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Business Accounting Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company. To compute: Key Ratios Given info: Items of balance sheet and income statement a) Answer: Current ratio : Current ratio = Current assets Current liabilities = $ 170 , 000 $ 129 , 000 = 1.32 Explanation: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. Formula: Current ratio = Current assets Current liabilities Conclusion: Hence, the current ratio is 1.32:1. b) Answer: Cash ratio Cash ratio = Cash + Cash equivalents Current liabilities = $ 20 , 000 + $ 0 $ 129 , 000 = 0.16 Explanation: Cash ratio is used to assess the extent of the company towards making payment of current liabilities with the cash and cash equivalents. The ideal cash ratio is 1. Formula: Cash ratio = Cash + Cash equivalents Current liabilities Conclusion: Hence, the cash ratio is 0.16:1. c) Answer: Acid-test ratio Acid-test ratio = Quick assets Current liabilities = $ 88 , 000 $ 129 , 000 = 0.68 Explanation: 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. Use the following formula to determine the acid-test ratio: Acid Ratio = Quick assets Current liabilities Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets: Quick assets = ( Current assets − Inventories − Prepaid expenses ) = $ 170 , 000 − $ 70 , 000 − $ 12 , 000 = $ 88 , 000 Conclusion: Hence, quick ratio is 0.68:1. d) Answer: Inventory turnover ratio Inventory turnover = Cost of goods sold Average merchandise inventory = $ 318 , 000 $ 68 , 000 =4 .67 times Explanation: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. Formula: Inventory turnover = Cost of goods sold Average inventory Average inventory is the average of sum of opening and closing inventory balance. It is calculated as follows: Average inventory = Opening balance + Closing balance 2 = $ 66 , 000 + $ 70 , 000 2 = $ 68 , 000 Conclusion: Hence, inventory turnover ratio is 4.67 times. e) Answer: Days’ inventory ratio Days' sales in inventory = 365 days Inventory turnover = 365 days 4 .67 times = 78.15 days Explanation: Days’ in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. Formula: Days' in inventory = Days in accounting period Inventory turnover Conclusion: Hence, days’ in inventory ratio is 78.15 days. f) Answer: Days’ sales in receivables Days' sales in receivables = Days in accounting period Accounts receivables turnover = 365 days 7.47 = 49 days Explanation: Days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables. Formula: Days' sales in receivables = Days in accounting period Accounts receivables 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. Accounts receivable turnover ratio is determined by following formula: Accounts receivables turnover ratio } = Net credit sales Average accounts receivables Thus, accounts receivable turnover ratio is Accounts receivables turnover ratio } = Net credit sales Average net accounts receivables = $ 478 , 000 $ 78 , 000 + $ 50 , 000 2 = 7.47 Conclusion: Hence, days’ sales in receivables is 49 days. g) Answer: Gross profit percentage Gross profit percentage = Gross profit Net sales revenue = $ 478 , 000 − $ 318 , 000 $ 478 , 000 = 0.335 Note: Gross profit = Net credit sales – Cost of goods sold Explanation: Gross profit percentage is determined to find out the level of each sales value of dollar that is earned above the expenses made for the cost of goods sold. Formula: Gross profit percentage = Gross profit Net sales revenue Conclusion: Hence, gross profit percentage is 3.35%.

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company. To compute: Key Ratios Given info: Items of balance sheet and income statement a) Answer: Current ratio : Current ratio = Current assets Current liabilities = $ 170 , 000 $ 129 , 000 = 1.32 Explanation: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. Formula: Current ratio = Current assets Current liabilities Conclusion: Hence, the current ratio is 1.32:1. b) Answer: Cash ratio Cash ratio = Cash + Cash equivalents Current liabilities = $ 20 , 000 + $ 0 $ 129 , 000 = 0.16 Explanation: Cash ratio is used to assess the extent of the company towards making payment of current liabilities with the cash and cash equivalents. The ideal cash ratio is 1. Formula: Cash ratio = Cash + Cash equivalents Current liabilities Conclusion: Hence, the cash ratio is 0.16:1. c) Answer: Acid-test ratio Acid-test ratio = Quick assets Current liabilities = $ 88 , 000 $ 129 , 000 = 0.68 Explanation: 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. Use the following formula to determine the acid-test ratio: Acid Ratio = Quick assets Current liabilities Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets: Quick assets = ( Current assets − Inventories − Prepaid expenses ) = $ 170 , 000 − $ 70 , 000 − $ 12 , 000 = $ 88 , 000 Conclusion: Hence, quick ratio is 0.68:1. d) Answer: Inventory turnover ratio Inventory turnover = Cost of goods sold Average merchandise inventory = $ 318 , 000 $ 68 , 000 =4 .67 times Explanation: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. Formula: Inventory turnover = Cost of goods sold Average inventory Average inventory is the average of sum of opening and closing inventory balance. It is calculated as follows: Average inventory = Opening balance + Closing balance 2 = $ 66 , 000 + $ 70 , 000 2 = $ 68 , 000 Conclusion: Hence, inventory turnover ratio is 4.67 times. e) Answer: Days’ inventory ratio Days' sales in inventory = 365 days Inventory turnover = 365 days 4 .67 times = 78.15 days Explanation: Days’ in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. Formula: Days' in inventory = Days in accounting period Inventory turnover Conclusion: Hence, days’ in inventory ratio is 78.15 days. f) Answer: Days’ sales in receivables Days' sales in receivables = Days in accounting period Accounts receivables turnover = 365 days 7.47 = 49 days Explanation: Days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables. Formula: Days' sales in receivables = Days in accounting period Accounts receivables 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. Accounts receivable turnover ratio is determined by following formula: Accounts receivables turnover ratio } = Net credit sales Average accounts receivables Thus, accounts receivable turnover ratio is Accounts receivables turnover ratio } = Net credit sales Average net accounts receivables = $ 478 , 000 $ 78 , 000 + $ 50 , 000 2 = 7.47 Conclusion: Hence, days’ sales in receivables is 49 days. g) Answer: Gross profit percentage Gross profit percentage = Gross profit Net sales revenue = $ 478 , 000 − $ 318 , 000 $ 478 , 000 = 0.335 Note: Gross profit = Net credit sales – Cost of goods sold Explanation: Gross profit percentage is determined to find out the level of each sales value of dollar that is earned above the expenses made for the cost of goods sold. Formula: Gross profit percentage = Gross profit Net sales revenue Conclusion: Hence, gross profit percentage is 3.35%.

