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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Ratio Analysis Byers Company presents the following condensed income Statement for 2019 and condensed December 31, 2019, balance sheet:

Chapter 5, Problem 16E, Ratio Analysis Byers Company presents the following condensed income Statement for 2019 and , example  1

Chapter 5, Problem 16E, Ratio Analysis Byers Company presents the following condensed income Statement for 2019 and , example  2

Additional information:

  1. 1. The company’s common stock was outstanding the entire year.
  2. 2. Dividends of $1.50 per share on the common stock were declared in 2019.
  3. 3. On December 31, 2019, common stock is selling for $20 per share.
  4. 4. On January 1, 2019, the accounts receivable (net) balance was $24,000, total assets amounted to $380,000, and total shareholders’ equity was $241,000.
  5. 5. Of the company’s net sales, 78% are on credit.
  6. 6. The company operates on a 365-day business year.

Required:

Compute the following ratios for Byers (round all computations to two decimals): (1) earnings per share, (2) gross profit margin, (3) operating profit margin, (4) net profit margin, (5) total asset turnover, (6) return on assets, (7) return on common equity, (8) receivables turnover (in days), and (9) interest coverage.

To determine

Ascertain the following ratios of Company B:

  1. 1. Earnings per share.
  2. 2. Gross profit margin.
  3. 3. Operating profit margin.
  4. 4. Net profit margin.
  5. 5. Total assets turnover ratio.
  6. 6. Return on assets ratio.
  7. 7. Return on common equity.
  8. 8. Receivables turnover ratio.
  9. 9. Interest coverage.
Explanation

Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

Net margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Asset turnover ratio:

The Asset turnover is a contrast to the profit margin ratio and it is calculated to determine the net sales and average total assets. Use the following formula to calculate the asset turnover ratio:

Asset turnover =NetsalesAverage total assets

Return on assets:

Return on assets is the ratio of the net income, and interest expense to the average total assets. The rate of return on total assets measures the efficiency of the business. It measures how efficiently the business is using its total assets in generating the income.

{Return on assets}=Net incomeTotal assets

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In simple, it indicates the number of times the average amount of net accounts receivables has been collected during a particular period.

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average. It is otherwise known as days to collect.

Compute the ratio as follows:

  1. 1.      Calculate the earnings per share of Company B:

Earnings per share = Net incomePreferred dividendsAverage common shares outstanding=$24,000$010,000=$2.40

  1. 2.      Calculate the gross profit margin of company B:

Gross profit margin=Gross profitNet sales=$107,000$267,000×100=40.07%

  1. 3.      Calculate the operating profit margin of company B:

operating profit margin=Operating incomeNet sales=$45,000$267,000×100=16.85%

  1. 4.      Calculate the net profit margin of company B:

Net profit margin=Net incomeNet sales=$24,000$267,000×100=8.99%

  1. 5.      Calculate the total asset turnover ratio of Company B:

Total Assets turnover ratio=Net salesAverage total assets=$267,000$390,000 (1)=0.68

Working note (1):

Calculate the value of average total assets.

Average total assets=[Total assets in balance sheet+Total assets in adjustments]2=$400,000+$380,0002=$780,0002=$390,000

  1. 6

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