Chapter 3, Problem 17QP

a)

Summary Introduction

To calculate: The current ratio

Introduction:

The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 17QP

The current ratio for the year 2011 and 2012 is 1.32 times and 1.38 times respectively.

Explanation of Solution

Given information:

• The total current assets (2011) are $75,598.
• The total current liabilities (2011) are $57,217.
• The total current assets (2012) are $83,848.
• The total current liabilities (2012) are $60,648.

Formula to calculate the current ratio:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

Compute current ratio for the year 2011:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets }}{\text{Current liabilities }}\\ =\frac{\$75,598}{\$57,217}\\ =1.32\text{ times}\end{array}$

Compute current ratio for the year 2012:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets }}{\text{Current liabilities }}\\ =\frac{\$83,848}{\$60,648}\\ =1.38\text{ times}\end{array}$

Hence, the current ratio for the year 2011 and 2012 is 1.32 times and 1.38 times respectively.

b)

Summary Introduction

To calculate: The quick ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 17QP

The quick ratio for the year 2011 and 2012 is 0.58 times and 0.61 times respectively.

Explanation of Solution

Given information:

• The total current asset (2011) is $75,598.
• Inventory (2011) is $42,636.
• The total current liabilities (2011) are $57,217.
• The total current asset (2012) is $83,848.
• Inventory (2012) is $46,915.
• The total current liabilities (2012) are $60,648.

Formula to calculate the current ratio:

$\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}$

Compute quick ratio for the year 2011:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$75,598-\$42,636\right)}{\$57,217}\\ =\frac{\$32,962}{\$57,217}\\ =0.58\text{ times}\end{array}$

Compute quick ratio for the year 2012:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\$83,848-\$46,915}{\$60,648}\\ =\frac{\$44,322}{\$66,442}\\ =0.61\text{ times}\end{array}$

Hence, the quick ratio for the year 2011 and 2012 is 0.58 times and 0.61 times respectively.

c)

Summary Introduction

To calculate: The cash ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 17QP

The cash ratio for the year 2011 and 2012 is 0.16 times and 0.18 times respectively.

Explanation of Solution

Given information:

• Cash (2011) is $9,279.
• Total current liabilities (2011) are $57,217.
• Cash (2012) is $11,173
• Total current liabilities (2012) are $60,648.

Formula to calculate the cash ratio:

$\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}$

Compute cash ratio for the year 2011:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$9,279}{\$57,217}\\ =0.16\text{ times}\end{array}$

Compute quick ratio for the year 2012:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$11,173}{\$60,648}\\ =0.18\text{ times}\end{array}$

Hence, the cash ratio for the year 2011 and 2012 is 0.16 times and 0.18 times respectively.

d)

Summary Introduction

To calculate: The net working capital to the ratio of total assets

Introduction:

The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 17QP

The net working capital to total asset ratio for the year 2011 and 2012 is 5.29% and 6.08% respectively.

Explanation of Solution

Given information:

• The total current asset (2011) $75,598.
• The total asset (2011) is 347,645.
• The total current liabilities (2011) are $57,217.
• The total current asset (2012) is $83,848.
• The total asset (2012) is $381,815.
• The total current liabilities (2012) are $60,648.

Formula to calculate the net working capital:

$\text{Net working capital}=\text{Total assets}-\text{Total liabilities}$

Note: It is needed to compute the net working capital to calculate the net working capital to total asset ratio.

Compute the net working capital for the year 2011:

$\begin{array}{c}\text{Net working capital}=\text{Total current assets}-\text{Total current liabilities}\\ =\$75,598-\$57,217\\ =\$18,381\end{array}$

Compute the net working capital for the year 2012:

$\begin{array}{c}\text{Net working capital}=\text{Total current assets}-\text{Total current liabilities}\\ =\$83,848-\$60,648\\ =\$23,200\end{array}$

Hence, the net working capital for the year 2011 and 2012 is $18,381 and $23,200 respectively.

Formula to calculate the net working capital to total asset ratio:

$\text{Net working capital ratio}=\frac{\text{Net working capital}}{\text{Total assets}}$

Compute the net working capital to total asset ratio for the year 2011:

$\begin{array}{c}\text{Net working capital ratio}=\frac{\text{Net working capital}}{\text{Total assets}}\\ =\frac{\$18,381}{\$347,645}\\ =0.0529\text{ or 5}\text{.29}\%\end{array}$

Compute the net working capital to total asset ratio for the year 2012:

$\begin{array}{c}\text{Net working capital ratio}=\frac{\text{Net working capital}}{\text{Total assets}}\\ =\frac{\$23,200}{\$381,815}\\ =0.0608\text{ or 6}\text{.08}\%\end{array}$

Hence, the net working capital to total asset ratio for the year 2011 and 2012 is 0.0529 or 5.29% and 0.0608 or 6.08% respectively.

e)

Summary Introduction

To calculate: The ratio of total debt.

