Chapter 17, Problem 4BPSB

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 1:

Current ratio.

Answer to Problem 4BPSB

Current ratio = 2.5 : 1

Explanation of Solution

  $\begin{array}{l}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ \\ \text{Current assets (\$6100 + \$6900 + \$15100 + \$13500 + \$2000) = \$43600}\\ \text{Current liabilities (\$11500 + \$3300 + \$2600) = \$17400}\\ \text{So, current ratio = }\frac{\$43600}{\$17400}\\ =\text{ 2}\text{.5 : 1}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 2:

Acid-test ratio.

Answer to Problem 4BPSB

Acid-test ratio = 1.6 : 1

Explanation of Solution

  $\begin{array}{l}\text{Acid-test ratio = }\frac{\text{Quick assets}}{\text{Current liabilities}}\\ \\ \text{Quick assets (\$6100 + \$6900 + \$15100) = \$28100}\\ \text{Current liabilities (\$11500 + \$3300 + \$2600) = \$17400}\\ \text{So, Acid-test ratio = }\frac{\$28100}{\$17400}\\ =\text{ 1}\text{.6 : 1}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 3:

Days' sales uncollected.

Answer to Problem 4BPSB

Days' sales uncollected = 17.5 days

Explanation of Solution

  $\begin{array}{l}\text{Days' sales uncollected = }\frac{\text{Accounts receivable, net}}{\text{Net sales }}\text{ x 365}\\ \\ \text{So, Days' sales uncollected = }\frac{\$15100}{\$315500}\text{ x 365}\\ =\text{ 17}\text{.5 days}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 4:

Inventory turnover.

Answer to Problem 4BPSB

Inventory turnover = 15.3 times

Explanation of Solution

  $\begin{array}{l}\text{Inventory turnover = }\frac{\text{Cost of goods sold}}{\text{Average inventory }}\\ \\ \text{Cost of goods sold = \$236100}\\ \text{Average inventory (\$17400 + \$13500) / 2 = \$15450}\\ \text{So, Inventory turnover = }\frac{\text{\$236100}}{\$15450}\\ =\text{ 15}\text{.3 times}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 5

Days' sales in inventory.

Answer to Problem 4BPSB

Days' sales in inventory = 20.9 days

Explanation of Solution

  $\begin{array}{l}\text{Days' sales in inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold }}\text{ x 365 }\\ \\ \text{Cost of goods sold = \$236100}\\ \text{Ending inventory = \$13500}\\ \text{So, Days' sales in inventory = }\frac{\text{\$13500}}{\$236100}\text{ x 365 }\\ =\text{ 20}\text{.9 days}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 6

Debt-to-equity ratio.

Answer to Problem 4BPSB

Debt-to-equity ratio = 0.68

Explanation of Solution

  $\begin{array}{l}\text{Debt-to-equity ratio = }\frac{\text{Total liabilities}}{\text{Total equity }}\\ \\ \text{Total liabilities}(\$11500+\text{ \$3300 + \$2600 + \$30000) = \$47400}\\ \text{Total equity (\$35000 + \$35100) = \$70100}\\ \text{So, Debt-to-equity ratio = }\frac{\text{\$47400}}{\$70100}\\ =\text{ 0}\text{.68}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 7

Times interest earned.

Answer to Problem 4BPSB

Times interest earned = 13.7 times

Explanation of Solution

  $\begin{array}{l}\text{Times interest earned = }\frac{\text{Income before interest expense and income tax expense}}{\text{Interest expense}}\\ \\ \text{Income before interest expense and income tax expense }(\$28000\text{ + \$2200) = \$30200}\\ \text{Interest expense = \$2200}\\ \text{So, Times interest earned = }\frac{\text{\$30200}}{\$2200}\\ =\text{ 13}\text{.7 times}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 8

Profit margin ratio.

Answer to Problem 4BPSB

Profit margin ratio = 7.5%

Explanation of Solution

  $\begin{array}{l}\text{Profit margin ratio = }\frac{\text{Net income}}{\text{Net sales}}\text{ x 100}\\ \\ \text{Net income = \$23800}\\ \text{Net sales = \$315500}\\ \text{So, Profit margin ratio = }\frac{\text{\$23800}}{\$315500}\text{ x 100 }\\ =\text{ 7}\text{.5\%}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 9

Total assets turnover.

Answer to Problem 4BPSB

Total assets turnover = 4.0 times

Explanation of Solution

  $\begin{array}{l}\text{Total assets turnover = }\frac{\text{Net sales}}{\text{Average total assets}}\\ \\ \text{Average total assets (\$117500 + \$94900) / 2 = \$106200}\\ \text{Net sales = \$315500}\\ \text{So, Total assets turnover = }\frac{\$315500}{\$106200}\\ =\text{ 3}\text{.97 times or 4}\text{.0 times}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 10

Return on total assets.

Answer to Problem 4BPSB

Return on total assets = 22.4%

Explanation of Solution

  $\begin{array}{l}\text{Return on total assets = }\frac{\text{Net income}}{\text{Average total assets}}\text{ x 100}\\ \\ \text{Average total assets (\$117500 + \$94900) / 2 = \$106200}\\ \text{Net income = \$23800}\\ \text{So, Return on total assets = }\frac{\$23800}{\$106200}\text{ x 100}\\ =\text{ 22}\text{.4\%}\end{array}$

To determine

Concept Introduction:

Current ratio:

Current ratio helps in measuring short-term liquidity of a firm. Current ratio is computed on the basis of current assets and current liabilities.

Acid-test ratio:

Acid-test ratio shows the relationship between quick assets and current liabilities. This ratio helps in measuring ability of the company to meet its short-term liabilities with liquid assets.

Gross margin ratio:

Gross margin ratio shows relationship between sales revenue and gross profit. This ratio helps in knowing that how much gross profit margin a business is generating from given amount of sales revenue.

Return on total assets:

Return on total assets is known as profitability measurement which is calculated on the basis of net income and average total assets. This ratio helps in knowing the rate of return on average total assets.

Requirement 11

Return on common stockholders' equity.

Answer to Problem 4BPSB

Return on common stockholders' equity = 38.3%

Explanation of Solution

  $\begin{array}{l}\text{Return on common stockholders' equity = }\frac{\text{Net income}}{\text{Average common stockholders' equity}}\text{ x 100 }\\ \\ \text{Average common stockholders' equity (\$35500 + \$18800 + \$35000 + \$35100) / 2 = \$62200}\\ \text{Net income = \$23800}\\ \text{So, Return on common stockholders' equity = }\frac{\text{\$23800}}{\$62200}\text{ x 100 }\\ =\text{ 38}\text{.3\%}\end{array}$