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Measures of liquidity, solvency, and profitability The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $82.60 on December 31, 20Y2. Marshall Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 20Y2 and 20Y1 20Y2 20Y1 Retained earnings, January 1........... $3,704,000 $3,264,000 Net income.................... 600,000 550,000 Total....................... $4,304,000 $3,814,000 Dividends: On preferred stock.............. $ 10,000 $ 10,000 On common stock............ 100,000 100,000 Total dividends............... $ 110,000 $ 110,000 Retained earnings, December 31..... $4,194,000 $3,704,000 Marshall Inc. Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1 20Y2 20Y1 Sales..................... $10,850,000 $10,000,000 Cost of goods sold......... 6,000,000 5,450,000 Gross profit............... $ 4,850,000 $ 4,550,00 Selling expenses.......... $ 2,170,000 $ 2,000,000 Administrative expenses... 1,627,500 1.500,000 Total operating expenses .. $3,797,500 $ 3,500,000 Income from operations ... $ 1,052,500 $ 1,050,000 Other revenue............ 99,500 20,000 $ 1,152,000 $ 1,070,000 Other expense (interest)... 132,000 120,000 Income before income tax . $ 1,020,000 $ 950,000 Income tax expense....... 420,000 400.000 Net income............... $ 600,000 $ 550,000 Marshall Inc. Comparative Balance Sheet December 31,20Y2 and 20Y1 20Y2 20Y1 Assets Current assets: Cash.......................................................... $1,050,000 $ 950,000 Marketable securities........................................... 301,000 420,000 Accounts receivable (net)....................................... 585,000 500,000 Inventories.................................................... 420,000 380,000 Prepaid expenses.............................................. 108,000 20,000 Total current assets.......................................... $ 2,464,000 $2,270,000 Long-term investments............................................ 800.000 800,000 Property, plant, and equipment (net)............................... 5,760,000 5,184,000 Total assets....................................................... $ 9,024,000 $8,254,000 Liabilities Current liabilities.................................................. $ 880,000 $ 800,000 Long-term liabilities: Mortgage note payable, 6%.............. $ 200,000 $ 0 Bonds payable, 4%............................................. 3,000,000 3,000,000 Total long-term liabilities.................................... $ 3,200,000 $3,000,000 Total liabilities.................................................... $ 4,080,000 $3,800,000 Stockholders' Equity Preferred 4% stock, $5 par......................................... $ 250,000 $ 250,000 Common stock, $5 par............................................. 500,000 500,000 Retained earnings................................................. 4,194,000 3,704,000 Total stockholders' equity.......................................... $ 4,944.000 $4,454,000 Total liabilities and stockholders' equity............................. $ 9,024.000 $8,254,000 Instructions Determine the following measures for 20Y2, rounding to one decimal place, including percentages, except for per-share amounts: 1. Working capital 2. Current ratio 3 Quick ratio 4. Accounts receivable turnover 5. Number of days’ sales in receivables 6. Inventory turnover 7. Number of days’ sales in inventory 8. Ratio of fixed assets to long-term liabilities 9. Ratio of liabilities to stockholders’ equity 10. Times interest earned 11. Asset turnover 12. Return on total assets 13. Return on stockholders’ equity 14. Return on common stockholders’ equity 15. Earnings per share on common stock 16. Price-earnings ratio 17. Dividends per share of common stock 18. Dividend yield

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 17, Problem 17.4APR
Textbook Problem

Measures of liquidity, solvency, and profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $82.60 on December 31, 20Y2.

Marshall Inc.

Comparative Retained Earnings Statement

For the Years Ended December 31, 20Y2 and 20Y1

  20Y2 20Y1
Retained earnings, January 1........... $3,704,000 $3,264,000
Net income.................... 600,000 550,000
Total....................... $4,304,000 $3,814,000
Dividends:    
On preferred stock.............. $ 10,000 $ 10,000
On common stock............ 100,000 100,000
Total dividends............... $ 110,000 $ 110,000
Retained earnings, December 31..... $4,194,000 $3,704,000

Marshall Inc.

Comparative Income Statement

For the Years Ended December 31, 20Y2 and 20Y1

  20Y2 20Y1
Sales..................... $10,850,000 $10,000,000
Cost of goods sold......... 6,000,000 5,450,000
Gross profit............... $ 4,850,000 $ 4,550,00
Selling expenses.......... $ 2,170,000 $ 2,000,000
Administrative expenses... 1,627,500 1.500,000
Total operating expenses .. $3,797,500 $ 3,500,000
Income from operations ... $ 1,052,500 $ 1,050,000
Other revenue............ 99,500 20,000
  $ 1,152,000 $ 1,070,000
Other expense (interest)... 132,000 120,000
Income before income tax . $ 1,020,000 $ 950,000
Income tax expense....... 420,000 400.000
Net income............... $ 600,000 $ 550,000

Marshall Inc.

