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Business Accounting Financial Accounting: Information for Decisions

1 Introduction: The Current ratio shows the resources a company has to pay off its short term debts and obligations. The acid-test ratio considers only those assets which are quickly convertible into cash and so it excludes inventory and prepaid expenses from the current assets. The days’ sales uncollected measures the number of days the company will take to collect its receivables. The inventory turnover shows the level of inventory in comparison to the sales level of the company. The days’ sales in inventory is computed to find out the number of days taken by the company to convert its inventory into sales. To compute: The current ratio, acid-test ratio, accounts receivable turnover, inventory turnover, days’ sales in inventory and days’ sales uncollected for both the companies. Current ratio Acid-test ratio Accounts receivable turnover Inventory turnover Days’ sales in inventory Days’ sales uncollected F company 2.5 1.1 20.2 times 8.4 times 52.7 days 22.0 days G company 2.6 1.1 14.8 times 5.3 times 76.5 days 26.8 days Current ratio(F Company) = Current assets Current liabilities Current assets = Cash + Accounts receivable + Merchandise inventory + Notes receivable + Prepaid expenses = 19500 + 37400 + 84440 + 9100 + 5000 = 155440 Current liabilities = 61340 Current ratio = 155440 61340 = 2.5 Current ratio(G Company) = 34000 + 57400 + 7200 + 132500 + 6950 93300 = 238050 93300 = 2.6 Acid-test ratio(F Company) = Current assets − Inventory − Prepaid expenese Current liabilities = 155440 − 84440 − 5000 61340 = 1.1 Acid-test ratio(G Company) = 238050 − 132500 − 6950 93300 = 1.1 Accounts receivable turnover(F Company) = Net sales Average accounts receivable Average accounts receivable = Opening accounts receivable + Closing accounts receivable + Opening niotes receivable+Closing notes recevable 2 = 29800 + 37400 + 0 + 9100 2 = 38150 Accounts receivable turnover = 770000 38150 = 20.2 Accounts receivable turnover(G Company) = 880200 54200 + 57400 + 0 + 7200 2 = 880200 59400 = 14.8 Inventory turnover(F Company) = Cost of goods sold Average inventory Average inventory = Opening inventory + Closing inventory 2 = 55600 + 84440 2 = 70020 Inventory turnover = 585100 70020 = 8.4 Inventory turnover(G Company) = 632500 107400 + 132500 2 = 632500 119950 = 5.3 Days' sales in inventory(F Company) = Merchandise inventory Cost of goods sold × days = 84440 585100 × 365 = 52.7 Days' sales in inventory(G Company) = 132500 632500 × 365 = 76.5 Days' sales uncollected(F Company) = Accounts receivable + Notes receivable Net sales × Days = 37400 + 9100 770000 × 365 = 22.0 days Days' sales uncollected(G Company) = 57400 + 7200 880200 × 365 = 26.8 days Both the companies have equal current ratio and acid-test ratio but F Company has better inventory turnover ratio and collects accounts receivables more rapidly than G Company. Therefore, F Company is better. 2 Introduction: The profit margin ratio is a profitability ratio computed by dividing net income by net sales and is expressed in percentage. The total asset turnover is computed by dividing net sales by average total assets of a company. This ratio helps to know how effectively the assets are being utilized by the company for generating sales. The return on total assets is a profitability measure that indicates how well the company is generating profits in comparison to the assets it has invested in. The return on common stockholders’ equity ratio helps to know how well the company has been able to generate profits for the stockholders. It is computed by dividing net income by average common stockholders’ equity. To compute: The profit margin ratio, total asset turnover, return on total assets, return on common stockholders’ equity, price earnings ratio and dividend yield. Profit margin ratio Total asset turnover Return on total assets Return on common stockholders’ equity Price earnings ratio Dividends yield F Company 21.1% 1.8 times 38.5% 55.8% 16.6 times 5.1% G Company 23.9% 1.9 times 45.55% 65.0% 14.7 times 5.2% Profit margin ratio(F Company) = Net income Net sales × 100 = 162200 770000 × 100 = 21.1 % Profit margin ratio(G Company) = 210400 880200 × 100 = 23.9 % Total asset turnover(F Company) = Net sales Average total assets Average total assets = Opening total asset + Closing total asset 2 = 398000 + 445440 2 = 421720 Total asset turnover = 770000 421720 = 1.8 Total asset turnover(G Company) = Net sales Average total assets = 880200 382500 + 542450 2 = 880200 462475 = 1.9 Return on total assets(F Company) = Net income Average total assets × 100 = 162200 421720 × 100 = 38.5 % Return on total assets(G Company) = Net income Average total assets × 100 = 210400 462475 × 100 = 45.5 % Return on common stockholders' equity(F Company) = Net income − Preference dividend Average common stockholders' equity × 100 Average common stockholders' equity = Opening common stock + Closing common stock + Opening retained earnings + Closing retained earnings 2 = 180000 + 180000 + 98260 + 123300 2 = 290780 Return on common stockholders' equity = 162200 290780 × 100 = 55.8 % Return on common stockholders' equity(G Company) = Net income − Preference dividend Average common stockholders' equity × 100 Average common stockholders' equity = Opening common stock + Closing common stock + Opening retained earnings + Closing retained earnings 2 = 206000 + 206000 + 93666 + 142150 2 = 323908 Return on common stockholders' equity = 210400 323908 × 100 = 65.0 % Price earnings ratio(F Company) = Market price per common share Earnings per share = 75 4.51 = 16.6 Price earnings ratio(G Company) = Market price per common share Earnings per share = 75 5.11 = 14.7 Dividend yield(F Company) = Annual cash dividends per share Market price per share × 100 = 3.81 75 × 100 = 5.1 % Dividend yield(G Company) = Annual cash dividends per share Market price per share × 100 = 3.93 75 × 100 = 5.2 % G Company is better in terms of investment as it has a higher return on common stockholders’ equity and it offers more dividends than F Company.

