Chapter 3, Problem 1M

Using the financial statements provided for S&S Air, calculate each of the ratios listed in the table for the light aircraft industry.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The current ratio is 0.74 times.

Explanation of Solution

Given information:

The income statement of Company S provides that the current assets is $2,262,740 and current liabilities is $3,050,355.

Formula to calculate the current ratio:

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

Compute the current ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio }=\frac{\$2,262,740}{\$3,050,355}\\ =0.74\text{ times}\end{array}$

Hence, the current ratio is 0.74 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

Hence, the quick ratio is 0.39 times.

Explanation of Solution

Given information:

The income statement of Company S provides that the current assets is $2,262,740, current liabilities is $3,050,355, and inventory is $1,073,180.

Formula to calculate Quick ratio:

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

Compute the quick ratio:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$2,262,740-\$1,073,180\right)}{\$3,050,355}\\ =\frac{\$1,189,560}{\$3,050,355}\\ =0.39\text{times}\end{array}$

Hence, the quick ratio is 0.39 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The cash ratio is 0.15 times.

Explanation of Solution

Given information:

The income statement of Company S provides the information of cash as $456,435 and current liabilities of $3,050,355.

Formula to calculate the cash ratio:

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

Compute the cash ratio:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$456,435}{\$3,050,355}\\ =0.15\text{ times}\end{array}$

Hence, the cash ratio is 0.15 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

The total asset turnover ratio is 2.01 times.

Explanation of Solution

Given information:

The income statement of Company S provides the following information of sales as $40,259,230 and total assets of $19,986,170.

Formula to calculate the total asset turnover ratio:

$\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}$

Compute the total asset turnover ratio:

$\begin{array}{c}\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$40,259,230}{\$19,986,170}\\ =2.01\text{times}\end{array}$

Hence, the total asset turnover ratio is 2.01 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

The inventory turnover ratio is 27.34 times

Explanation of Solution

Given information: The income statement of Company S provides the following information of cost of goods sold as $29,336,446 and inventory as $1,073,180.

Formula to calculate the inventory turnover ratio:

$\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}$

Compute the inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$29,336,446}{\$1,073,180}\\ =27.34\text{ times}\end{array}$

Hence, the inventory turnover ratio is 27.34 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The receivables turnover ratio is 54.91 times.

Explanation of Solution

Given information:

The income statement of Company S provides the following information as the sales is $40,259,230 and accounts receivables as $733,125.

Formula to calculate the receivables turnover ratio:

$\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}$

Compute the receivables turnover ratio:

$\begin{array}{c}\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}\\ =\frac{\$40,259,230}{\$733,125}\\ =54.91\text{ times}\end{array}$

Hence, the receivables turnover ratio is 54.91 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The total debt ratio is 0.43 times.

Explanation of Solution

Given information: The income statement of Company S provides the following information as the total assets is $19,986,170 and total equity is $11,435,815.

Formula to calculate the total debt ratio:

$\text{Total debt ratio = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}$

Compute the total debt ratio:

$\begin{array}{c}\text{Total debt ratio = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}\\ =\frac{\left(\$19,986,170-\$11,435,815\right)}{\$19,986,170}\\ =\frac{8,550,355}{\$19,986,170}\\ =0.43\text{ times}\end{array}$

Hence, the total debt ratio is 0.43 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

The debt-equity ratio is 0.75 times.

Explanation of Solution

Given information:

The income statement of Company S provides the following information as total debt is $8,050,355 and total equity is $11,435,815.

Formula to calculate the debt-equity ratio:

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

Compute the debt-equity:

$\begin{array}{c}\text{Debt-equity ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$3,050,355+\$5,500,000}{\$11,435,815}\\ =\frac{\$8,550,355}{\$11,435,815}\\ =\$0.75\text{ times}\end{array}$

Hence, the debt-equity ratio is 0.75 times.

Note: The total debt is calculated by adding the total-long term debt and the total current liabilities.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The equity multiplier ratio is 1.75 times.

Explanation of Solution

Given information: The income statement of Company S provides the following information.

Formula to calculate the equity multiplier:

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

Compute the equity multiplier ratio:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{debt-equity ratio}\\ =1+0.75\\ =1.75\text{ times}\end{array}$

Hence, the equity multiplier ratio is 1.75 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

The times interest earned are 6.37 times.

Explanation of Solution

Given information: The income statement of Company S provides the following information.

Formula to calculate the times interest earned ratio:

$\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}$

Compute the times interest earned ratio:

$\begin{array}{c}\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}\\ =\frac{\$4,013,464}{\$630,520}\\ =6.37\text{ times}\end{array}$

Hence, the times interest earned are 6.37 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The cash coverage ratio is 9.23 times.

Explanation of Solution

Given information: The income statement of Company S provides the following information.

Formula to calculate the cash coverage ratio:

$\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}$

Compute the cash coverage ratio:

$\begin{array}{c}\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}\\ =\frac{\$4,013,464+\$1,804,220}{\$630,520}\\ =\frac{\$5,817,684}{\$630,520}\\ =9.23\text{ times}\end{array}$

Hence, the cash coverage ratio is 9.23 times.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The profit margin is 5.04%.

Explanation of Solution

Given information: The income statement of Company S provides the following information.

Formula to calculate the profit margin ratio:

$\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}$

Compute the profit margin:

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\\ =\frac{\$2,029,766}{\$40,259,230}\\ =0.0504\text{ or 5}\text{.04}\%\end{array}$

Hence, the profit margin is 5.04%.

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

The return on assets is 0.1016.

Explanation of Solution

Given information: The income statement of Company S provides the following information.

Formula to calculate the Return on assets (ROA):

$\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}$

Compute the Return on assets (ROA):

$\begin{array}{c}\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}\\ =\frac{\$2,029,766}{\$19,986,170}\\ =0.1016\text{ or }10.16\%\end{array}$

Hence, the return on assets is 0.1016 or 10.16%

Summary Introduction

Case synopsis:

Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has a mastered Finance and so he has been employed in finance department of the company. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.

Characters in the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own and fly their own airplanes
• Company S takes up a different method for its operations

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement

Answer to Problem 1M

The return on equity is 0.1775.

Explanation of Solution

Given information: The income statement of Company S provides the following information.

Formula to calculate the Return on equity (ROE):

$\text{ROA}=\frac{\text{Net income}}{\text{Total equity}}$

Compute the Return on equity (ROE):

$\begin{array}{c}\text{ROE}=\frac{\text{Net income}}{\text{Total equity}}\\ =\frac{\$2,029,766}{\$11,435,815}\\ =0.1775\text{ or }17.75\%\end{array}$

Hence, the return on equity is 0.1775 or 17.75%.