Solution Summary: The author explains that financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

5th Edition

ISBN: 9780134077321

Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura

Publisher: PEARSON

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Chapter 15, Problem 15.19E

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Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

Ch. 15 - What part of the Libertys annual report is written...Ch. 15 - Horizontal analysis of Liberty's balance sheet for...Ch. 15 - Vertical analysis of Liberty's balance sheet for...Ch. 15 - Which statement best describes Liberty's acid-test...Ch. 15 - Liberty's inventory turnover during 2017 was...Ch. 15 - Prob. 6QC Ch. 15 - Prob. 7QC Ch. 15 - Liberty's rate of return on common stockholders'...Ch. 15 - The company has 2,500 shares of common stock...Ch. 15 - Prob. 10AQC

Ch. 15 - What ate the three main ways to analyze financial...Ch. 15 - What is an annual report? Briefly describe the key...Ch. 15 - Prob. 3RQ Ch. 15 - What is trend analysis, and how does it differ...Ch. 15 - Prob. 5RQ Ch. 15 - Prob. 6RQ Ch. 15 - Prob. 7RQ Ch. 15 - Briefly describe the ratios that can be used to...Ch. 15 - Prob. 9RQ Ch. 15 - Briefly describe the ratios that can be used to...Ch. 15 - Briefly describe the ratios that can be used to...Ch. 15 - Prob. 12RQ Ch. 15 - Prob. 13RQ Ch. 15 - Prob. 14RQ Ch. 15 - Prob. 15RQ Ch. 15 - Prob. 15.1SE Ch. 15 - Performing horizontal analysis McDonald Corp....Ch. 15 - Calculating trend analysis Variline Corp. reported...Ch. 15 - Performing vertical analysis Hoosier Optical...Ch. 15 - Preparing common-size income statement Data for...Ch. 15 - Shine's Companies, a home improvement store chain,...Ch. 15 - Shine's Companies, a home improvement store chain,...Ch. 15 - Shine's Companies, a home improvement store chain,...Ch. 15 - Prob. 15.9SE Ch. 15 - Prob. 15.10SE Ch. 15 - Prob. 15.11SE Ch. 15 - Using ratios to reconstruct a balance sheet...Ch. 15 - Prob. 15.13SE Ch. 15 - Prob. 15.14SE Ch. 15 - Prob. 15.15E Ch. 15 - Computing trend analysis Grand Oaks Realty's net...Ch. 15 - Prob. 15.17E Ch. 15 - Prob. 15.18E Ch. 15 - Prob. 15.19E Ch. 15 - Prob. 15.20E Ch. 15 - Analyzing the ability to pay liabilities Big Bend...Ch. 15 - Analyzing profitability Varsity, Inc.s comparative...Ch. 15 - Prob. 15.23E Ch. 15 - Using ratios to reconstruct a balance sheet The...Ch. 15 - Prob. 15.25E Ch. 15 - Computing earnings per share Falconi Academy...Ch. 15 - Prob. 15.27AP Ch. 15 - Prob. 15.28AP Ch. 15 - Prob. 15.29AP Ch. 15 - Prob. 15.30AP Ch. 15 - Using ratios to evaluate a stock investment...Ch. 15 - Prob. 15.32AP Ch. 15 - Preparing an income statement The following...Ch. 15 - Computing trend analysis and return on common...Ch. 15 - Prob. 15.35BP Ch. 15 - Prob. 15.36BP Ch. 15 - Determining the effects of business transactions...Ch. 15 - Prob. 15.38BP Ch. 15 - Prob. 15.39BP Ch. 15 - Prob. 15.40BP Ch. 15 - Prob. 15.41CP Ch. 15 - Lance Berkman is the controller of Saturn, a dance...Ch. 15 - Prob. 15.1CTEI

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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License