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1)
Introduction:
To determine:
The current ratio of the given company
Answer to Problem 4BPSB
Solution:
The current ratio is 2.5
Explanation of Solution
Explanation:
Current Ratio =
Current Assets include
| Cash | 6100 |
| Short-term investment | 6900 |
| 12100 | |
| Notes Receivable | 3000 |
| Merchandise Inventory | 13500 |
| Prepaid Expenses | 2000 |
| Total Current Assets | 43600 |
Current liabilities Include
| Accounts Payable | 11500 |
| Accrued Wages Payable | 3300 |
| Income Taxes Payable | 2600 |
| Total Current liabilities | 17400 |
So, Current Ratio= =2.5
Conclusion:
The Current Ratio of 2.5 indicates that the company’s liquidity position is strong and it is able to meet its short-term payment requirements.
2)
Introduction:
The Acid Test Ratio or the Quick ratio is the
Quick Ratio= .
To determine:
The Acid Test Ratio of the given company
Answer to Problem 4BPSB
Solution:
The Acid Test Ratio is 1.6 :1
Explanation of Solution
Explanation:
Quick Assets=
Quick Ratio=
=
= = 1.6 :1
Conclusion:
The Acid Test ratio of 1.6 :1 indicates that the company is fairly liquid and able to repay its short-term cash payment obligations easily
3)
Introduction:
Days sales uncollected implies the number of days the sales made by the company will not be collected from the accounts receivables. The debtors balance including the value of trade notes are divided by the net sales during the year and then multiplied with 365 days to calculate the days’ sales uncollected.
To determine:
The days sales uncollected of the given company
Answer to Problem 4BPSB
Solution:
The day’s sales uncollected is 17.5 days
Explanation of Solution
Explanation:
Given that,
Net Sales = 315500
Accounts Receivable = 12100
Notes Receivable= 3000
So, day’s sales uncollected= *365
= * 365 = *365 = 17.5 days
Conclusion:
Hence, the days’ sales uncollected are 17.5 days which indicates that the revenue from sales is collected within 18 days of sales.
4)
Introduction:
Inventory Turnover ratio measures the number of times the inventory is sold and replaced by new inventory in each period. The cost of goods sold is divided by the average inventory to calculate this ratio.
To determine:
The inventory turnover of the given company.
Answer to Problem 4BPSB
Solution:
The inventory turnover ratio is 15.3
Explanation of Solution
Explanation:
Cost of goods sold= 236100
Closing Inventory= 13500.
Opening Inventory= 17400.
Average Inventory= =15450
So, Inventory turnover ratio= = =15.3
Conclusion:
Hence the inventory turnover ratio shows that the inventory is sold and gets replaced in 15.3 days
5)
Introduction:
The Days sales in Inventory show the number of days the company takes to convert its inventory into sales. The closing Inventory is divided by the cost of goods sold and multiplied with 365 days to calculate the days sales in Inventory.
To determine:
The Days sales in Inventory of the given company.
Answer to Problem 4BPSB
Solution:
The Days sales in Inventory is 20.9 days.
Explanation of Solution
Explanation:
Closing Inventory= 13500
cost of goods sold=236100
Days Sales in Inventory=
= =20.9 days.
Conclusion:
Hence, it takes about 20.9 days for the company to convert its inventory into sales.
6)
Introduction:
The debt to equity ratio shows the financial leverage of the company. It shows the ratio of assets of the company financed by debt in comparison to equity. It is indicative of the financial wellbeing of the company and a growing debt-equity ratio indicates that the company is increasingly using external sources of funds rather than internal sources and might be a warning signal.
To determine:
The debt-equity ratio of the given company.
Answer to Problem 4BPSB
Solution:
The debt-equity ratio is 0.43
Explanation of Solution
Explanation:
Debt here is Long term notes Payable secured by mortgage on plant assets = 30000
Equity = = 35000+35100=70100
Hence, debt-equity ratio = = =0.43
Conclusion:
Thus, the company has a debt-equity ratio of 0.43 which reflects that equity financing is more than debt financing.
7)
Introduction:
Times interest earned indicates the ability of the company to meet its interest payment obligations. It is computed by dividing the Earnings before Interest and taxes by the Interest expenses.
To determine:
The times interest earned for the given company.
Answer to Problem 4BPSB
Solution:
The times interest earned is 13.7 times
Explanation of Solution
Explanation:
Earnings before Interest and Taxes= = 79400-49200= 30200
Interest expenses= 2200
So, times interest earned = =13.7
Conclusion:
Hence, the times interest earned is 13.7
8)
Introduction:
The Profit margin ratio indicates the profitability of the company when compared with the total revenue. The net profits is divided by the sales revenue to calculate the profit margin.
To determine:
The profit margin ratio of the given company.
Answer to Problem 4BPSB
Solution:
The profit margin ratio is 7.5%
Explanation of Solution
Explanation:
Net Sales= 315500
Net Profit= 23800
Hence, profit margin ratio= = =0.075=7.5%
Conclusion:
Hence, for every $100 of sales revenue, the net profit of $7.5 is generated.
9)
Introduction:
Total Asset turnover indicates the efficiency of the company in utilizing its assets to generate sales. The net sales is divided by the average total assets to calculate the ratio.
To determine:
The total asset turnover ratio of the given company
Answer to Problem 4BPSB
Solution:
The total asset turnover ratio is 2.1
Explanation of Solution
Explanation:
Opening total assets= 94900
Closing total assets= 117500
Average total assets= = =106200
Net Sales=315500
So, total inventory turnover= = =2.9
Conclusion:
Hence, the inventory turnover ratio is 2.9 times.
10)
Introduction:
Return on total assets shows the efficiency of using the company’s assets in generating profits before the contractual obligations i.e. interest and taxes are paid off. It is calculated by dividing Earnings before interest and tax by average total assets.
To determine:
The Return on Total Assets of the given company.
Answer to Problem 4BPSB
Solution:
The Return on total assets is 28.4%
Explanation of Solution
Explanation:
Earnings before Interest and Taxes= = 28000+2200= 30200
Average Total Assets as computed above=106200
So, the Return on Total Assets = = =0.284 =28.4%
Conclusion:
Hence, the return on total assets is 28.4%
11)
Introduction:
Return on common
To determine:
The return on common stockholder’s equity for the given period.
Answer to Problem 4BPSB
Solution:
The return on common stockholder’s equity is 38.3%
Explanation of Solution
Explanation:
Net profit =23800
Opening common stock= 35500
Closing common stock = 35000
Opening
Closing retained earnings = 35100
So, Average equity= = =62200
Return on common stockholder’s equity= = =38.3%
Conclusion:
Hence, the return on common stockholder’s equity is 38.3%
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