Nineteen measures of solvency and profitability The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was $119.70 on December 31, 2016. Stargel Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Retained earnings, January 1................ $5,375,000 $4,545,000 Add net income for year......................... 900,000 925,000 Total..................................... $6,275,000 $5,470,000 Deduct dividends: On preferred stock ............................................. $ 45,000 $ 45,000 On common stock.............................................. 50,000 50,000 Total........................................................ $ 95,0000 $ 95,000 Retained earnings, December 3’................................... $6,180,000 $5,375,000 Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015 2016 2015 Sales..................... $10,000,000 $9,400,000 Cost of goods sold......... 5,350,000 4,950,000 Gross profit............... $ 4,650,000 $4,450,000 Selling expenses.......... $ 2,000,000 $1,080,000 Administrative expenses... 1,500.000 1,410,000 Total operating expenses……… $3,500,000 $3,290,000 Income from operations ... $1,150,000 $1,160,000 Other income............. 150,000 140,000 $ 1,300,000 $1,300,000 Other expense (interest)……. 170,000 150,000 Income before income tax…… $ 1,130,000 $1,150,000 Income tax expense....... 230,000 225,000 Net income............... $ 900,000 $ 925,000 Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015 Dec.31, 2016 Dec. 31, 2015 Assets Current Assets: Cash.................................... $ 500,000 $ 400,000 Marketable securities.................... 1,010,000 1,000,000 Accounts receivable (net)................. 740,000 510,000 Inventories.............................. 1,190000 950,000 Prepaid expenses........................ 250,000 229,000 Total current assets..................... $3,690,000 $3,089,000 Long-term investments.................... 2,350,000 2,300,000 Property, plant and equipment (net)....... 3,740,000 3,366,000 Total assets............................... $9,780,000 $8,755,000 Liabilities Current liabilities.......................... $ 900,000 $ 880,000 Long-term liabilities: Mortgage note payable, 8.8%, due 2021... $ 200,000 $ 0 Bonds payable, 9%, due 2017............. 1,500,000 1,500,000 Total long term liabilities............... $1,700,000 $1,500,000 Total liabilities............................ $2,600,000 $2,380,000 Stockholders' equity Preferred stock $0.90, $10 par………….. $ 500,000 $ 500,000 Common stock. $5 par..................... 500,000 500,000 Retained earnings......................... 6,180,000 5,375,000 T otal stockholders' equity............... $7,180,000 $6,375,000 Total liabilities and stockholders' equity..... $9,780,000 $8,755,000 Instructions Determine the following measures for 2016, rounding to one decimal place, except per share amounts, which should be rounded to the nearest penny: 1. Working capital 2. Current ratio 3. Quick ratio 4. Accounts receivable turnover 5. Number of days’ salts in receivables 6. Inventory turnover 7. Number of days’ sales in inventory 8. Ratio of fixed assets to long-term liabilities 9. Ratio of liabilities to .stockholders' equity 10. Number of times interest charges are earned 11. Number of times preferred dividends are earned 12. Ratio of sales to assets 13. Rate earned on total assets 14. Rate earned on stockholders' equity 15. Rate earned on common stockholders' equity 16. Earnings per share on common stock 17. Price-earnings ratio 18. Dividends per share of common stock 19. Dividend yield

Question

Want to see more full solutions like this?

Answer 1

Textbook Question

Chapter 15, Problem 15.4BPR

Nineteen measures of solvency and profitability

The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was $119.70 on December 31, 2016.

