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1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edison Stagg Thornton Cash $6,000 $5,000 $4,000
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:
20X5 20X4 Net 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
Instructions 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 company reported the following information for 20X7:
Net sales $1,750,000 Interest expense 120,000 Income tax expense 80,000 Preferred dividends 25,000 Net income 130,000 Average assets 1,200,000 Average common stockholders’ equity 500,000
Compute the profit margin on sales 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.
20X2 20X1 Current Assets $86,000 $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 153,000 160,000 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
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 $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
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 3,000
2,300
Total Current Assets $6,400
$5,300
Property, Plant, and Equipment
Land $1,700
$500
Buildings and Equipment (net) 1,500
1,000
Total 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
1,900
Total Current Liabilities $3,900
$3,600
Long-Term Liabilities
Bonds Payable 4,100
2,100
Total Liabilities $8,000
$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 $9,600
$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
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 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
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