Chapter 13, Problem 4PSB

To determine

(1)

Introduction:

Liquidity or short-term ratios determines the ability of a firm to pay its current obligations. A good liquidity ration states that the company has liquid assets which can be easily convertible into cash. It includes current ratio, quick ratio etc.

To calculate:

Current ratio.

Answer to Problem 4PSB

Current ratio is 2.50:1

Explanation of Solution

$\text{Current ratio=}\frac{Current\text{ Asset}}{Current\text{ Liabilities}}$

$\begin{array}{l}CurrentAssets=Cash+Short-TermInvestments+AccountsReceivable+\\ MerchandiseInventory+PrepaidExpenses\end{array}$

$CurrentAssets=\$6,100+\$6,900+\$15,100+\text{ \$13},500+\$2,000$

= $43,600

$CurrentLiabilities=AccountsPayable+AccruedWagesPayable+IncomeTaxesPayable$

$CurrentLiabilities=\$11,500+\$3,300+\$2,600$

= $17,400

$Currentratio=\frac{\$43,600}{\$17,400}$

= 2.50:1

To determine

(2)

Introduction:

Liquidity or short-term ratios determines the ability of a firm to pay its current obligations. A good liquidity ration states that the company has liquid assets which can be easily convertible into cash. It includes current ratio, quick ratio etc.

To calculate:

Acid-test ratio.

Answer to Problem 4PSB

Acid-test ratio is 1.72:1

Explanation of Solution

$Acid-testratio=\frac{Currentassets-inventory}{CurrentLiabilities}$

$= \frac{\$43,600-\$13,500}{\$17,400}$

$= \frac{\$30,100}{\$17,400}$

= 1.72:1

To determine

(3)

Introduction:

Days sales uncollected ratio helps the creditors and investors to measure the time in which company collects its account receivable.

To calculate:

Days sales uncollected.

Answer to Problem 4PSB

Days sales uncollected = 18 days

Explanation of Solution

$Dayssalesuncollected=\frac{AccountsReceivable}{NetSales}\times 365$

$=\frac{\$15,100}{\$315,500}\times 365$

= 18 days

To determine

(4)

Introduction:

Inventory turnover ratio measures how many times inventory is sold during a period.

To calculate:

Inventory turnover ratio.

Answer to Problem 4PSB

Inventory-turnover ratio is 15.2 times.

Explanation of Solution

$Inventoryturnover=\frac{CostofGoodsSold}{AverageInventory}$

$Averageinventory=\frac{Beginningbalance\left(\$17,400\right)+Endingbalance\left(\$13,500\right)}{2}$

= $15,450

$Inventory-turnover\text{ ratio}=\frac{\$236,100}{\$15,450}$

= 15.2 times

To determine

(5)

Introduction:

Days sales in inventory calculates the time period which company takes to convert its inventory into sales.

To calculate:

Days sales in inventory.

Answer to Problem 4PSB

Days sales in inventory = 24 days

Explanation of Solution

$Dayssalesininventory=\frac{Averageinventory}{C.O.G.S}\times 365$

$=\frac{\$15,450}{\$236,100}\times 365$

= 24 days.

To determine

(6)

Introduction:

Debt-equity ratio measures the proportion of debt and equity in the capital structure.

To calculate:

Debt to equity ratio.

Answer to Problem 4PSB

Debt to equity ratio is 1.4:1

Explanation of Solution

$Debt-to-equityratio=\frac{Totalliabilities}{Totalequity}$

$\begin{array}{l}Liabilities=Accountspayable+Accruedwagespayable+Incometaxespayable+\\ Longtermnotepayable\end{array}$

$=\$11,500+\$3,300+\$2,600+\text{ \$30},000$

= $47,400:

$Equity=Commonstock+Retainedearnings$

$=\$35,000+\$35,100$

= $70,100

$=\frac{\$70,100}{\$47,400}$

= 1.4:1

To determine

(7)

Introduction:

Time interest earned ratio measures the amount of income that will be required for covering the interest expenses in the future.

To calculate:

Time interest earned.

Answer to Problem 4PSB

Time interest earned= 6.6

Explanation of Solution

$Timesinterestearned=\frac{EarningsBeforeIncomeTax}{InterestExpense}$

$\text{=} \frac{\$28,\text{ 00}0}{\$4,200}$

= 6.6

To determine

(8)

Introduction:

Profit margin ratio is calculated by dividing net income by the net sales.

To calculate:

Profit margin ratio.

Answer to Problem 4PSB

Profit margin ratio is 7.5%

Explanation of Solution

$Profitmarginratio=\frac{Netincome}{Netsales}$

$=\frac{\$23,800}{\$315,500}$

= 7.5%

To determine

(9)

Introduction:

Asset turnover ratio calculates the ability of a company to generate sales with the total assets.

To calculate:

Asset-turnover ratio.

Answer to Problem 4PSB

Asset-turnover ratio = 2.6

Explanation of Solution

$Totalassetturnover=\frac{Netsales}{Totalassets}$

$=\frac{\$315,500}{\$117,500}$

= 2.6:

To determine

(10)

Introduction:

Return on total asset is a ratio that calculated by dividing earnings before income tax by total assets.

To calculate:

Return on total asset.

Answer to Problem 4PSB

Return on total asset is $0.20

Explanation of Solution

$Returnontotalassets=\frac{Earningsbeforeinterestandtaxes}{Totalassets}$

$=\frac{\$23,800}{\$117,500}$

= $0.20

$EBIT=\$28,000-\$4,200$

= $23,800

To determine

(11)

Introduction:

Return on common stockholder’s equity is calculated by dividing net income by shareholder’s equity. It helps in measuring the financial performance of a company.

To calculate:

Return on common stockholder’s equity.

Answer to Problem 4PSB

Return on common stockholder’s equity is $0.33

Explanation of Solution

$Returnoncommonstockholders\text{'}equity=\frac{Netincome}{Stockholders\text{'}equity}$

$=\frac{\$23,800}{\$70,100}$

= $0.33: