
Concept Introduction:
Basic Earnings per share:
The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:
Debt to Equity Ratio:
Debt to equity ratio is calculated to determine the leverage position of the company. It compares the total liabilities of the company with it total shareholders’ equity. The debt to equity ratio is calculated by dividing the Total Liabilities by Total Stockholder’s Equity. The formula to calculate Debt to equity ratio is as follows:
Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:
Acid test ratio:
Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:
This is an efficiency ratio that indicates the conversion of accounts receivable into cash. This ratio is calculated by dividing the Net credit Sales by the Average accounts receivable. The formula to calculate this ratio is as follows:
Inventory Turnover Ratio: Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:
Note: Average inventory is calculated with the help of following formula:
Times interest earned Ratio:
A company pays its interest expenses from the Net operating Income available. To find the company’s ability to pay the interest expenses, the ratio of Net operating income to Interest expense should be calculated. Times Interest earned ratio shows the number of times interest expenses are covered by the net operating income. It is calculated by dividing the Net operating Income by Interest Expense. The formula is as under:
Times interest earned Ratio = Net Operating Income / Interest Expense
(Note: The numerator of the formula .Net operating income. is equal to the Income before deduction of Interest and taxes)
Return on total Assets: The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:
Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:
To calculate:The missing amounts for balance sheet and income statement

Answer to Problem 21P
Solution: The Complete
Pepper Industries | ||||
Balance Sheet | ||||
Mar. 31 | ||||
Current Assets: | ||||
Cash | $ 70,000 | |||
Accounts Receivables, Net | $ 330,000 | |||
Inventory | $ 480,000 | |||
Total Current Assets | $ 880,000 | |||
Plant and Equipment, net | $ 908,889 | |||
Total Assets | $ 1,788,889 | |||
Liabilities: | ||||
Current Liabilities: | $ 320,000 | |||
Bonds Payable, 10% | $ 514,815 | |||
Total Liabilities | $ 834,815 | |||
Common Stock, $5 par value | $ 700,000 | |||
$ 254,074 | ||||
Total Stockholder's Equity | $ 954,074 | |||
Total Liabilities and Stockholder's Equity | $ 1,788,889 |
Pepper Industries | ||||
Income Statement | ||||
For the year ended Mar. 31 | ||||
Sales | $ 4,200,000 | |||
Cost of Goods Sold | $ 2,730,000 | |||
Gross Margin | $ 1,470,000 | |||
Selling and administrative expenses | $ 930,000 | |||
Net operating income | $ 540,000 | |||
Interest Expense | $ 80,000 | |||
Net Income before taxes | $ 460,000 | |||
Income taxes (30%) | $ 138,000 | |||
Net Income | $ 322,000 |
Explanation of Solution
The missing amounts for balance sheet and income statement are calculated as follows:
Pepper Industries | ||||
Balance Sheet | ||||
Mar. 31 | ||||
Calculations | ||||
Current Assets: | ||||
Cash | Total Current Assets -Accounts Receivable -Inventory = 880000-330000-480000 = | $ 70,000 | ||
Accounts Receivables, Net | (Credit Sales /Accounts Receivable turnover)*2-Beginning Accounts receivable =(4200000/14)*2- 270000= | $ 330,000 | ||
Inventory | Total Current Assets - (Current Liabilities * Acid Test Ratio) = 880000-(320000*1.25) = | $ 480,000 | ||
Total Current Assets | Current Liabilities * Current Ratio = 320000*2.75 = | $ 880,000 | ||
Plant and Equipment, net | Total Assets - Total Current Assets = 1788889-880000= | $ 908,889 | ||
Total Assets | Net Income / Return on Total Assets = 322000/18% = | $ 1,788,889 | ||
Liabilities: | ||||
Current Liabilities: | $ 320,000 | |||
Bonds Payable, 10% | Total Liabilities - Current Liabilities = 834815-320000= | $ 514,815 | ||
Total Liabilities | Total Assets * Debt to equity ratio / (1+Debt to equity ratio) = 1788889*0.875/1.875 = | $ 834,815 | ||
Stockholder's Equity: | ||||
Common Stock, $5 par value | (Net Income / Earnings per share )*Par value = (322000/2.3)*5 = | $ 700,000 | ||
Retained earnings | Total Stockholder's Equity - Common Stock = 954074-700000= | $ 254,074 | ||
Total Stockholder's Equity | Total Assets - Total Liabilities = 1788889-834815 = | $ 954,074 | ||
Total Liabilities and Stockholder's Equity | Total Liabilities and Stockholder's Equity = Total Assets = | $ 1,788,889 |
Pepper Industries | ||||
Income Statement | ||||
For the year ended Mar. 31 | ||||
Sales | $ 4,200,000 | |||
Cost of Goods Sold | Average Inventory * Inventory Turnover = ((360000+480000)/2))*6.5= | $ 2,730,000 | ||
Gross Margin | Sales - Cost of Goods Sold = 4200000-3900000= | $ 1,470,000 | ||
Selling and administrative expenses | Gross Margin -Net operating income = 1470000-540000= | $ 930,000 | ||
Net operating income | Interest expense * Times interest earned ratio = 80000*6.75 = | $ 540,000 | ||
Interest Expense | $ 80,000 | |||
Net Income before taxes | Net operating income - Interest Expense = 540000-80000= | $ 460,000 | ||
Income taxes (30%) | Net Income before taxes * 30% = 460000*30% = | $ 138,000 | ||
Net Income | Net Income before taxes - Income tax = 460000-138000= | $ 322,000 |
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Chapter 15 Solutions
MANAGERIAL ACCOUNTING W/CONNECT
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