1 Introduction: The Current ratio shows the resources a company has to pay off its short term debts and obligations. The acid-test ratio considers only those assets which are quickly convertible into cash and so it excludes inventory and prepaid expenses from the current assets. The days’ sales uncollected measures the number of days the company will take to collect its receivables. The inventory turnover shows the level of inventory in comparison to the sales level of the company. The days’ sales in inventory is computed to find out the number of days taken by the company to convert its inventory into sales. To compute: The current ratio, acid-test ratio, accounts receivable turnover, inventory turnover, days’ sales in inventory and days’ sales uncollected for both the companies. Current ratio Acid-test ratio Accounts receivable turnover Inventory turnover Days’ sales in inventory Days’ sales uncollected F company 2.5 1.1 20.2 times 8.4 times 52.7 days 22.0 days G company 2.6 1.1 14.8 times 5.3 times 76.5 days 26.8 days Current ratio(F Company) = Current assets Current liabilities Current assets = Cash + Accounts receivable + Merchandise inventory + Notes receivable + Prepaid expenses = 19500 + 37400 + 84440 + 9100 + 5000 = 155440 Current liabilities = 61340 Current ratio = 155440 61340 = 2.5 Current ratio(G Company) = 34000 + 57400 + 7200 + 132500 + 6950 93300 = 238050 93300 = 2.6 Acid-test ratio(F Company) = Current assets − Inventory − Prepaid expenese Current liabilities = 155440 − 84440 − 5000 61340 = 1.1 Acid-test ratio(G Company) = 238050 − 132500 − 6950 93300 = 1.1 Accounts receivable turnover(F Company) = Net sales Average accounts receivable Average accounts receivable = Opening accounts receivable + Closing accounts receivable + Opening niotes receivable+Closing notes recevable 2 = 29800 + 37400 + 0 + 9100 2 = 38150 Accounts receivable turnover = 770000 38150 = 20.2 Accounts receivable turnover(G Company) = 880200 54200 + 57400 + 0 + 7200 2 = 880200 59400 = 14.8 Inventory turnover(F Company) = Cost of goods sold Average inventory Average inventory = Opening inventory + Closing inventory 2 = 55600 + 84440 2 = 70020 Inventory turnover = 585100 70020 = 8.4 Inventory turnover(G Company) = 632500 107400 + 132500 2 = 632500 119950 = 5.3 Days' sales in inventory(F Company) = Merchandise inventory Cost of goods sold × days = 84440 585100 × 365 = 52.7 Days' sales in inventory(G Company) = 132500 632500 × 365 = 76.5 Days' sales uncollected(F Company) = Accounts receivable + Notes receivable Net sales × Days = 37400 + 9100 770000 × 365 = 22.0 days Days' sales uncollected(G Company) = 57400 + 7200 880200 × 365 = 26.8 days Both the companies have equal current ratio and acid-test ratio but F Company has better inventory turnover ratio and collects accounts receivables more rapidly than G Company. Therefore, F Company is better. 2 Introduction: The profit margin ratio is a profitability ratio computed by dividing net income by net sales and is expressed in percentage. The total asset turnover is computed by dividing net sales by average total assets of a company. This ratio helps to know how effectively the assets are being utilized by the company for generating sales. The return on total assets is a profitability measure that indicates how well the company is generating profits in comparison to the assets it has invested in. The return on common stockholders’ equity ratio helps to know how well the company has been able to generate profits for the stockholders. It is computed by dividing net income by average common stockholders’ equity. To compute: The profit margin ratio, total asset turnover, return on total assets, return on common stockholders’ equity, price earnings ratio and dividend yield. Profit margin ratio Total asset turnover Return on total assets Return on common stockholders’ equity Price earnings ratio Dividends yield F Company 21.1% 1.8 times 38.5% 55.8% 16.6 times 5.1% G Company 23.9% 1.9 times 45.55% 65.0% 14.7 times 5.2% Profit margin ratio(F Company) = Net income Net sales × 100 = 162200 770000 × 100 = 21.1 % Profit margin ratio(G Company) = 210400 880200 × 100 = 23.9 % Total asset turnover(F Company) = Net sales Average total assets Average total assets = Opening total asset + Closing total asset 2 = 398000 + 445440 2 = 421720 Total asset turnover = 770000 421720 = 1.8 Total asset turnover(G Company) = Net sales Average total assets = 880200 382500 + 542450 2 = 880200 462475 = 1.9 Return on total assets(F Company) = Net income Average total assets × 100 = 162200 421720 × 100 = 38.5 % Return on total assets(G Company) = Net income Average total assets × 100 = 210400 462475 × 100 = 45.5 % Return on common stockholders' equity(F Company) = Net income − Preference dividend Average common stockholders' equity × 100 Average common stockholders' equity = Opening common stock + Closing common stock + Opening retained earnings + Closing retained earnings 2 = 180000 + 180000 + 98260 + 123300 2 = 290780 Return on common stockholders' equity = 162200 290780 × 100 = 55.8 % Return on common stockholders' equity(G Company) = Net income − Preference dividend Average common stockholders' equity × 100 Average common stockholders' equity = Opening common stock + Closing common stock + Opening retained earnings + Closing retained earnings 2 = 206000 + 206000 + 93666 + 142150 2 = 323908 Return on common stockholders' equity = 210400 323908 × 100 = 65.0 % Price earnings ratio(F Company) = Market price per common share Earnings per share = 75 4.51 = 16.6 Price earnings ratio(G Company) = Market price per common share Earnings per share = 75 5.11 = 14.7 Dividend yield(F Company) = Annual cash dividends per share Market price per share × 100 = 3.81 75 × 100 = 5.1 % Dividend yield(G Company) = Annual cash dividends per share Market price per share × 100 = 3.93 75 × 100 = 5.2 % G Company is better in terms of investment as it has a higher return on common stockholders’ equity and it offers more dividends than F Company.

