts receivable turnover is 5.27.
B Company:
Thus, accounts receivable turnover is 9.28.
(d)
Formula to calculate inventory turnover is,
F Company
Given,
Cost of goods sold is $290,600.
Inventory in the beginning of the year is $105,100.
Inventory at the end of the year is $86,800.
Substitute $290,600 for cost of goods sold and $105,100 for inventory in the beginning of the year and $86,800 at the end of the year.
Thus, inventory turnover is 3.03.
B Company:
Thus, inventory turnover is 5.91.
(e)
Formula to calculate day’s sales in inventory is,
F Company
Given,
Inventory at the end of the year is $86,800.
Cost of goods sold is $290,600.
Substitute $290,600 for cost of goods sold and $86,800 for inventory at the end of the year.
Thus, day’s sales inventory is 109.02 day
B Company:
Thus, inventory turnover is 62.35 days
(f)
Formula to calculate day’s sales uncollected is,
F Company
Given,
Accounts receivable is $77,100.
Net sales are $393,600.
Substitute $77,100 for accounts receivable and $393,600 for net sales.
Thus, day’s sales uncollected are 77.5 days .
B Company:
Thus, day’s sales uncollected is 38.55 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,
F Company
Given,
Net income is $33,850.
Net sales are $393,600.
Substitute $33,850 for net income and $393,600 for net sales.
Thus, profit margin ratio is 8.6%.
B Company:
Thus, profit margin ratio is 9.24%.
(b)
Formula to calculate total assets turnover ratio is,
F Company
Given,
Net sales are $393,600.
Assets in the beginning of the year are $383,400.
Assets at the end of the year are $382,100.
Substitute $393,600 for net sales and $383,400 for assets in the beginning of the year and $382,100 at the end of the year.
Thus, total assets turnover ratio is 1.03.
B Company:
Thus, total assets turnover ratio is 1.48.
(c)
Formula to calculate return on total assets ratio is,
F Company
Given,
Net income is $33,850.
Assets in the beginning of the year are $383,400.
Assets at the end of the year are $382,100.
Substitute $33,850 for net income and $383,400 for assets in the beginning of the year and $382,100 at the end of the year.
Thus, return on total assets ratio is 0.09
B Company:
Thus, return on total assets ratio is 0.14
(d)
Formula to calculate return on common stockholder’s equity is,
F Company
Given,
Net income is $33,850.
Common stock in the beginning of the year is $133,000.
Common stock at the end of the year is $133,000.
Substitute $33,850 for net income and $133,000 for common stock in the beginning of the year and $133,000 at the end of the year.
Thus, return on common stockholder’s equity is 25.45%.
B Company:
Thus, return on common stockholder’s equity is 43.76%.
(e)
Formula to calculate price earnings ratio is,
F Company
Given,
Market value per share is $25.
Earnings per share are $1.27.
Substitute $25 for market value per share and $1.27 for earnings per share.
Thus, price earning ratio is $19.69.
B Company:
Thus, price earning ratio is $11.42.
(f)
Formula to calculate dividend yield is,
F Company
Given,
Cash dividend per share is $1.50.
Market price per share is $25.
Substitute $25 for market price per share and $1.50 for annual cash dividend per share.
Thus, dividend yield is $0.06.
B Company:
Thus, dividend yield is $0.06.
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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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