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Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

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BuyFindarrow_forward

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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