Stargel Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015
		2016			2015
Retained earnings, January 1................		$5,375,000			$4,545,000
Add net income for year.........................		900,000			925,000
Total.....................................		$6,275,000			$5,470,000
Deduct dividends:
On preferred stock.............................................		$ 45,000			$ 45,000
On common stock..............................................		50,000			50,000
Total........................................................		$ 95,0000			$ 95,000
Retained earnings, December 3’...................................		$6,180,000			$5,375,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
	2016			2015
Sales.....................	$10,000,000			$9,400,000
Cost of goods sold.........	5,350,000			4,950,000
Gross profit...............	$ 4,650,000			$4,450,000
Selling expenses..........	$ 2,000,000			$1,080,000
Administrative expenses...	1,500.000			1,410,000
Total operating expenses………	$3,500,000			$3,290,000
Income from operations ...	$1,150,000			$1,160,000
Other income.............	150,000			140,000
	$ 1,300,000			$1,300,000
Other expense (interest)…….	170,000			150,000
Income before income tax……	$ 1,130,000			$1,150,000
Income tax expense.......	230,000			225,000
Net income...............	$ 900,000			$ 925,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
			Dec.31, 2016			Dec. 31, 2015
Assets
Current Assets:
Cash....................................			$ 500,000			$ 400,000
Marketable securities....................			1,010,000			1,000,000
Accounts receivable (net).................			740,000			510,000
Inventories..............................			1,190000			950,000
Prepaid expenses........................			250,000			229,000
Total current assets.....................			$3,690,000			$3,089,000
Long-term investments....................			2,350,000			2,300,000
Property, plant and equipment (net).......			3,740,000			3,366,000
Total assets...............................			$9,780,000			$8,755,000
Liabilities
Current liabilities..........................			$ 900,000			$ 880,000
Long-term liabilities:
Mortgage note payable, 8.8%, due 2021...			$ 200,000			$ 0
Bonds payable, 9%, due 2017.............			1,500,000			1,500,000
Total long term liabilities...............			$1,700,000			$1,500,000
Total liabilities............................			$2,600,000			$2,380,000
Stockholders' equity
Preferred stock $0.90, $10 par…………..			$ 500,000			$ 500,000
Common stock. $5 par.....................			500,000			500,000
Retained earnings.........................			6,180,000			5,375,000
^Total stockholders' equity...............			$7,180,000			$6,375,000
Total liabilities and stockholders' equity.....			$9,780,000			$8,755,000

Instructions

Determine the following measures for 2016, rounding to one decimal place, except per share amounts, which should be rounded to the nearest penny:

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days’ salts in receivables
6. Inventory turnover
7. Number of days’ sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to .stockholders' equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Rate earned on common stockholders' equity
16. Earnings per share on common stock
17. Price-earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Expert Solution & Answer

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

Given true option financial accounting question

hello tutor please help me

Please need answer the financial accounting question

Answer 2

Textbook Question

Chapter 15, Problem 15.4BPR

Nineteen measures of solvency and profitability

The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was $119.70 on December 31, 2016.

Stargel Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015
		2016			2015
Retained earnings, January 1................		$5,375,000			$4,545,000
Add net income for year.........................		900,000			925,000
Total.....................................		$6,275,000			$5,470,000
Deduct dividends:
On preferred stock.............................................		$ 45,000			$ 45,000
On common stock..............................................		50,000			50,000
Total........................................................		$ 95,0000			$ 95,000
Retained earnings, December 3’...................................		$6,180,000			$5,375,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
	2016			2015
Sales.....................	$10,000,000			$9,400,000
Cost of goods sold.........	5,350,000			4,950,000
Gross profit...............	$ 4,650,000			$4,450,000
Selling expenses..........	$ 2,000,000			$1,080,000
Administrative expenses...	1,500.000			1,410,000
Total operating expenses………	$3,500,000			$3,290,000
Income from operations ...	$1,150,000			$1,160,000
Other income.............	150,000			140,000
	$ 1,300,000			$1,300,000
Other expense (interest)…….	170,000			150,000
Income before income tax……	$ 1,130,000			$1,150,000
Income tax expense.......	230,000			225,000
Net income...............	$ 900,000			$ 925,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
			Dec.31, 2016			Dec. 31, 2015
Assets
Current Assets:
Cash....................................			$ 500,000			$ 400,000
Marketable securities....................			1,010,000			1,000,000
Accounts receivable (net).................			740,000			510,000
Inventories..............................			1,190000			950,000
Prepaid expenses........................			250,000			229,000
Total current assets.....................			$3,690,000			$3,089,000
Long-term investments....................			2,350,000			2,300,000
Property, plant and equipment (net).......			3,740,000			3,366,000
Total assets...............................			$9,780,000			$8,755,000
Liabilities
Current liabilities..........................			$ 900,000			$ 880,000
Long-term liabilities:
Mortgage note payable, 8.8%, due 2021...			$ 200,000			$ 0
Bonds payable, 9%, due 2017.............			1,500,000			1,500,000
Total long term liabilities...............			$1,700,000			$1,500,000
Total liabilities............................			$2,600,000			$2,380,000
Stockholders' equity
Preferred stock $0.90, $10 par…………..			$ 500,000			$ 500,000
Common stock. $5 par.....................			500,000			500,000
Retained earnings.........................			6,180,000			5,375,000
^Total stockholders' equity...............			$7,180,000			$6,375,000
Total liabilities and stockholders' equity.....			$9,780,000			$8,755,000

Instructions

Determine the following measures for 2016, rounding to one decimal place, except per share amounts, which should be rounded to the nearest penny:

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days’ salts in receivables
6. Inventory turnover
7. Number of days’ sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to .stockholders' equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Rate earned on common stockholders' equity
16. Earnings per share on common stock
17. Price-earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Expert Solution & Answer

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Textbook Question

Chapter 15, Problem 15.4BPR

Nineteen measures of solvency and profitability

The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was $119.70 on December 31, 2016.

