Chapter 13, Problem 4PSA

To determine

Current ratio:

Current ratio is the ratio which is used to measure a company’s liquidity and it considers current assets and current liabilities.

Acid test ratio:

Acid test ratio is a ratio which represents capability of a company to pay off its current obligations out of its cash or quick assets.

Day’s sales uncollected:

Day’s sales uncollected shows number of days a company takes to collect its accounts receivables.

Inventory turnover:

Frequency of a company’s inventory sold or returned is shown by inventory turnover.

Day’s sales in inventory:

Day’s sales inventory shows the average number of days the company not selling its inventory or holding it before selling.

Debt to equity ratio:

Debt to equity ratio is a solvency ratio which indicates relative proportion of total liabilities and total equity.

Time interest earned:

Time interest earned is the ratio which reflects risk of loan repayments of vendors or creditors of with interest.

Profit margin ratio:

Profit margin ratio shows net income as a percent of sales. This ratio reflects a company’s ability of earning.

Total assets turnover ratio:

Total assets turnover ratio is the measurement of a company’s revenue or sales to its value of total assets.

Return on total assets ratio:

Measurement of a company’s earnings against its net assets is known as return on total assets ratio.

Return on common stockholder’s equity:

Return on common stockholder’s equity displays returns received on stockholder’s equity for a certain period of time.

(1)

To compute: Current ratio of C Corporation.

Explanation of Solution

Given,

Current assets are $86,900

Current liabilities are $24,000

Formula to calculate current ratio is:

  $\text{Current}\text{ratio}=\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}$

Substitute $86,900 for current assets and $24,000 for current liabilities.

  $\begin{array}{c}\text{Current ratio for 2017}=\frac{\$86,900}{\$24,000}\\ =3.62\end{array}$

Thus current ratio is 3.62 .

Working notes:

Calculation of current assets,

  $\begin{array}{c}\text{Current}\text{assets}=\left(\begin{array}{c}\text{Cash}+\text{Short-term investments}+\text{Accounts}\text{}\text{receivable}\\ +\text{Notes receivable}+\text{Merchasdise}\text{inventory}+\text{Prepaid}\text{expenses}\end{array}\right)\\ =\$10,000+\$84,00+\$29,200+\$45,00+\$32,150+\$2,650\\ =\$86,900\end{array}$

Calculation of current liabilities,

  $\begin{array}{c}\text{Current}\text{liabilities}=\left(\begin{array}{l}\text{Accounts}\text{payable}+\text{Accrued}\text{}\text{wages}\text{payable}\\ +\text{Income}\text{tax}\text{payable}\end{array}\right)\\ =\$17,500+\$3,200+\$3,300\\ =\$24,000\end{array}$

(2)

To determine

To compute: Acid test ratio of C Corporation.

Explanation of Solution

Given,

Cash is $10,000.

Short term investments are $8,400.

Accounts receivables are $29,200.

Formula to calculate acid test ratio is,

  $\text{Acid}\text{test}\text{ratio}=\frac{\text{Cash + Short term investments + Accounts receivables}}{\text{Current}\text{liabilities}}$

Substitute $10,000 for cash, $8,400 for short term investments $29,200 for accounts receivable and $24,000 for current liabilities.

  $\begin{array}{c}\text{Acid}\text{test}\text{ratio}=\frac{\$10,000+\$8,400+\$29,200}{\$24,000}\\ =\frac{\$47,600}{\$24,000}\\ =1.98\end{array}$

Thus, acid test ratio is 1.98 .

Working notes:

Calculation of current liabilities,

  $\begin{array}{c}\text{Current}\text{liabilities}=\left(\begin{array}{l}\text{Accounts}\text{payable}+\text{Accrued}\text{}\text{wages}\text{payable}\\ +\text{Income}\text{tax}\text{payable}\end{array}\right)\\ =\$17,500+\$3,200+\$3,300\\ =\$24,000\end{array}$

(3)

To determine

To compute: Day’s sales uncollected of C Corporation.

Explanation of Solution

Given,

Accounts receivable is $29,200.

