Accounting

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    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
    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 20X4
    Net credit sales $832,000 $760,000
    Cost of goods sold 440,000 350,000
    Cash, Dec. 31 125,000 110,000
    Average Accounts receivable 180,000 140,000
    Average Inventory 70,000 50,000
    Accounts payable, Dec. 31 115,000 108,000

    a. 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 $1,500,000
    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
    a. Compute the profit margin 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 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 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.

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

    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 4,000
    Interest Expense 400
    Income Tax Expense 2,000 32,400
    Net Income $ 3,600
    Retained Earnings, Jan. 1 900
    $ 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

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