Chapter 3, Problem 16QP

Calculating Financial Ratios. Based on the balance sheets given for Bethesda Mining, calculate the following financial ratios for each year:

a.    Current ratio

b.    Quick ratio

c.    Cash ratio

d.    Debt–equity ratio and equity multiplier

e.    Total debt ratio

Summary Introduction

To calculate: The current ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 16QP

The current ratio for the year 2015 and 2016 are 0.70 times and 0.79 times respectively.

Explanation of Solution

Given information:

• The total current assets (2015) is $175,278.
• The total current liabilities (2015) is $250,749.
• The total current assets (2016) is $205,685.
• The total current liabilities (2016) is $261,590.

Formula to calculate the current ratio:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

Compute current ratio for the year 2015:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets }}{\text{Current liabilities }}\\ =\frac{\$175,278}{\$250,749}\\ =0.70\text{ times}\end{array}$

Compute current ratio for the year 2016:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets }}{\text{Current liabilities }}\\ =\frac{\$205,685}{\$261,590}\\ =0.79\text{ times}\end{array}$

Hence, the current ratio for the year 2015 and 2016 are 0.70 times and 0.79 times respectively.

Summary Introduction

To calculate: The quick ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 16QP

The quick ratio for the year 2015 and 2016 are 0.26 times and 0.29 times respectively.

Explanation of Solution

Given information:

• The total current asset (2015) is $175,278.
• Inventory (2015) is $109,626.
• The total current liabilities (2015) is $250,749.
• The total current asset (2016) is $205,685.
• Inventory (2016) is $129,253.
• The total current liabilities (2016) is $261,590.

Formula to calculate the current ratio:

$\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}$

Compute quick ratio for the year 2015:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$175,278-\$109,626\right)}{\$250,749}\\ =0.26\text{ times}\end{array}$

Compute quick ratio for the year 2016:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\$205,685-\$129,253}{\$261,590}\\ =0.29\text{ times}\end{array}$

Hence, the quick ratio for the year 2015 and 2016 are 0.26 times and 0.29 times respectively.

Summary Introduction

To calculate: The cash ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 16QP

The cash ratio for the year 2015 and 2016 are 0.08 times and 0.08 times respectively.

Explanation of Solution

Given information:

• Cash (2015) is $19,256.
• Total current liabilities (2015) is $250,749.
• Cash (2016) is $21,946.
• Total current liabilities (2016) is $261,590.

Formula to calculate the cash ratio:

$\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}$

Compute cash ratio for the year 2015:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$19,256}{\$250,749}\\ =0.08\text{ times}\end{array}$

Compute quick ratio for the year 2016:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$21,946}{\$261,590}\\ =0.08\text{ times}\end{array}$

Hence, the cash ratio for the year 2015 and 2016 are 0.08 times and 0.08 times respectively.

Summary Introduction

To calculate: The debt-equity ratio and equity multiplier ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 16QP

The debt-equity ratio and equity multiplier ratio for the year 2015 and 2016 are 1.35 times and 1.20 times respectively and 2.35 times and 2.20 times respectively.

Explanation of Solution

Given information:

• The total current liabilities (2015) is $261,590.
• The total long term debt (2015) is $255,000.
• The total equity (2015) is $374,915.
• The total current liabilities (2016) is $261,590.
• The total long term debt (2016) is $278,500.
• The total equity (2016) is $450,800.

Formula to calculate the total debt value:

$\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}$

Note: It is needed to compute the value of total debt to calculate the total debt ratio.

Compute the total debt value for the year 2015:

$\begin{array}{c}\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}\\ =\$261,590+\$255,000\\ =\$516,590\end{array}$

Compute the total debt value for the year 2016:

$\begin{array}{c}\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}\\ =\$261,590+\$278,500\\ =\$540,090\end{array}$

Hence, the total debt value for the year 2015 and 2016 are $516,590 and $540,090 respectively.

Formula to calculate the total debt ratio:

$\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}$

Compute the total debt ratio for the year 2015:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$516,590}{\$374,915}\\ =1.35\text{ times}\end{array}$

Compute the total debt ratio for the year 2016:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$540,090}{\$450,800}\\ =1.20\text{ times}\end{array}$

Hence, the total debt ratio for the year 2015 and 2016 are 1.35 times and 1.20 times respectively.

Formula to calculate the equity multiplier ratio:

$\text{Equity multiplier ratio}=1+\text{debt-equity ratio}$

Compute the equity multiplier ratio for the year 2015:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{debt-equity ratio}\\ =1+1.35\\ =2.35\text{ times}\end{array}$

Compute the equity multiplier ratio for the year 2016:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{debt-equity ratio}\\ =1+1.20\\ =2.20\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2015 and 2016 are 2.35 times and 2.20 times respectively.

Summary Introduction

To calculate: The total debt ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.

Answer to Problem 16QP

The total debt ratio for the year 2015 and 2016 are 0.57 times and 0.55 times respectively.

Explanation of Solution

Given information:

• The total asset (2015) is $880,664.
• The total equity (2015) is $374,915.
• The total long term debt (2015) is $255,000.
• The total asset (2016) is $990,890.
• The total equity (2016) is $450,800.
• The total long-term debt (2016) is $278,500.

Formula to calculate the total debt ratio:

$\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}$

Compute the total debt ratio for the year 2015:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}\\ =\frac{\$880,664-\$374,915}{\$880,664}\\ =0.57\text{ times}\end{array}$

Compute the total debt ratio for the year 2016:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}\\ =\frac{\$990,890-\$450,800}{\$990,890}\\ =0.55\text{ times}\end{array}$

Hence, the total debt ratio for the year 2015 and 2016 are 0.57 times and 0.55 times respectively.