   Chapter 15.III, Problem 7TIE ### Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

#### Solutions

Chapter
Section ### Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447
Textbook Problem

# Use the balance sheet and income statement on pages 487-488 and 499 to calculate the financial ratios for Royal Equipment Supply. Inc.

To determine

To calculate: The financial ratios for the company Royal Equipment Supply, Inc. using the balance sheet and income statement of the company.

 Royal equipment supply, Inc. Balance Sheet June 30,2016 Assets ($) ($) Current Assets Cash $3,400 Accounts receivables$5,600 Merchandise inventory $98,700 Prepaid insurance$445 Supplies $800 Total Current Assets$108,955 Property, Plant and Equipment Land and building $147,000 Fixtures$8,600 Delivery Vehicles $27,000 Forklift$7,000 Total of Property, Plant and Equipment $189,600 Investment and other Assets Goodwill$10,000 Total investment and other assets $10,000 Total Assets$308,555 Liabilities and Owner’s Equity Current liabilities: Accounts payable $16,500 Notes payable$10,000 Total Current Liabilities $26,500 Long-Term Liabilities: Mortgage payable$67,000 Total Long-Term Liabilities $67,000 Total Liabilities$93,500 Owner’s Equity Common stock $185,055 Retained earnings$30,000 Total Owner’s equity $215,055 Total Liabilities and Owner’s equity$308,555

The income statement is,’

 Royal equipment supply, Inc. Income Statement December 31,2016 Revenue ($) ($) Gross Sales $458,400 Less: Sales Returns and Allowances$13,200 Sales Discounts $1,244 Net Sales$443,956 Cost of goods sold Merchandise Inventory Jan. 1 $198,700 Net purchases$86,760 Freight in $875 Goods available for sale$286,335 Less: Merchandise Inventory, Dec. 31 $76,400 Cost of goods sold$209,935 Gross Margin $234,021 Operating Expenses Salaries$124,200 Rents $21,000 Utilities$1,780 Advertising $5,400 Insurance$2,340 Administrative Expenses $14,500 Miscellaneous Expenses$6,000 Total Operating Expenses $175,220 Income before Taxes$58,801 Income tax $17,335 Net-Income$41,466
Explanation

Given information:

The provided balance sheet is,

 Royal equipment supply, Inc. Balance Sheet June 30,2016 Assets ($) ($) Current Assets Cash $3,400 Accounts receivables$5,600 Merchandise inventory $98,700 Prepaid insurance$445 Supplies $800 Total Current Assets$108,955 Property, Plant and Equipment Land and building $147,000 Fixtures$8,600 Delivery Vehicles $27,000 Forklift$7,000 Total of Property, Plant and Equipment $189,600 Investment and other Assets Goodwill$10,000 Total investment and other assets $10,000 Total Assets$308,555 Liabilities and Owner’s Equity Current liabilities: Accounts payable $16,500 Notes payable$10,000 Total Current Liabilities $26,500 Long-Term Liabilities: Mortgage payable$67,000 Total Long-Term Liabilities $67,000 Total Liabilities$93,500 Owner’s Equity Common stock $185,055 Retained earnings$30,000 Total Owner’s equity $215,055 Total Liabilities and Owner’s equity$308,555

The income statement is,

 Royal equipment supply, Inc. Income Statement December 31,2016 Revenue ($) ($) Gross Sales $458,400 Less: Sales Returns and Allowances$13,200 Sales Discounts $1,244 Net Sales$443,956 Cost of goods sold Merchandise Inventory Jan. 1 $198,700 Net purchases$86,760 Freight in $875 Goods available for sale$286,335 Less: Merchandise Inventory, Dec. 31 $76,400 Cost of goods sold$209,935 Gross Margin $234,021 Operating Expenses Salaries$124,200 Rents $21,000 Utilities$1,780 Advertising $5,400 Insurance$2,340 Administrative Expenses $14,500 Miscellaneous Expenses$6,000 Total Operating Expenses $175,220 Income before Taxes$58,801 Income tax $17,335 Net-Income$41,466

Formula used:

The formula to compute working capital is:

Working capital=Current AssetsCurrent liabilities

The formula to compute current ratio is:

Current ratio=Current AssetsCurrent liabilities

The formula to compute acid test ratio is:

Acid test ratio=Cash+Marketable securities+ReceivableCurrent liabilities

The formula to compute average collection period is:

Average collection period=Accounts receivablesCredit sales×365

The formula to compute Average inventory:

Average inventory=Beginning inventory+Ending inventory2

The formula to compute inventory turnover is:

Inventory turnover=Cost of goods soldAverage inventory

The formula to compute asset turnover ratio is:

Asset turnover ratio=Net salesTotal assets

The formula to compute debt to assets ratio is:

Debt to assets ratio=Total liabilitiesTotal assets

The formula to compute debt to equity ratio is:

Debt to equity ratio=Total liabilitiesOwner's equity

The formula to compute gross profit margin is:

Gross profit margin=Gross profitNet sales

The formula to compute net profit margin is:

Net profit margin=Net profitNet sales

The formula to compute return on investment is;

Return on investment=Net incomeOwner's equity×100

Calculation:

Consider that Current assets are $108,955, current liabilities are$26,500.

Compute the working capital:

Substitute $108,955 for current assets, and$26,500 for current liabilities in the formula Working Capital=Current AssetsCurrent Liabilities as,

Working Capital=Current AssetsCurrent Liabilities=$108,955$26,500=$82,455 Hence, working capital is$82,455.

Consider that current assets are $108,955, Current liabilities are$26,500.

Compute the current ratio:

Substitute $108,955 for current assets, and$26,500 for current liabilities in the formula Current ratio=Current assetsCurrent liabilities as,

Current ratio=Current assetsCurrent liabilities=$108,955$26,500=4.11=4.11:1

Hence, current ratio is 4.11:1

Consider that cash balance is $3,400, accounts receivables are$5,600, and Current liabilities are \$26,500

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