Stargel Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015
		2016			2015
Retained earnings, January 1................		$5,375,000			$4,545,000
Add net income for year.........................		900,000			925,000
Total.....................................		$6,275,000			$5,470,000
Deduct dividends:
On preferred stock.............................................		$ 45,000			$ 45,000
On common stock..............................................		50,000			50,000
Total........................................................		$ 95,0000			$ 95,000
Retained earnings, December 3’...................................		$6,180,000			$5,375,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
	2016			2015
Sales.....................	$10,000,000			$9,400,000
Cost of goods sold.........	5,350,000			4,950,000
Gross profit...............	$ 4,650,000			$4,450,000
Selling expenses..........	$ 2,000,000			$1,080,000
Administrative expenses...	1,500.000			1,410,000
Total operating expenses………	$3,500,000			$3,290,000
Income from operations ...	$1,150,000			$1,160,000
Other income.............	150,000			140,000
	$ 1,300,000			$1,300,000
Other expense (interest)…….	170,000			150,000
Income before income tax……	$ 1,130,000			$1,150,000
Income tax expense.......	230,000			225,000
Net income...............	$ 900,000			$ 925,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
			Dec.31, 2016			Dec. 31, 2015
Assets
Current Assets:
Cash....................................			$ 500,000			$ 400,000
Marketable securities....................			1,010,000			1,000,000
Accounts receivable (net).................			740,000			510,000
Inventories..............................			1,190000			950,000
Prepaid expenses........................			250,000			229,000
Total current assets.....................			$3,690,000			$3,089,000
Long-term investments....................			2,350,000			2,300,000
Property, plant and equipment (net).......			3,740,000			3,366,000
Total assets...............................			$9,780,000			$8,755,000
Liabilities
Current liabilities..........................			$ 900,000			$ 880,000
Long-term liabilities:
Mortgage note payable, 8.8%, due 2021...			$ 200,000			$ 0
Bonds payable, 9%, due 2017.............			1,500,000			1,500,000
Total long term liabilities...............			$1,700,000			$1,500,000
Total liabilities............................			$2,600,000			$2,380,000
Stockholders' equity
Preferred stock $0.90, $10 par…………..			$ 500,000			$ 500,000
Common stock. $5 par.....................			500,000			500,000
Retained earnings.........................			6,180,000			5,375,000
^Total stockholders' equity...............			$7,180,000			$6,375,000
Total liabilities and stockholders' equity.....			$9,780,000			$8,755,000

Instructions

Determine the following measures for 2016, rounding to one decimal place, except per share amounts, which should be rounded to the nearest penny:

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days’ salts in receivables
6. Inventory turnover
7. Number of days’ sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to .stockholders' equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Rate earned on common stockholders' equity
16. Earnings per share on common stock
17. Price-earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Expert Solution & Answer

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 15, Problem 15.4BPR

Nineteen measures of solvency and profitability

The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was $119.70 on December 31, 2016.

