
1 (1)
Determine
1 (1)

Explanation of Solution
Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.
Working capital
Working capital is determined as the difference between current assets and current liabilities.
Formula:
1 (2)
Determine
1 (2)

Explanation of Solution
Current ratio
Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. Current assets include cash and cash equivalents, short-term investments, net, accounts and notes receivables, net, inventories, and prepaid expenses and other current assets. Current liabilities include short-term obligations and accounts payable.
Formula:
1 (3)
Determine quick ratio.
1 (3)

Explanation of Solution
Quick ratio
Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. It is referred as quick ratio. Use the following formula to determine the acid-test ratio:
1 (4)
Determine
1 (4)

Explanation of Solution
Accounts receivable turnover
Accounts receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. Main purpose of accounts receivable turnover ratio is to manage the working capital of the company. This ratio is determined by dividing credit sales and sales return.
Formula:
Average accounts receivable is determined as follows:
1 (5)
Determine number of days’ sales in receivables.
1 (5)

Explanation of Solution
Number of days’ sales in receivables
Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.
Formula:
Average daily sales are determined by dividing sales by 365 days.
1 (6)
Determine: Inventory turnover ratio.
1 (6)

Explanation of Solution
Inventory turnover ratio
Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.
Formula:
Average inventory is determined as below:
1 (7)
Determine number of days’ sales in inventory ratio.
1 (7)

Explanation of Solution
Number of days sales in inventory ratio
Number of days’ sales in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them.
Formula:
Average daily cost of goods sold are determined by dividing cost of goods sold by 365 days. Thus, average daily cost of goods sold are determined as follows:
1 (8)
Determine ratio of fixed assets to long-term liabilities.
1 (8)

Explanation of Solution
Ratio of fixed assets to long-term liabilities
Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.
Formula:
1 (9)
Determine ratio of liabilities to
1 (9)

Explanation of Solution
Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.
Formula:
1 (10)
Determine times interest earned ratio.
1 (10)

Explanation of Solution
Times interest earned ratio
Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.
Formula:
1 (11)
Determine asset turnover ratio.
1 (11)

Explanation of Solution
Asset turnover ratio
Asset turnover ratio is used to determine the asset’s efficiency towards sales.
Formula:
Working notes for average total assets are as follows:
1 (12)
Determine return on total assets.
1 (12)

Explanation of Solution
Return on assets determines the particular company’s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets.
Formula:
1 (13)
Determine return on stockholders’ equity.
1 (13)

Explanation of Solution
Return on stockholders’ equity
Formula:
Average stockholders’ equity is determined as follows:
1 (14)
Determine return on common stockholders’ equity.
1 (14)

Explanation of Solution
Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.
Formula:
Average common stockholders’ equity is determined as follows:
1 (15)
Determine earnings per share on common stock.
1 (15)

Explanation of Solution
A portion of profit that an individual earns from each share is referred to earnings per share.
Formula:
1 (16)
Determine price earnings ratio.
1 (16)

Explanation of Solution
Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.
Formula:
1 (17)
Determine dividend per share of common stock.
1 (17)

Explanation of Solution
Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.
Formula:
1 (18)
Determine dividend yield ratio.
1 (18)

Explanation of Solution
Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.
Formula:
Thus, summary table of determined ratios are below:
S.No | Particulars | Ratios |
1. | Working capital | $2,790,000 |
2. | Current ratio | 4.1 |
3. | Acid test ratio | 2.5 |
4. | Accounts receivable turnover ratio | 16.0 |
5. | Number of days’ sales in receivables | 22.8 |
6. | Inventory turnover ratio | 5.0 |
7. | Number of days sales in inventory | 73.0 |
8. | Ratio of fixed assets to long-term liabilities | 2.2 |
9. | Ratio of liabilities to stockholders’ equity | 0.4 |
10. | Times interest earned ratio | 7.6 |
11. | Asset turnover ratio | 1.1 |
12. | Return on total assets | 11.5% |
13. | Return on stockholders’ equity | 13.3% |
14. | Return on common stockholders’ equity | 13.6% |
15. | Earnings per share | $8.55 |
16. | Price earnings ratio | 14.0 |
17. | Dividend per share of common stock | $0.50 |
18. | Dividend yield | 0.4% |
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Chapter 14 Solutions
Managerial Accounting
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