Chapter 17, Problem 4PB

### Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124

Chapter
Section

### Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124
Textbook Problem
1 views

# Measures of liquidity, solvency and profitabilityThe comparative financial statements of Stargel Inc. are as follows. The market price of Stargel common stock was $11970 on December 31, 20Y2.InstructionsDetermine 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 daysâ€™ sales in receivables 6. Inventory turnover 7. Number of daysâ€™ sales in inventory 8. Ratio of fixed assets to long-term liabilities 9. Ratio of liabilities to stockholdersâ€™ equity 10. Times interest earned 11. Asset turnover 12. Return on total assets 13. Return on stockholdersâ€™ equity 14. Return on common stockholdersâ€™ equity 15. Earnings per share on common stock 16. Price-earnings ratio 17. Dividends per share of common stock 18. Dividend yield To determine Calculate 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 Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company. 1. Working capital WorkingÂ capitalÂ Â =Â CurrentÂ assetsÂ â€“Â â€‹CurrentÂ liabilitiesÂ =Â$3,690,000Â â€“Â $900,000=Â$2,790,000

Description:

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

Formula:

WorkingÂ capitalÂ =Â CurrentÂ assetsÂ â€“Â â€‹CurrentÂ liabilitiesÂ

2. Current ratio

CurrentÂ ratio=CurrentÂ assetsCurrentâ€‰liabilities=$3,690,000$900,000=4.1

Description:

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.Â  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.Â Â

Formula:

CurrentÂ ratio=CurrentÂ assetsCurrentâ€‰liabilities

3. Quick ratio

QuickÂ ratioÂ =QuickÂ assetsÂ Currentâ€‰liabilities=$2,250,000$900,000=2.5

Description:

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:

AcidÂ Ratio=QuickÂ assetsCurrentâ€‰â€‰liabilities

4. Accounts receivable turnover

AccountsÂ receivablesÂ turnoverÂ ratio}=NetÂ creditÂ salesAverageÂ accountsÂ receivables=$10,000,000$625,000=16.0

Description:

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:

AccountsÂ receivablesÂ turnoverÂ ratio}=NetÂ creditÂ salesAverageÂ accountsÂ receivables

Average accounts receivable is determined as follows:

AverageÂ accountsÂ receivablesÂ }=Â (OpeningÂ accountsÂ receivablesÂ +Â ClosingÂ accountsÂ receivablesÂ )2=$740,000+$510,0002=$625,000 5. Number of daysâ€™ sales in receivables Â NumberÂ ofÂ daysâ€™Â salesÂ inÂ receivableÂ }=AverageÂ accountsÂ receivableÂ AverageÂ dailyÂ sales=$625,00027,397.26=22.8â€‰days

Description:

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

Formula:

Â NumberÂ ofÂ daysâ€™Â salesÂ inÂ receivableâ€‰=AverageÂ accountsÂ receivableÂ AverageÂ dailyÂ sales

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

AverageÂ dailyÂ salesÂ =Â Sales365â€‰days=$10,000,000365â€‰days=$27,397.26

6. Inventory turnover ratio

InventoryÂ turnoverÂ ratioÂ =CostÂ ofÂ goodsÂ soldAverageÂ inventory=$5,350,000$1,070,000=2.2â€‰times

Description:

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

Formula:

InventoryÂ turnover=CostÂ ofÂ goodsÂ soldAverageÂ inventory

Average inventory is determined as below:

Â AverageÂ inventoryÂ =Â (OpeningÂ inventoryÂ +Â ClosingÂ inventoryÂ )2=$1,190,000+$950,0002=$1,070,000 7. Â Number of days sales in inventory ratio Â NumberÂ ofÂ daysâ€™Â salesÂ inÂ inventoryÂ }=AverageÂ inventoryÂ AverageÂ dailyÂ costÂ ofÂ goodsÂ sold=$1,070,000$14,657.53=73.0â€‰days Description: Number of daysâ€™ sales in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them. Formula: Â NumberÂ ofÂ daysâ€™Â salesÂ inÂ invenotry=AverageÂ inventoryÂ AverageÂ dailyÂ costÂ ofÂ goodsÂ 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: AverageÂ dailyÂ costÂ ofÂ goodsÂ sold=Â CostÂ ofÂ goodsÂ sold365â€‰days=$5,350,000365â€‰days=$14,657.53 8. Ratio of fixed assets to long-term liabilities RatioÂ ofÂ fixedÂ assetsÂ toÂ long-termÂ liabilities=FixedÂ assetsÂ Long-termÂ liabilitiesÂ =$3,740,000$1,700,000=2.2 Description: Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities. Formula: RatioÂ ofÂ fixedÂ assetsÂ toÂ long-termÂ liabilities=FixedÂ assetsÂ Long-termÂ liabilitiesÂ 9. Ratio of liabilities to stockholdersâ€™ equity Â RatioÂ ofÂ liabilitiesÂ toÂ stockholders'Â equityÂ }=TotalÂ liabilitiesStockholders'Â equity=$2,600,000$7,180,000=0.4 Description: Ratio of liabilities to stockholdersâ€™ equity is determined by dividing liabilities and stockholdersâ€™ equity. Formula: Â RatioÂ ofÂ liabilitiesÂ toÂ stockholders'Â equity=TotalÂ liabilitiesStockholders'Â equity 10. Times interest earned ratio Times-interest-earnedÂ ratioÂ }=IncomeÂ beforeÂ incomeÂ tax+InterestÂ expenseInterestÂ expense=$1,130,000+$170,000$170,000=7

### Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

#### The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started