Comparative Balance Sheet

December 31,20Y2 and 20Y1

  20Y2 20Y1
Assets
Current assets:
Cash.......................................................... $1,050,000 $ 950,000
Marketable securities........................................... 301,000 420,000
Accounts receivable (net)....................................... 585,000 500,000
Inventories.................................................... 420,000 380,000
Prepaid expenses.............................................. 108,000 20,000
Total current assets.......................................... $ 2,464,000 $2,270,000
Long-term investments............................................ 800.000 800,000
Property, plant, and equipment (net)............................... 5,760,000 5,184,000
Total assets....................................................... $ 9,024,000 $8,254,000
Liabilities
Current liabilities.................................................. $ 880,000 $ 800,000
Long-term liabilities:
Mortgage note payable, 6%.............. $ 200,000 $ 0
Bonds payable, 4%............................................. 3,000,000 3,000,000
Total long-term liabilities.................................... $ 3,200,000 $3,000,000
Total liabilities.................................................... $ 4,080,000 $3,800,000
Stockholders' Equity
Preferred 4% stock, $5 par......................................... $ 250,000 $ 250,000
Common stock, $5 par............................................. 500,000 500,000
Retained earnings................................................. 4,194,000 3,704,000
Total stockholders' equity.......................................... $ 4,944.000 $4,454,000
Total liabilities and stockholders' equity............................. $ 9,024.000 $8,254,000

Instructions

Determine the following measures for 20Y2, rounding to one decimal place, including percentages, except for per-share amounts:

1. Working capital

2. Current ratio

3 Quick ratio

4. Accounts receivable turnover

5. Number of days’ sales in receivables

6. Inventory turnover

7. Number of days’ sales in inventory

8. Ratio of fixed assets to long-term liabilities

9. Ratio of liabilities to stockholders’ equity

10. Times interest earned

11. Asset turnover

12. Return on total assets

13. Return on stockholders’ equity

14. Return on common stockholders’ equity

15. Earnings per share on common stock

16. Price-earnings ratio

17. Dividends per share of common stock

18. Dividend yield

Expert Solution
To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

To determine:  The following ratios measures for 20Y2.

  1. 1. Working capital
  2. 2. Current ratio
  3. 3. Quick ratio
  4. 4. Accounts receivable turnover
  5. 5. Number of days' sales in receivables
  6. 6. Inventory turnover ratio
  7. 7. Number of days' sales in inventory
  8. 8. Ratio of fixed assets to long-term liabilities
  9. 9. Ratio of liabilities to stockholders’ equity
  10. 10. Times interest earned ratio
  11. 11. Asset turnover ratio
  12. 12. Return on total assets
  13. 13. Return on stockholders' equity
  14. 14. Return on common stockholders' equity
  15. 15. Earnings per share on common stock
  16. 16. Price earnings ratio
  17. 17. Dividends per share of common stock
  18. 18. Dividend yield

Explanation of Solution

1.  Working capital

Working capital  = Current assets – Current liabilities = $2,464,000 – $880,000= $1,584,000

Explanation:

Working capital is determined as the difference between current assets and current liabilities.

Formula:

Working capital = Current assets – Current liabilities 

2. Current ratio

Current ratio=Current assetsCurrentliabilities=$2,464,000$880,000=2.8

Explanation:

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.  Current assets include cash and cash equivalents, short-term investments, net, accounts and notes receivables, net, inventories, and prepaid expenses and other current assets. Current liabilities include short-term obligations and accounts payable.

Formula:

Current ratio=Current assetsCurrentliabilities

3. Quick ratio

Quick ratio =Quick assets Currentliabilities=$1,936,000$880,000=2.2

Explanation:

Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. It is referred as quick ratio. Use the following formula to determine the acid-test ratio:

Acid Ratio=Quick assetsCurrentliabilities

4. Accounts receivable turnover

Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,850,000$542,500=20.0

Explanation:

Accounts receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. Main purpose of accounts receivable turnover ratio is to manage the working capital of the company. This ratio is determined by dividing credit sales and sales return.

Formula:

Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables

Average accounts receivable is determined as follows:

Average accounts receivables }(Opening accounts receivables + Closing accounts receivables )2=$585,000+$500,0002=$542,500

5. Number of days’ sales in receivables

 Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$542,50029,726.02=18.3days

Explanation:

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

 Number of days’ sales in receivable=Average accounts receivable Average daily sales

Average daily sales are determined by dividing sales by 365 days.

Average daily sales = Sales365days=$10,850,000365days=$29,726.02

6. Inventory turnover ratio

Inventory turnover ratio =Cost of goods soldAverage inventory=$6,000,000$400,000=15.0times

Explanation:

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

Inventory turnover=Cost of goods soldAverage inventory

Average inventory is determined as below:

Average inventory = (Opening inventory + Closing inventory )2=$420,000+$380,0002=$400,000

7.  Number of days sales in inventory ratio

 Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$400,000$16,438.35=24.3days

Explanation:

Number of days’ sales in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them.

Formula:

 Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold

Average daily cost of goods sold are determined by dividing cost of goods sold by 365 days. Thus, average daily cost of goods sold are determined as follows:

Average daily cost of goods sold= Cost of goods sold365days=$6,000,000365days=$16,438.35

8. Ratio of fixed assets to long-term liabilities

Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$5,760,000$3,200,000=1.8

Explanation:

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities 

9.Ratio of liabilities to stockholders’ equity

 Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$4,080,000$4,944,000=0.8

Explanation:

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

 Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity

10.Times interest earned ratio

Times-interest-earned ratio }=Income before income tax+Interest expenseInterest expense=$1,020,000+$132,000$132,000=8

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Chapter 17 Solutions

Accounting
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