Chapter 3, Problem 2P

a.

Summary Introduction

Adequate information:

Ratio	Value	Formula
Current Ratio	1.832716	$\frac{\text{Current Assets}}{\text{Current Liabilities}}$
Inventory Turnover	4.414239	$\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$
A/R Turnover	8.333333	$\frac{\text{Net Sales}}{\text{Average Accounts Receivable}}$
Fixed Turnover	1.657982	$\frac{\text{Net Sales}}{\text{Average Fixed Assets}}$
LTD To Equity	0.843090	$\frac{\text{Long Term Debt}}{\text{Equity}}$
Times Interest Earned	1.833333	$\frac{\text{Earnings Before Interest And Tax}}{\text{Interest}}$
Net Profit Margin	0.016000	$\frac{\text{Net Profit}}{\text{Sales}}$
Return On Total Assets	0.018061	$\frac{\text{Net Income }}{\text{Total Assets}}$
Return On Equity	0.040307	$\frac{\text{Net Income}}{\text{Equity}}$

To compute: Figures marked with ‘ratio’ in the financial statements.

Explanation of Solution

Sequence of figures calculated and basis:

Figure Calculated	Ratio Used for Calculation	Remark
Cost of Goods Sold	Inventory Turnover Ratio	Inventory value is given
Net Income	Return on Total Assets	Value of total asset is given
Equity	Return on Equity	Net income used to calculate
Long Term Debt	LTD To Equity	Equity value used
Sales	Net Profit Margin	Net profit used to find sales
Interest Expense	Times Interest Earned	Earnings before interest and tax used to calculate
Accounts Receivable	A/R Turnover	Sales figure already calculated
Net Plant and Equipment	Fixed Turnover	Sales figure used to find Average fixed assets and half of depreciation deducted to get closing value.

  

b)

Summary Introduction

To compute: Figures marked with ‘formula’ in the financial statements.

Explanation of Solution

Sequence of figures calculated and basis:

Formula to Be Calculated	Remark
Gross Profit	Sales − Cost Of Goods Sold
Earnings Before Interest and Tax	Gross Profit − Depreciation − Selling and Administration Expenses − Lease Expenses
Earnings Before Tax	Earnings Before Interest And Tax − Interest
Tax	Charged at 40 % of Earnings Before Tax
Total Current Assets	Cash + Accounts Receivable + Inventory
Accumulated Depreciation	Balancing Figure
Short Term Notes Payable	Balancing Figure
Total Liabilities and Owner’s Equity	Total Assets