Stargel Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015
		2016			2015
Retained earnings, January 1................		$5,375,000			$4,545,000
Add net income for year.........................		900,000			925,000
Total.....................................		$6,275,000			$5,470,000
Deduct dividends:
On preferred stock.............................................		$ 45,000			$ 45,000
On common stock..............................................		50,000			50,000
Total........................................................		$ 95,0000			$ 95,000
Retained earnings, December 3’...................................		$6,180,000			$5,375,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
	2016			2015
Sales.....................	$10,000,000			$9,400,000
Cost of goods sold.........	5,350,000			4,950,000
Gross profit...............	$ 4,650,000			$4,450,000
Selling expenses..........	$ 2,000,000			$1,080,000
Administrative expenses...	1,500.000			1,410,000
Total operating expenses………	$3,500,000			$3,290,000
Income from operations ...	$1,150,000			$1,160,000
Other income.............	150,000			140,000
	$ 1,300,000			$1,300,000
Other expense (interest)…….	170,000			150,000
Income before income tax……	$ 1,130,000			$1,150,000
Income tax expense.......	230,000			225,000
Net income...............	$ 900,000			$ 925,000
Stargel Inc. Comparative Income Statement For the Year Ended December 31, 2016 and 2015
			Dec.31, 2016			Dec. 31, 2015
Assets
Current Assets:
Cash....................................			$ 500,000			$ 400,000
Marketable securities....................			1,010,000			1,000,000
Accounts receivable (net).................			740,000			510,000
Inventories..............................			1,190000			950,000
Prepaid expenses........................			250,000			229,000
Total current assets.....................			$3,690,000			$3,089,000
Long-term investments....................			2,350,000			2,300,000
Property, plant and equipment (net).......			3,740,000			3,366,000
Total assets...............................			$9,780,000			$8,755,000
Liabilities
Current liabilities..........................			$ 900,000			$ 880,000
Long-term liabilities:
Mortgage note payable, 8.8%, due 2021...			$ 200,000			$ 0
Bonds payable, 9%, due 2017.............			1,500,000			1,500,000
Total long term liabilities...............			$1,700,000			$1,500,000
Total liabilities............................			$2,600,000			$2,380,000
Stockholders' equity
Preferred stock $0.90, $10 par…………..			$ 500,000			$ 500,000
Common stock. $5 par.....................			500,000			500,000
Retained earnings.........................			6,180,000			5,375,000
^Total stockholders' equity...............			$7,180,000			$6,375,000
Total liabilities and stockholders' equity.....			$9,780,000			$8,755,000

Instructions

Determine the following measures for 2016, rounding to one decimal place, except per share amounts, which should be rounded to the nearest penny:

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days’ salts in receivables
6. Inventory turnover
7. Number of days’ sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to .stockholders' equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Rate earned on common stockholders' equity
16. Earnings per share on common stock
17. Price-earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Expert Solution & Answer

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Answer 8

Expert Solution & Answer

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

The following ratios measures for 2016.

1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables
6. Inventory turnover ratio
7. Number of days' sales in inventory
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges are earned
11. Number of times preferred dividends are earned
12. Ratio of sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders' equity
15. Return on common stockholders' equity
16. Earnings per share on common stock
17. Price earnings ratio
18. Dividends per share of common stock
19. Dividend yield

Answer 12

Explanation of Solution

1. Working capital

$Working capital = Current assets – Current liabilities = $3,690,000 – $900,000= $2,790,000$

Working capital is determined as the difference between current assets and current liabilities.

Formula:

$Working capital = Current assets – Current liabilities$

2. Current ratio

$Current ratio=Current assetsCurrent liabilities=$3,690,000$900,000=4.1$

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:

$Current ratio=Current assetsCurrent liabilities$

3. Quick ratio

$Quick ratio =Quick assets Current liabilities=$2,250,000$900,000=2.5$

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:

$Acid Ratio=Quick assetsCurrent liabilities$

4. Accounts receivable turnover

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$10,000,000$625,000=16.0$

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:

$Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables$

Average accounts receivable is determined as follows:

$Average accounts receivables }= (Opening accounts receivables + Closing accounts receivables )2=$740,000+$510,0002=$625,000$

5. Number of days’ sales in receivables

$Number of days’ sales in receivable }=Average accounts receivable Average daily sales=$625,00027,397.26=22.8 days$

Number of days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

$Number of days’ sales in receivable =Average accounts receivable Average daily sales$

Average daily sales are determined by dividing sales by 365 days.

$Average daily sales = Sales365 days=$10,000,000365 days=$27,397.26$

6. Inventory turnover ratio

$Inventory turnover ratio =Cost of goods soldAverage inventory=$5,350,000$1,070,000=5 times$

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$Inventory turnover=Cost of goods soldAverage inventory$

Average inventory is determined as below:

$Average inventory = (Opening inventory + Closing inventory )2=$1,190,000+$950,0002=$1,070,000$

7. Number of days sales in inventory ratio

$Number of days’ sales in inventory }=Average inventory Average daily cost of goods sold=$1,070,000$14,657.53=73.0 days$

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:

$Number of days’ sales in invenotry=Average inventory Average daily cost of goods sold$

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:

$Average daily cost of goods sold= Cost of goods sold365 days=$5,350,000365 days=$14,657.53$

8. Ratio of fixed assets to long-term liabilities

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities =$3,740,000$1,700,000=2.2$

Ratio of fixed assets to long-term liabilities is determined by dividing fixed assets and long-term liabilities.

Formula:

$Ratio of fixed assets to long-term liabilities=Fixed assets Long-term liabilities$

9.Ratio of liabilities to stockholders’ equity

$Ratio of liabilities to stockholders' equity }=Total liabilitiesStockholders' equity=$2,600,000$7,180,000=0.4$

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity.

