Chapter 18, Problem 18.2DIE

To determine

Current Ratio: A part of liquidity ratios, current ratio reflects the ability to oblige the short term debts of a company. It is calculated based on the current assets and current liabilities; a company has in an accounting period. Current ratio is useful tool for analysis of financials of a company.

Inventory Turnover: It is a part of efficiency ratios used during the process of ratio analysis. It reflects the number of times a company’s inventory is converted into sale during a particular period. The cost of goods sold is divided by average inventory to get the value of inventory turnover.

Profit Margin: Profit margin reflects the portion of net income in the net sales. It is a profitability measure tool that is used to evaluate the net income a business earns on every dollar of net sales. It is computed as net income divided by net revenue.

Return on Total Assets: It is a measure to evaluate the efficiency of company’s assets. It reports the profit earned as the percentage of total assets used in the business. A company’s rate of return on total assets reflects its ability to optimize the use of total assets.

Rate of Return on Common Stockholders’ Equity: It is a measure of net income available to common stockholders of the company. A company’s rate of return on equity shows the amount earned for each dollar invested by the common stockholders.

Debt to Assets Ratio: It is the ratio between total assets of the company and the total liabilities. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Times Interest Earned Ratio: It’s a measure to evaluate the net income for interest payment on debt of a company. It is a part of solvency ratios.

To compute: (a) Current ratio (b) Inventory turnover (c) Profit margin (d) Return on assets (e) Return on common stockholders’ equity (f) Debt to assets ratio (g) Times interest earned ratios of M Company for 2016 and 2017.