Solution Summary: The author explains the current ratio, acid-test ratio and days' sales uncollected for both the companies.

Financial Accounting: Information for Decisions

Financial Accounting: Information for Decisions

8th Edition

ISBN: 9781259533006

Author: John J Wild

Publisher: McGraw-Hill Education

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Financial Accounting: Information for Decisions

Ch. 13 - Explain the difference between financial reporting...Ch. 13 - Prob. 2DQ Ch. 13 - Prob. 3DQ Ch. 13 - Prob. 4DQ Ch. 13 - Prob. 5DQ Ch. 13 - Prob. 6DQ Ch. 13 - Prob. 7DQ Ch. 13 - Prob. 8DQ Ch. 13 - Prob. 9DQ Ch. 13 - Prob. 10DQ

Ch. 13 - Prob. 11DQ Ch. 13 - Prob. 12DQ Ch. 13 - Prob. 13DQ Ch. 13 - Prob. 14DQ Ch. 13 - Prob. 15DQ Ch. 13 - Prob. 16DQ Ch. 13 - Prob. 17DQ Ch. 13 - Financial reporting Cl. Which of the following...Ch. 13 - Prob. 2QS Ch. 13 - Prob. 3QS Ch. 13 - Prob. 4QS Ch. 13 - Prob. 5QS Ch. 13 - Prob. 6QS Ch. 13 - Prob. 7QS Ch. 13 - Prob. 8QS Ch. 13 - Prob. 9QS Ch. 13 - Prob. 1E Ch. 13 - Prob. 2E Ch. 13 - Prob. 3E Ch. 13 - Prob. 4E Ch. 13 - Prob. 5E Ch. 13 - Prob. 6E Ch. 13 - Prob. 7E Ch. 13 - Prob. 8E Ch. 13 - Risk and capital structure analysis P3 Refer to...Ch. 13 - Prob. 10E Ch. 13 - Prob. 11E Ch. 13 - Prob. 12E Ch. 13 - Prob. 14E Ch. 13 - Prob. 15E Ch. 13 - Prob. 1PSA Ch. 13 - Prob. 2PSA Ch. 13 - Prob. 3PSA Ch. 13 - Prob. 4PSA Ch. 13 - Prob. 5PSA Ch. 13 - Prob. 6PSA Ch. 13 - Prob. 1PSB Ch. 13 - Prob. 2PSB Ch. 13 - Prob. 3PSB Ch. 13 - Prob. 4PSB Ch. 13 - Prob. 5PSB Ch. 13 - Prob. 6PSB Ch. 13 - Prob. 13SP Ch. 13 - Prob. 1BTN Ch. 13 - Prob. 2BTN Ch. 13 - Prob. 3BTN Ch. 13 - Prob. 7BTN Ch. 13 - Prob. 9BTN

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