Introduction:

The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 17QP

The debt equity ratio and equity multiplier ratio for the year 2011 and 2012 are 0.39 times and 0.33 times, 1.39 times and 1.33 times respectively.

Explanation of Solution

Given information:

• The total current liabilities (2011) are $57,217.
• The total long term debts (2011) are 40,000.
• The total equity (2011) is $250,428.
• The total current liabilities (2012) are $60,648.
• The total long term debts (2012) are $35,000.
• The total equity (2012) is $286,167.

Formula to calculate the total debt value:

$\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}$

Note: It is needed to compute the value of total debt to calculate the total debt ratio.

Compute the total debt value for the year 2011:

$\begin{array}{c}\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}\\ =\$57,217+\$40,000\\ =\$97,217\end{array}$

Compute the total debt value for the year 2012:

$\begin{array}{c}\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}\\ =\$60,648+\$35,000\\ =\$95,648\end{array}$

Hence, the total debt value for the year 2011 and 2012 is $97,217 and $95,648 respectively.

Formula to calculate the total debt ratio:

$\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}$

Compute the total debt ratio for the year 2011:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$97,217}{\$250,428}\\ =0.39\text{ times}\end{array}$

Compute the total debt ratio for the year 2012:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$95,648}{\$286,167}\\ =0.33\text{ times}\end{array}$

Hence, the total debt ratio for the year 2011 and 2012 is 0.39 times and 0.33 times respectively.

Formula to calculate the equity multiplier ratio:

$\text{Equity multiplier ratio}=1+\text{debt-equity ratio}$

Compute the equity multiplier ratio for the year 2011:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{debt-equity ratio}\\ =1+0.39\\ =1.39\text{ times}\end{array}$

Compute the equity multiplier ratio for the year 2012:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{debt-equity ratio}\\ =1+0.33\\ =1.33\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2011 and 2012 is 1.39 times and 1.33 times respectively.

f)

Summary Introduction

To calculate: The long-term debt.

Introduction:

The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 17QP

The total debt ratio and long-debt ratio for the year 2011 and 2012 are 0.28 times and 0.25 times, 0.14 times and 0.11 times respectively.

Explanation of Solution

Given information:

• The total asset (2011) is 347,645.
• The total equity (2011) is $250,428.
• The total long-term debt (2011) is $40,000.
• The total asset (2012) is 381,815.
• The total equity (2012) is $286,167.
• The total long-term debt (2012) is $35,000.

Formula to calculate the total debt ratio:

$\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}$

Compute the total debt ratio for the year 2011:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}\\ =\frac{\$347,645-\$250,428}{\$347,645}\\ =\frac{\$97,217}{\$347,645}\\ =0.28\text{ times}\end{array}$

Compute the total debt ratio for the year 2012:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}\\ =\frac{\$381,815-\$286,167}{\$381,815}\\ =\frac{\$95,648}{\$381,815}\\ =0.25\text{ times}\end{array}$

Hence, the total debt ratio for the year 2011 and 2012 is 0.28 times and 0.25 times respectively.

Formula to calculate the long-term debt ratio:

$\text{Long-term debt ratio}=\frac{\text{Long-term debt}}{\text{Long-term debt}+\text{Total equity}}$

Compute the long-debt ratio for the year 2011:

$\begin{array}{c}\text{Long-term debt ratio}=\frac{\text{Long-term debt}}{\text{Long-term debt}+\text{Total equity}}\\ =\frac{\$40,000}{\$40,000+\$250,428}\\ =\frac{\$40,000}{\$290,428}\\ =0.14\text{ times}\end{array}$

Compute the long-debt ratio for the year 2012:

$\begin{array}{c}\text{Long-term debt ratio}=\frac{\text{Long-term debt}}{\text{Long-term debt}+\text{Total equity}}\\ =\frac{\$35,000}{\$35,000+\$286,167}\\ =\frac{\$35,000}{\$321,167}\\ =0.11\text{ times}\end{array}$

Hence, the long-debt ratio for the year 2011 and 2012 is 0.14 times and 0.11 times respectively.