Formula:

$Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity$

10.Number of times interest charges are earned

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense=$1,130,000+$170,000$170,000=7.6%$

Number of times interest charges are 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:

$Number of times interest charges are earned }=Income before income tax+Interest expenseInterest expense$

11. Number of times preferred dividends are earned

$Number of times preferred dividends are earned }=Net incomePreferred dividends=$300,000$15,000=20.0$

Number of times preferred dividends are determined by dividing net income and preferred dividends.

Formula: $Number of times preferred dividends are earned }=Net incomePreferred dividends$

12. Ratio of sales to assets

$Ratio of sales to assets=SalesAverage total assets=$10,000,000$9,267,500=1.1$

Ratio of sales to assets is used to determine the asset’s efficiency towards sales.

Formula: $Ratio of sales to assets=SalesAverage total assets$

Working notes for average total assets are as follows:

$Average total assets =Beginning total assets + Ending total assets 2=$7,430,000+$8,755,0002=$9,267,500$

13. Rate earned on total assets

$Rate earned on total assets=Net income + Interest expenseAverage total assets=$900,000+$170,000$9,267,500=11.5%$

Rate earned on total 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: $Rate earned on total assets=Net income + Interest expenseAverage total assets$

14. Rate earned on stockholders’ equity

$Rate earned on stockholders' equity}= Net income Average stockholder’s equity= $900,000$6,777,500=13.3%$

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average equity that are invested in the company.

Formula: $Rate earned on stockholders' equtiy = Net incomeAverage stockholder’s equity$

Average stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning stockholders' equity + Ending stockholders' equity 2)=$7,180,000+$6,375,0002=$6,777,500$

15. Rate earned on common stockholders’ equity

$Rate earned on common stockholders' equity}= Net income – Preferred dividends Average stockholder’s equity= $900,000–$45,000$6,277,500=13.6%$

Rate earned 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: $Rate earned on common stockholders' equtiy} = Net income – Preferred dividends Average common stockholder’s equity$

Average common stockholders’ equity is determined as follows:

$Average stockholders' equity =(Beginning common stockholders' equity + Ending common stockholders' equity 2)=$6,680,000+$5,875,0002=$6,277,500$

16. Earnings per share on common stock

$Earnings per share=(Net income – PreferreddividendsWeighted-average common shares outstanding)=$900,000−$45,000100,000=$8.55$

A portion of profit that an individual earns from each share is referred to earnings per share.

Formula:

$Earnings per share}=Net income −Preferred dividendsWeighted average number of common shares outstanding$

17. Price earnings ratio

$Price earnings ratio =Market price per shareEarning per share=$119.70$8.55=14.0 times$

Price/earnings ratio is used to determine the profitability of a company. This ratio is abbreviated as P/E.

Formula:

$Price/earnings ratio= Market price per share of common stockEarnings per share$

18.Dividend per share of common stock

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100=$50,000100,000 shares=$0.50$

Dividend per share of commons stock is determined by dividing dividend per common stock and shares of common stock.

Formula:

$Dividend per share of common stock}= Dividend per Common stockShares of common stock × 100$

19.Dividend yield ratio

$Dividend yield = Annual dividend per ShareMarket price per Share × 100=$0.50$119.70=0.4%$

Dividend yield ratio is determined to evaluate the relationship between the annual dividend per share and the market price per share.

Formula:

$Dividend yield = Annual dividend per ShareMarket price per Share × 100$

Answer 13

Conclusion

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.	Number of times interest charges are earned	7.6
11.	Number of times preferred dividends are earned	20.0
12.	Ratio of sales to assets	1.4
13.	Rate earned on total assets	11.5%
14.	Rate earned on stockholders’ equity	13.3%
15.	Rate earned on common stockholders’ equity	13.6%
16.	Earnings per share	$8.55
17.	Price earnings ratio	14.0
18.	Dividend per share of common stock	$0.50
19.	Dividend yield	0.4%

Answer 14

Ch. 15 - Prob. 1DQ Ch. 15 - What is the advantage of using comparative...Ch. 15 - A companys current year net income (after income...Ch. 15 - Prob. 4DQ Ch. 15 - Prob. 5DQ Ch. 15 - Prob. 6DQ Ch. 15 - Prob. 7DQ Ch. 15 - Prob. 8DQ Ch. 15 - Prob. 9DQ Ch. 15 - Prob. 10DQ

Videos

Explanation of Solution

Want to see more full solutions like this?

Chapter 15 Solutions