ACC 205 Week Five Exercise Assignment Financial Ratios
Week Five Exercise Assignment
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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 | $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 | 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 |
- 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.
| 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.
- 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 calculations to two decimal places when necessary:
- Quick ratio
- Current ratio
- Inventory-turnover ratio
- Accounts-receivable-turnover ratio
- Return-on-assets ratio
- Net-profit-margin ratio
- Return-on-common-stockholders’ equity
- Debt-to-total assets
- Number of times that interest is earned
- Dividend payout rate
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