accounting

Financial Ratios

 

1.

    

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

 

  Edison Stagg Thornton Cash $

4,000

$2,500 $

1,000

  Short-term investments

3,000

2,500

2,000

  Accounts receivable

2,000

2,500 3,000   Inventory

1,000

2,500

4,000

  Prepaid expenses 800 800 800   Accounts payable 200 200 200   Notes payable: short-term

3,100

3,100 3,100   Accrued payables 300 300 300   Long-term liabilities 3,800 3,800 3,800             

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:

    19X5 19X4 Net credit sales $832,000 $760,000   Cost of goods sold 440,000 3

50,000

  Cash, Dec. 31 1

25,000

110,000   Average Accounts receivable 180,000 140,000   Average Inventory 70,000 50,000   Accounts payable, Dec. 31 115,000 108,000         

Compute the accounts receivable and inventory turnover ratios for 19X5. 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 com­pany reported the following information for 19X7:

  Net sales $1,

500,000

Interest expense 120,000 Income tax expense 80,000 Preferred dividends

25,000

Net income 130,000 Average assets 1,100,000 Average common stockholders’ equity

400

,000    

Compute the gross profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.

Does the firm have positive or negative financial leverage? Briefly ex­plain.

   

4.      Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the

20X1

and

20X2

financial statements follow.

 

20X1

Current

25,000

500,000

    

		20X2
Assets
	$ 7 6,000		$ 80,000
	Property, Plant, and Equipment (net)		99,000		90,000
	Intangibles		50,000
		Current Liabilities
	40,800		48,000
		Long-Term Liabilities
	143,000		160,000
		Stockholders’ Equity
	16,200		12,000
	Net Sales				500,000
	Cost of Goods Sold		332,500		350,000
	Operating Expenses		93,500		85,000

 

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 20X1

Current Assets

$ 76,000 $ 80,000 Property, Plant, and Equipment (net) 99,000 90,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 143,000 160,000 Stockholders’ Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 332,500 350,000 Operating Expenses 93,500 85,000       

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.

 

20X2 20X1 Assets Current Assets

3,000

2,000

$ 600

1,000

Current Liabilities

$1,700

Long-Term Liabilities

Stockholders’ Equity

$ 200

$1,600

$8,600 $6,800

    

LONE PINE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1 ($000 Omitted)
Cash and Short-Term Investments	$	400		$ 600
Accounts Receivable (net)	2,400
Inventories	2,200
Total Current Assets	$5,400	$5,200
Property, Plant, and Equipment
Land		$1,700
Buildings and Equipment (net)	1,500
Total Property, Plant, and Equipment	$3,200		$1,600
Total Assets		$8,600		$6,800
Liabilities and Stockholders’ Equity
Accounts Payable	$1,800
Notes Payable	1,100	1, 900
Total Current Liabilities	$2,900	$3,600
Bonds Payable	4,100	2,100
Total Liabilities	$7,000	$5,700
Common Stock		$ 200
Retained Earnings	1,400		900
Total Stockholders’ Equity	$1,100
Total Liabilities and Stockholders’ Equity

 

4,000

400

900

3,100

    

LONE PINE COMPANY Statement of Income and Retained Earnings For 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
Interest Expense
Income Tax Expense	2,000	32,400
Net Income	$ 3,600
Retained Earnings, Jan. 1
$ 4,500
Cash Dividends Declared and Paid
Retained Earnings, Dec. 31	$ 1,400
*All sales are on account.

 

Instructions

Compute the following items for Lone Pine Company for 20X2, rounding all calcu­lations 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

j. Dividend payout rate