Chapter 14, Problem 1PS

Summary Introduction

(A)

Adequate information:

Cost of goods sold - $2850000

Opening inventory - $480000

Closing inventory - $490000

To calculate inventory turnover ratio

Introduction:

Inventory turnover ratio is a turnover ratio which shows how inventory is managed by dividing cost of goods sold by average inventory. It measures the number of times a company sold its average inventory during a year.

Explanation of Solution

Calculation of Inventory turnover ratio

  $\begin{array}{l}\text{Inventory turnover ratio = Cost of goods sold}\hfill \\ \text{ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_}\hfill \\ \left(\text{opening inventory +closing inventory}\right)\text{ / 2}\hfill \\ \text{ = \$2850000}\hfill \\ \text{ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_}\hfill \\ \left(\text{\$480000+\$490000}\right)\text{ / 2}\hfill \\ \text{ = 5}\text{.87 times}\hfill \end{array}$

Conclusion

The inventory turnover ratio of Heifer Sports Inc. is 5.87 times.

Summary Introduction

(B)

Adequate information:

Shareholder's equity - $960000

Total Liabilities= $-\$4300000-\$960000=\$3340000$

Introduction:

The debt-equity ratio is a financial ratio which measures the financial health of the company. It shows relative contribution of capital by creditors with the contribution by equity shareholders.

Explanation of Solution

Calculation of Debt-Equity ratio

  $\begin{array}{l}Debt-equityratio=Totalliabilities/shareholdersequity\hfill \\ =\$3340000/\$960000\hfill \\ =3.48\hfill \end{array}$

Conclusion

The debt-equity ratio of Heifer Sports Inc. is 3.48.

Summary Introduction

(C)

Adequate information:

Net Income - $410000

Accounts receivables for year ending 2014 - $690000

Accounts receivables for year ending 2015 - $660000

Inventory for year ending 2014 - $480000

Inventory for year ending 2015 - $490000

Accounts payable for year ending 2014 - $450000

Accounts payable for year ending 2015 - $340000

Introduction:

The statement of cash flows shows cash flow from operations is adequate for dividend payments at sustainable levels. It is an evidence for well being of the company.

It is denoted as Net income (including depreciation & amortization) + Changes in working capital.

Explanation of Solution

Statement of cash flow from operating activities

Particulars	Amount (In $)
Net Income Changes in accounts receivable ($690000 - $660000) Changes in inventories ($480000 - $490000) Changes in accounts payable ($450000 - $340000)	410000 30000 (10000) 110000
Cash Flow from Operating Activities	540000

Conclusion

The cash flow from operating activities for Heifer Sports Inc. is $540000

Summary Introduction

(D)

Adequate information:

Sales - $5500000

Accounts receivables for year ending 2014 - $690000

Accounts receivables for year ending 2015 - $660000

Introduction:

The average collection period is the average time lag for a business between the date of sale and the date of payment owed in terms of accounts receivables. It is expressed as:

Average collection period = 365 / receivables turnover ratio

Where receivable turnover ratio = Net credit sales / average accounts receivables

Explanation of Solution

  $\begin{array}{l} Receivablesturnoverratio=Netcreditsales/Averageaccountsreceivables\hfill \\ = \$5500000\hfill \\ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\hfill \\ \left(\$690000+\$660000\right)/2\hfill \\ =8.1\hfill \end{array}$

Now Average collection period

  $$

Conclusion

The average collection period for Heifer Sports Inc. is 45 days approximately.

Summary Introduction

(E)

Adequate information:

Sales - $5500000

Total assets for year ending 2014 - $4010000

Total assets for year ending 2015 - $4300000

Introduction:

Assets turnover ratio is a financial ratio which measures the ability of the firm to generate sales from its total assets. It is denoted as Net sales / average total assets.

Explanation of Solution

  $\begin{array}{l}AssetsTurnoverRatio= NetSales\hfill \\ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\hfill \\ Averagetotalassets\hfill \\ = \$5500000\hfill \\ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\hfill \\ \left(\$4010000+\$4300000\right)/2\hfill \\ =1.32times\hfill \end{array}$

Conclusion

The assets turnover ratio for Heifer Sports Inc. is 1.32 times.

