Introduction:
Accounting ratio helps in comparing two or more financial data of the financial statements of the company. It is used by various parties to measure the performance of the companies.
To find:
All the possible ratios.
Answer to Problem 6.1GAP
Company R | Company C | ||
1 | Net profit margin | 10.0% | 12.50% |
2 | Gross profit percentage | 40.00% | 46.42% |
3 | Fixed asset turnover | 1.45 | 1.75 |
4 | Return on equity | 14.54 | 16.82 |
5 | Earnings per share | $3.33 | $3.33 |
6 | P/E ratio | $4.20 | $3.30 |
7 | Account receivable turnover ratio | 15.68 | 18.66 |
8 | Inventory turnover ratio | 4.68 | 4.76 |
9 | 2.75 | 8.80 | |
10 | Debt-to-assets ratio | 2.28 | 2.92 |
Explanation of Solution
- Profit margin ratio is calculated by dividing net income by the net sales. It helps in calculating the net income as a percentage of revenue.
- Gross profit percentage helps the company to compare gross margin to the net sales. This ratio tells the profitability at which company sells its inventory.
- Asset turnover ratio calculates the ability of a company to generate sales with the fixed assets. A decline in the ratio means company has overinvested the amount in the fixed assets.
- Return on equity measure the profit earned using capital provided by the shareholders of a firm or in other words we can say that
ROI measures the effectiveness with which a company uses the assets to create profits. - Earnings per share (EPS) is that part of the profit of the company which is allocated to common stock per share. Earnings per share acts as an indicator of a company's profitability.
- Price earnings ratio is calculated by dividing market value per share with earning per share. This ratio is used by the investors to find the value of company’s share and helps in making the comparison.
- Receivable turnover ratio measures the number of times a company collects its accounts receivable.
- Inventory turnover ratio measures the number of times a company has sold its inventory.
- Current ratio is the ratio of current assets to current liabilities
- Debt-to-asset ratio calculates the proportion of total assets financed by the creditors. If the ratio is higher, it means that the financing strategy of the company is risky.
Formula used:
Company R | Company C | |
Net income | $80,000 | $35,000 |
Total revenue | $800,000 | $280,000 |
Net profit margin | 10.0% | 12.50% |
Formula used:
Company R | Company C | |
Net sales (1) | $800,000 | $280,000 |
COGS (2) | $480,000 | $150,000 |
Gross profit (1 − 2) | $320,000 | $130,000 |
Gross profit percentage | 40.00% | 46.42% |
To calculate average
The ending value of assets is taken as the values of their averages.
Formula used:
Company R | Company C | |
Net revenue | $800,000 | $280,000 |
Average net fixed assets | $550,000 | $160,000 |
Fixed asset turnover | 1.45 | 1.75 |
To calculate average stockholder’s equity:
Formula Used to calculate return on equity:
Company R | Company C | |
Net income | $80,000 | $35,000 |
Average stockholder’s equity | ||
Return on equity | 14.54 | 16.82 |
• Ending equity = Capital stock + additional paid in capital
Formula used:
Company R | Company C | |
Net income | $80,000 | $35,000 |
Average numbers of common share outstanding. | 24,000 shares (480,000÷20) | 10,500 (210,000÷20) |
Preferred dividends. | $0 | $0 |
Earnings per share. | $3.33 | $3.33 |
Formula used to calculate P/E ratio:
Company R | Company C | |
Market value per share | $14.00 | $11.00 |
Earnings per share | $3.33 | $3.33 |
P/E ratio | $4.20 | $3.30 |
To calculate Average account receivables
To calculate account receivable turnover ratio:
Company R | Company C | |
Net credit sales or net sales | $800,000 | $280,000 |
Average account receivables | ||
Account receivable turnover ratio | 15.68 | 18.66 |
To calculate average inventory:
To calculate inventory turnover ratio:
Company R | Company C | |
Cost of goods sold | $480,000 | $150,000 |
Average inventory | ||
Inventory turnover ratio | 4.68 | 4.76 |
Company R | Company C | |
Current Assets | $330,000 | $132,000 |
Current liabilities | $120,000 | $ 15,000 |
Current ratio | 2.75 | 8.80 |
Current assets = Cash + Accounts receivable + inventory + Other assets
Current Assets of company R = $25,000 + $55,000 + $110,000 + $140,000
= $330,000
Current Assets of company C=$45,000 + $16,000 + $25,000 + 46,000
= $132,000
Formula used:
Company R | Company C | |
Total assets | $880,000 | $292,000 |
Total liabilities (current liabilities+ Notes payable (long-term) + borrowed loan) | $385,000 | $100,000 |
Debt-to-assets ratio | 2.28 | 2.92 |
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Chapter 13 Solutions
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