Week -5 Exercise – Financial Ratios

Week Five Exercise AssignmentFinancial Ratios

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Edison Stagg ThorntonCash $6,000 $5,000 $4,000Short-term investments 3,000 2,500 2,000Accounts receivable 2,000 2,500 3,000Inventory 1,000 2,500 4,000Prepaid expenses 800 800 800Accounts payable 200 200 200Notes payable: short-term 3,100 3,100 3,100Accrued payables 300 300 300Long-term liabilities 3,800 3,800 3,800

a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

20X5 20X4Net credit sales $832,000 $760,000 Cost of goods sold 530,000 400,000 Cash, Dec. 31 125,000 110,000 Average Accounts receivable 205,000 156,000 Average Inventory 70,000 50,000 Accounts payable, Dec. 31 115,000 108,000 

Instructionsa. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places. 

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com¬pany reported the following information for 20X7:

Net sales $1,750,000 Interest expense 120,000Income tax expense 80,000Preferred dividends 25,000Net income 130,000Average assets 1,200,000Average common stockholders’ equity 500,000

a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.b. Does the firm have positive or negative financial leverage? Briefly ex¬plain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2 20X1Current Assets $86,000 $80,000 Property, Plant, and Equipment (net) 99,000 90,000Intangibles 25,000 50,000Current Liabilities 40,800 48,000Long-Term Liabilities 153,000 160,000Stockholders’ Equity 16,200 12,000Net Sales 500,000 500,000Cost of Goods Sold 322,500 350,000Operating Expenses 93,500 85,000

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2 20X1Current Assets $86,000 $80,000 Property, Plant, and Equipment (net) 99,000 80,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 153,000 150,000 Stockholders’ Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 322,500 350,000 Operating Expenses 93,500 85,000

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

6. Ratio computation. The financial statements of the Lone Pine Company follow.

LONE PINE COMPANYComparative Balance SheetsDecember 31, 20X2 and 20X1 ($000 Omitted)20X2 20X1Assets Current Assets Cash and Short-Term Investments $400 $600 Accounts Receivable (net) 3,000  2,400Inventories 3,000  2,300Total Current Assets $6,400 $5,300 Property, Plant, and Equipment Land $1,700 $500 Buildings and Equipment (net) 1,500  1,000Total Property, Plant, and Equipment $3,200 $1,500 Total Assets $9,600 $6,800 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable $2,800 $1,700 Notes Payable 1,100  1,900Total Current Liabilities $3,900 $3,600 Long-Term Liabilities Bonds Payable 4,100  2,100Total Liabilities $8,000 $5,700 Stockholders’ Equity Common Stock $200 $200 Retained Earnings 1,400  900Total Stockholders’ Equity $1,600 $1,100 Total Liabilities and Stockholders’ Equity $9,600 $6,800

LONE PINE COMPANYStatement of Income and Retained EarningsFor the Year Ending December 31,20X2 ($000 Omitted)Net Sales* $36,000 Less: Cost of Goods Sold $20,000 Selling Expense 6,000 Administrative Expense 4,000 Interest Expense 400 Income Tax Expense 2,000 32,400 Net Income $3,600 Retained Earnings, Jan. 1 900 Ending Retained Earnings  $4,500 Cash Dividends Declared and Paid 3,100 Retained Earnings, Dec. 31 $1,400 *All sales are on account.

Instructions Compute the following items for Lone Pine Company for 20X2, rounding all calcu¬lations to two decimal places when necessary: a. Quick ratio b. Current ratio c. Inventory-turnover ratio d. Accounts-receivable-turnover ratio e. Return-on-assets ratio f. Net-profit-margin ratio g. Return-on-common-stockholders’ equity h. Debt-to-total assets i. Number of times that interest is earned