Net sales are $448,600.

Formula to calculate day’s sales uncollected is,

  $\text{Day's}\text{sales}\text{uncollected}=\left(\frac{\text{Accounts}\text{Receivable}}{\text{Net}\text{Sales}}\right)\times 365$

Substitute $29,200 for accounts receivable and $448,600 for net sales.

  $\begin{array}{c}\text{Day's}\text{sales}\text{uncollected}=\left(\frac{\$29,200}{\$448,600}\right)\times 365\\ =23.76\end{array}$

Thus, day’s sales uncollected are 23.76 days .

(4)

To determine

To compute: Inventory turnover of C Corporation.

Explanation of Solution

Given info,

Cost of goods sold is $297,250.

Inventory in the beginning of the year is $48,900.

Inventory at the end of the year is $32,150

Formula to calculate inventory turnover is,

  $\begin{array}{l}\text{Inventory turnover}=\left(\frac{\text{Cost}\text{of}\text{goods}\text{sold}}{\text{Average}\text{inventory}}\right)\\ \end{array}$

  $\text{Average}\text{inventory}=\left(\frac{\begin{array}{l}\text{Inventory in}\text{the}\text{begning}\text{of}\text{the}\text{year}+\\ \text{Inventory at}\text{the}\text{end}\text{of}\text{the}\text{year}\end{array}}{\text{2}}\right)$

Substitute $297,500 for cost of goods sold and $48,900 for inventory in the beginning of the year and $32,150 at the end of the year.

  $\begin{array}{c}\text{Inventory turnover}=\frac{297,250}{\left(\frac{\$48,900+32,150}{2}\right)}\\ =\frac{\$297,250}{\$40525}\\ =7.33\end{array}$

Thus, inventory turnover is 7.33.

(5)

To determine

To compute: Day’s sales inventory of C Corporation.

Explanation of Solution

Given info,

Inventory at the end of the year is $32,150

Cost of goods sold is $297,250

Formula to calculate day’s sales in inventory is,

  $\text{Day’s sales in inventory }=\left(\frac{\text{Inventory}\text{at}\text{the}\text{end}\text{of}\text{the}\text{year}}{\text{Cost}\text{of}\text{goods}\text{sold}}\right)\times 365$

Substitute $297,500 for cost of goods sold and $32,150 for inventory at the end of the year.

  $\begin{array}{c}\text{Day’s sales in inventory }=\left(\frac{\$32,150}{\$297,250}\right)\times 365\\ =39.48\end{array}$

Thus, day’s sales inventory is 39.48 days.

(6)

To determine

To compute: Debt and equity ratio of C Corporation.

Explanation of Solution

Given info,

Long term notes payable is $63,400.

Equity is $152,800

Formula to calculate debt and equity ratio is,

  $\text{Debt and equity ratio}=\frac{\text{Debt}}{\text{Equity}}$

Substitute $63,400 for debt and $152,800 for equity.

  $\begin{array}{c}\text{Debt and equity ratio}=\frac{\$63,400}{\$152,800}\\ =0.41\end{array}$

Thus, debt and equity ratio is 0.41.

Working notes:

Calculation of equity,

  $\begin{array}{c}\text{Equity}=\text{Common}\text{stock}+\text{Retained}\text{earnings}\\ =\$90,000+\$62,800\\ =\$152,800\end{array}$

(7)

To determine

To compute: Time interest earned ratio of C Corporation.

Explanation of Solution

Given info,

Income before interest and tax is $52,750.

Interest expense is $4,100.

Formula to calculate time interest earned ratio is,

  $\text{Time interest earned ratio}=\frac{\text{Income}\text{before}\text{interest}\text{and}\text{tax}}{\text{Interest}\text{expense}}$

Substitute $52,750 for income before interest and tax and $4,100 for interest expense.

  $\begin{array}{c}\text{Time interest earned ratio =}\frac{\$52,750}{\$4,100}\\ =12.87\end{array}$

Thus, time interest earned ratio is 12.87.

(8)

To determine

To compute: Profit margin ratio of C Corporation.

