Chapter 3, Problem 35QP

a)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2013 are $87,354 and for 2014 is $109,219.
• The total liabilities and equity for the year 2013 are $87,354 and for 2014 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2013 and 2014 are $6,702 and $8,149 respectively.
• The inventory for the year 2013 and 2014 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2013 and 2014 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2013 and 2014 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2013 and 2014 are $138 and $165 respectively.
• The notes payable for the year 2013 and 2014 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2013 and 2014 are $22,500 and $19,000.
• The common stock and paid in surplus for 2013 are $38,000 and for 2014 are $38,000.
• The accumulated retained earnings for 2013 are $20,535 and 2014 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Short-term solvency ratios:

Formula to calculate the current ratio:

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

Compute the current ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio for 2013}=\frac{\$28,666}{\$6,319}\\ =4.54\text{ times}\end{array}$

Hence, the current ratio for 2013 is 4.54 times.

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio for 2014}=\frac{\$32,409}{\$7,427}\\ =4.36\text{ times}\end{array}$

Hence, the current ratio for 2014 is 4.36 times.

b)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate Quick ratio:

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

Compute the quick ratio:

$\begin{array}{c}\text{Quick ratio for 2013}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$28,666-\$17,357\right)}{\$6,319}\\ =\frac{\$11,309}{\$6,319}\\ =1.79\text{times}\end{array}$

Hence, the quick ratio for 2013 is 1.79 times.

$\begin{array}{c}\text{Quick ratio for 2014}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$32,409-\$19,350\right)}{\$7,427}\\ =\frac{\$13,059}{\$7,427}\\ =1.76\text{times}\end{array}$

Hence, the quick ratio for 2014 is 1.76 times.

c)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the cash ratio:

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

Compute the cash ratio:

$\begin{array}{c}\text{Cash ratio for 2013}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$4,607}{\$6,319}\\ =0.73\text{ times}\end{array}$

Hence, the cash ratio for 2013 is 0.73 times.

$\begin{array}{c}\text{Cash ratio for 2014}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$4,910}{\$7,427}\\ =0.66\text{ times}\end{array}$

Hence, the cash ratio for 2014 is 0.42 times.

d)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

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:

$\begin{array}{c}\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$205,227}{\$109,219}\\ =1.88\text{times}\end{array}$

Hence, the total asset turnover ratio is 1.88 times.

e)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the inventory turnover ratio:

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

Compute the inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$138,383}{\$19,350}\\ =7.15\text{ times}\end{array}$

Hence, the inventory turnover ratio is 7.15 times.

f)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the receivables turnover ratio:

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

Compute the receivables turnover ratio:

$\begin{array}{c}\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}\\ =\frac{\$205,227}{\$8,149}\\ =25.18\text{ times}\end{array}$

Hence, the receivables turnover ratio is 25.18 times.

g)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the total debt ratio:

$\text{Total debt ratio = }\frac{\left(\text{Current liabilities}+\text{Long term debt}\right)}{\text{Total assets}}$

Compute the total debt ratio:

$\begin{array}{c}\text{Total debt ratio for the year 2013 = }\frac{\left(\text{Current liabilities}+\text{Long term debt}\right)}{\text{Total assets}}\\ =\frac{\left(\$6,319+\$22,500\right)}{\$87,354}\\ =\frac{\$28,819}{\$87,354}\\ =0.33\text{times}\end{array}$

Hence, the total debt ratio for 2013 is 0.33 times.

$\begin{array}{c}\text{Total debt ratio for 2014 = }\frac{\left(\text{Current liabilities}+\text{Long term debt}\right)}{\text{Total assets}}\\ =\frac{\left(\$7,427+\$19,000\right)}{\$109,219}\\ =\frac{\$26,427}{\$109,219}\\ =0.24\text{times}\end{array}$

Hence, the total debt ratio for 2014 is 0.24 times.

h)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the debt-equity ratio:

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

Compute the debt-equity:

$\begin{array}{c}\text{Debt-equity ratio for 2013}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$6,319+\$22,500}{\$58,533}\\ =\frac{\$28,819}{\$58,533}\\ =0.49\text{ times}\end{array}$

Hence, the debt-equity ratio for the year 2013 is 0.49 times.

$\begin{array}{c}\text{Debt-equity ratio for 2014}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$7,427+\$19,000}{\$82,792}\\ =\frac{\$26,427}{\$82,792}\\ =0.32\text{ times}\end{array}$

Hence, the debt-equity ratio for the year 2014 is 0.32 times.

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

i)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the equity multiplier:

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

Compute the equity multiplier ratio for the year 2013:

$\begin{array}{c}\text{Equity multiplier ratio for 2013}=1+\text{debt-equity ratio}\\ =1+0.49\\ =1.49\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2013 is 1.49 times.

$\begin{array}{c}\text{Equity multiplier ratio for 2014}=1+\text{debt-equity ratio}\\ =1+0.32\\ =1.32\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2014 is 1.32 times.

j)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

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:

$\begin{array}{c}\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}\\ =\frac{\$60,934}{\$1,617}\\ =37.68\text{ times}\end{array}$

Hence, the times interest earned is 37.68 times.

k)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

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:

$\begin{array}{c}\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}\\ =\frac{\$60,934+\$5,910}{\$1,617}\\ =\frac{\$66,844}{\$1,617}\\ =41.34\text{ times}\end{array}$

Hence, the cash coverage ratio is 41.34 times.

l)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the profit margin ratio:

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

Compute the profit margin:

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\\ =\frac{\$38,557}{\$205,227}\\ =0.1879\text{ or 18}\text{.79}\%\end{array}$

Hence, the profit margin is 18.79%.

m)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the Return on assets (ROA):

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

Compute the Return on assets (ROA):

$\begin{array}{c}\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}\\ =\frac{\$38,557}{\$109,219}\\ =0.3530\end{array}$

Hence, the return on assets is 35.30%.

n)

Summary Introduction

To find: The financial ratios of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is the ratio analysis.

Explanation of Solution

Formula to calculate the Return on equity (ROE):

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

Compute the Return on equity (ROE):

$\begin{array}{c}\text{ROE}=\frac{\text{Net income}}{\text{Total equity}}\\ =\frac{\$38,557}{\$82,792}\\ =0.4657\end{array}$

Hence, the return on equity is 0.4657 or 46.57%.