Week 4 homework 2024_Chaitanya

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Webster University *

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5200

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Accounting

Date

Apr 3, 2024

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docx

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Uploaded by LieutenantRockLemur10

Homework Week 4 2024 1. Ratio Analysis involves calculating and analyzing financial ratios to assess a firm’s performance and to identify actions that could improve performance. 2. Total Assets Turn Over measure how efficiently a firm uses its assets, (inventory, accounts receivable and fixed assets). 3. Which equation looks at ROA as the product of the profit margin and the total asset turnover ratios? Answer: The DuPont Analysis Equation is a formula that calculates Returns on Assets (ROA) as the product of profit margins and total asset turnover ratios. ROA = Profit Margin x Total Assets Turnover. 4. What type of financial statements divide all balance sheet amounts by total assets and all income statement amounts by net sales? A. Common Size Financial Statement is type of financial statements that divide all balance sheet amounts by total assets and all income statement amounts by net sales.

5. Financial Leverage Ratio measure the extent to which a firm uses debt (or financial leverage) versus equity to finance its assets as well as how well the firm can pay off its debts. 6. Profitable Ratios show the combined effects of liquidity, asset management, and debt management on the overall operating results of the firm. 7. Which set of ratios relate a firm’s stock price to its earnings and book value? A. Financial Valuation Ratios is a set of ratios relate a firm’s stock price to its earnings and book value. 8. Steve’s Tree Farm has $205,000,000 in total current assets which includes $111,000,000 in inventory. Steve’s Tree Farm also has $123,000,000 in current liabilities. Calculate the current ratio. Answer: The current ratio is: Current Ratio = Total Current Assets / Total Current Liabilities = $205,000,000 / $123,000,000 = 1.67 Steve's Tree Farm has $1.67 of current assets available to settle its current liabilities for every dollar of liability. 9. Given the same information in #8, if the industry average for a quick ratio is 1.50, is Steve’s Tree Farm doing better or worse than its competitors? Answer: The formula for calculating quick ratio is: Quick Ratio=Total Current Assets−Inventory /Total Current Liabilities For Steve's Tree Farm: Quick Ratio=205,000,000−111,000,000/123,000,000 Quick Ratio=123,000,000/ 205,000,000−111,000,000 Quick Ratio≈0.73 The industry average for a quick ratio is typically reported as 1.50. Now, let's compare Steve's Tree Farm's quick ratio to the industry average. If Steve's Tree Farm has a quick ratio higher than 1.50, it indicates that it is performing better than its competitors. Conversely, if Steve's Tree Farm has a quick ratio lower than 1.50, it suggests that it is performing worse than its competitors. In this particular case, Steve's Tree Farm has a quick ratio of approximately 0.73, which is below the industry average of 1.50. Therefore, based on the quick ratio, Steve's Tree Farm is performing worse than its competitors.

10. Given the same information in #8, calculate the quick ratio (also known as the acid test ratio) Answer: 1. Current Ratio: Current Ratio=Total Current Assets/Total Current Liabilities For Steve's Tree Farm: Current Ratio=205,000,000 /123,000,000 Current Ratio≈1.67 Steve's Tree Farm has a current ratio of around 1.67. 2. Quick Ratio (Acid-Test Ratio): Quick Ratio=Total Current Assets−Inventory/Total Current Liabilities For Steve's Tree Farm: Quick Ratio=205,000,000−111,000,000/123,000,000 Quick Ratio≈0.73 Steve's Tree Farm has a current ratio of 1.67, suggesting that the company has a good liquidity position. However, when looking for a more cautious measure of liquidity, the quick ratio of around 0.73 is utilized. Inventory is excluded from the quick ratio calculation because it may not be rapidly converted to cash. This gives a more accurate view of the company's capacity to satisfy its short-term obligations without relying on inventory sales.