Explanation of Solution

Given,

Net income is $29,052.

Net sales are $448,600.

Formula to calculate Profit margin ratio is,

  $\text{Profit margin ratio}=\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\times 100$

Substitute $29,052 for net income and $448,600 for net sales.

  $\begin{array}{c}\text{Profit margin ratio}=\frac{\$29,052}{\$448,600}\times 100\\ =6.48\%\end{array}$

Thus, profit margin ratio is 6.48%.

(9)

To determine

To compute: Total assets turnover ratio of C Corporation.

Explanation of Solution

Given,

Net sales are $448,600.

Assets in the beginning of the year are $189,400.

Assets at the end of the year are $240,200.

Formula to calculate total assets turnover ratio is,

  $\text{Total assets turnover ratio}=\frac{\text{Net}\text{sales}}{\text{Average}\text{total}\text{assets}}$

  $\text{Average}\text{total}\text{assets}=\frac{\left(\begin{array}{l}\text{Assets in}\text{the}\text{beginning}\text{of}\text{the}\text{year}\\ +\text{Assets}\text{at}\text{the}\text{end}\text{of}\text{the}\text{year}\end{array}\right)}{\text{2}}$

Substitute $448,600 for net sales and $189,400 for assets in the beginning of the year and $240,200 at the end of the year.

  $\begin{array}{c}\text{Total assets turnover ratio}=\frac{\text{\$448,600}}{\left(\frac{\$189,400+\$240,200}{2}\right)}\\ =\frac{\text{\$448,600}}{\$214800}\\ =2.1\end{array}$

Thus, total assets turnover ratio is 2.1.

(10)

To determine

To compute: Return on total assets ratio of C Corporation.

Explanation of Solution

Given,

Net income is $29,052.

Assets in the beginning of the year are $189,400.

Assets at the end of the year are $240,200.

Formula to calculate return on total assets ratio is,

  $\text{Return on total assets ratio}=\frac{\text{Net Income}}{\text{Average}\text{total}\text{assets}}$

  $\text{Average}\text{total}\text{assets}=\frac{\left(\begin{array}{l}\text{Assets in}\text{the}\text{beginning}\text{of}\text{the}\text{year}\\ +\text{Assets}\text{at}\text{the}\text{end}\text{of}\text{the}\text{year}\end{array}\right)}{\text{2}}$

Substitute $29,052 for net income and $189,400 for assets in the beginning of the year and $240,200 at the end of the year.

  $\begin{array}{c}\text{Return on total assets ratio}=\frac{\$29,052}{\left(\frac{\$189,400+\$240,200}{2}\right)}\\ =\frac{\text{\$29,052}}{\$214800}\\ =0.14\end{array}$

Thus, return on total assets ratio is 0.14.

(11)

To determine

To compute: Return on common stockholder’s equity of C Corporation.

Explanation of Solution

Given,

Net income is $29,052.

Common stock in the beginning of the year is $90,000.

Common stock at the end of the year is $90,000.

Formula to calculate return on common stockholder’s equity is,

  $\left[\begin{array}{l}\text{Return on common}\\ \text{stockholder’s equity}\end{array}\right]=\left[\frac{\text{Net}\text{income}-\text{Preferred}\text{dividends}}{\text{Average}\text{common stockholder’s equity}}\times 100\right]$

  $\text{Average}\text{common}\text{stock}=\frac{\left(\begin{array}{l}\text{Common stock in}\text{the}\text{beginning}\text{of}\text{the}\text{year}\\ +\text{Common stock}\text{at}\text{the}\text{end}\text{of}\text{the}\text{year}\end{array}\right)}{\text{2}}$

Substitute $29,052 for net income and $90,000 for common stock in the beginning of the year and $90,000 at the end of the year.

  $\begin{array}{c}\text{Return on common stockholder’s equity}=\frac{\$29,052-\$0}{\left(\frac{\$90,000+\$90,000}{2}\right)}\times 100\\ =\frac{\$29,052}{\$90,000}\\ =32.28\%\end{array}$

Thus, return on common stockholder’s equity is 32.28%.