Summary Introduction

(F)

Adequate information:

EBIT or Earnings before interest and taxes - $870000

Interest expense - $130000

Introduction:

Interest coverage ratio is a profitability ratio which determines the ability of the company to pay interest on its outstanding debt. It is calculated by dividing earnings before interest and taxes by interest expense.

Explanation of Solution

  $\begin{array}{l}InterestCoverageratio=Earningsbeforeinterestandtaxes\hfill \\ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\hfill \\ InterestExpense\hfill \\ \hfill \\ =\$870000\hfill \\ \_\_\_\_\_\_\_\_\hfill \\ \$130000\hfill \\ =6.7times\hfill \end{array}$

Conclusion

The interest coverage ratio for Heifer Sports Inc. is 6.7 times.

Summary Introduction

(G)

Adequate information:

EBIT or Earnings before interest and taxes - $870000

Sales - $5500000

Introduction:

Operating profit margin measures the profit a company makes on sales after paying for variable cost of production but before paying interest and taxes. It is calculated by dividing a company's operating profit by its net sales.

Explanation of Solution

  $\begin{array}{l}Operatingprofitmargin=OperatingprofitorEBIT\hfill \\ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\hfill \\ Netsales\hfill \\ = \$870000\hfill \\ \_\_\_\_\_\_\_\_\_ \times 100\hfill \\ \$5500000\hfill \\ =16\%\hfill \end{array}$

Conclusion

The operating profit margin for Heifer Sports Inc. is 16%.

Summary Introduction

(H)

Adequate information:

Net Income - $410000

Shareholder's equity - $960000 Introduction: It measures the financial performance of the company by focusing only on the profitability of equity investments. It is expressed as:

  $ReturnonEquity= \frac{NetIncome}{Shareholder\text{'}sequity}$

Explanation of Solution

Calculation of return on equity.

  $ReturnonEquity= \frac{NetIncome}{Shareholder\text{'}sequity}$

  $\begin{array}{l}\begin{array}{l}=\frac{\$410000}{\$960000}\times \text{100}\\ \text{=43\% }\end{array}\hfill \\ \hfill \\ \hfill \\ \hfill \end{array}$

Conclusion

The return on equity for Heifer Sports Inc. is 43%.

Summary Introduction

(I)

Adequate information:

Assets - $4300000

Equity - $960000

EBIT or Earnings before interest and taxes - $870000

Interest expense - $130000

Introduction:

Compound leverage factor is denoted as interest coverage X leverage ratio where

  $$

Leverage ratio = Assets Debt

_______ = 1 +_______

Equity Equity

Explanation of Solution

Calculation of leverage ratio

Leverage ratio = Assets/ equity

  $\begin{array}{l} =\frac{\$4300000}{\$960000}\hfill \\ =4.47\hfill \end{array}$

Compound leverage ratio = interest coverage ratio * leverage ratio

  $\begin{array}{l}=\frac{\$870000}{\$130000}\times 4\cdot 47\\ =30\%\end{array}$

Summary Introduction

(J)

Adequate information:

Net Income - $410000

Accounts receivables for year ending 2014 - $690000

Accounts receivables for year ending 2015 - $660000

Inventory for year ending 2014 - $480000

Inventory for year ending 2015 - $490000

Accounts payable for year ending 2014 - $450000

Accounts payable for year ending 2015 - $340000

Introduction:

The statement of cash flows shows cash flow from operations is adequate for dividend payments at sustainable levels. It is an evidence for well being of the company.

It is denoted as Net income(including depreciation & amortization) + Changes in working capital.

Explanation of Solution

Statement of cashflow from operatingactivities

  $\begin{array}{cc}Particulars& Amount\left(In\$\right)\\ \begin{array}{l}NetIncome\\ + Changesinaccountsreceivable\left(\$690000-\$660000\right)\\ + Changesininventories\left(\$480000-\$490000\right)\\ +Changesinaccountspayable\left(\$450000-\$340000\right)\end{array}& \begin{array}{l}\begin{array}{l}410000\hfill \\ 30000\hfill \\ \left(10000\right)\hfill \end{array}\\ 110000\end{array}\\ CashFlowfromOperatingActivities& 540000\end{array}$

Conclusion

The net cash provided by operating activities for Heifer Sports Inc. is $540000