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11. Roberts and Company reported sales for 2023 of $1,500,000. Roberts and Company listed $300,000 of inventory on its balance sheet. Using a 365-day year, how many days did Roberts and Companies inventory stay on the premises? Answer: To determine the duration for which the inventory remained on the premises, an equation can be utilized. The formula is as follows: Number of days = Inventory / Sales per day Initially, it is necessary to compute the sales per day: Sales per day = Total sales / 365 days

Sales per day = $1,500,000 / 365 days = $4,109.59 Subsequently, the number of days the inventory stayed on the premises can be calculated: Number of days = $300,000 (inventory) / $4,109.59 (sales per day) = 73 days Consequently, it can be concluded that Roberts and Company's inventory remained on the premises for a period of 73 days. 12. Given the same information in #11, how many times per year did Roberts and Company inventory turnover? Answer: To determine the duration for which the inventory remained on the premises, it is necessary to compute the inventory turnover period, which represents the number of days it takes for the inventory to be sold. This can be achieved by dividing the inventory by the cost of goods sold (COGS) and then multiplying the result by the number of days in a year. To begin with, the calculation of COGS is required: COGS = Sales - Gross Profit = $1,500,000 - ($1,500,000 x 0.20) = $1,200,000 Subsequently, the inventory turnover period can be determined: Inventory turnover period = $300,000 / $1,200,000 x 365 days = 73 days Consequently, it can be concluded that Roberts and Company's inventory remained on the premises for a period of 73 days. To ascertain the number of times the inventory turned over within the year, a simple division of 365 days by the inventory turnover period can be conducted: Inventory turnover frequency = 365 days / 73 days = 5 times Hence, it can be inferred that Roberts and Company's inventory turned over 5 times throughout the year. 13. Tammy’s Tasty Treats has sales of $4,000,000, cost of goods sold of $2,250,000, cash on hand of 250,000, net plant and equipment of 1,500,000 and accounts payable of 55,000. Calculate the gross profit. Answer:

In order to determine the gross profit, it is necessary to deduct the cost of goods sold (COGS) from the total sales figure: Gross Profit = Sales - COGS = $4,000,000 - $2,250,000 = $1,750,000 Hence, the gross profit for Tammy's Tasty Treats amounts to $1,750,000. 14. Given the same information in #13, calculate the gross profit margin. Answer: To calculate the gross profit, we need to subtract the cost of goods sold (COGS) from sales: Gross Profit = Sales - COGS = $4,000,000 - $2,250,000 = $1,750,00 To calculate the gross profit margin, we need to divide the gross profit by sales and multiply by 100: Gross Profit Margin = (Gross Profit ÷ Sales) x 100 = ($1,750,000 ÷ $4,000,000) x 100 = 43.75% So the gross profit margin for Tammy's Tasty Treats is 43.75%.

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15. Affordable Roofing company has cash of 400,000, accounts receivable of 70,000, prepaid expenses of 12,500, accounts payable of 50,000, other current liabilities of 70,000, common stock of 375,000 and long term liabilities of 65,000. Affordable Roofing Company also produced a profit of 20,000 during the last calendar year. What is Affordable Roofing Companies working capital? Answer: To calculate the working capital, you need to subtract the current liabilities from the current assets: Current Assets: * Cash: $400,000 * Accounts Receivable: $70,000 * Prepaid Expenses: $12,500 Total Current Assets: $482,500 Current Liabilities: * Accounts Payable: $50,000 * Other Current Liabilities: $70,000 Total Current Liabilities: $120,000 Working Capital: Working Capital = Total Current Assets - Total Current Liabilities = $482,500 - $120,000 = $362,500 Therefore, Affordable Roofing Company's working capital is $362,500. 16. ABC company has accounts payable of 30,000, long term debt of 25,000, common stock with a value of 50,000, sales in the amount of 100,000, cash in the amount of 40,000 and accounts receivable in the amount of 10,000. Calculate the debt ratio. Answer: To calculate the debt ratio, you need to add the accounts payable and long-term debt to get the total debt, and then divide that by the total assets. Total debt = accounts payable + long-term debt = 30,000 + 25,000 = 55,000 Total assets = cash + accounts receivable + common stock = 40,000 + 10,000 + 50,000 = 100,000 Debt ratio = total debt / total assets = 55,000 / 100,000

= 0.55 or 55% Therefore, the debt ratio for ABC company is 55%.