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

   

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