Chapter 3, Problem 26QP

Some recent financial statements for Smolira Golf Corp. follow. Use this information to work Problems 26 through 30.

SMOLIRA GOLF CORP. 2015 Income Statement
Sales		$422,045
Cost of goods sold		291,090
Depreciation		37,053
Earnings before interest and taxes		$ 93,902
Interest paid		16,400
Taxable income		$ 77,502
Taxes (35%)		27,126
Net income		$ 50,376
Dividends	$20,000
Retained earnings	30,376

26. Calculating Financial Ratios [LO2] Find the following financial ratios for Smolira Golf Corp. (use year-end figures rather than average values where appropriate):

Short-term solvency ratios:

a. Current ratio	____________________
b. Quick ratio	____________________
c. Cash ratio	____________________

Asset utilization ratios:

d. Total asset turnover	____________________
e. Inventory turnover	____________________
f. Receivables turnover	____________________

Long-term solvency ratios:

g. Total debt ratio	____________________
h. Debt–equity ratio	____________________
i. Equity multiplier	____________________
j. Times interest earned ratio	____________________
k. Cash coverage ratio	____________________

Profitability ratios:

l. Profit margin	____________________
m. Return on assets	____________________
n. Return on equity	____________________

Summary Introduction

To find: The financial current ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The current ratio for 2014 and 2015 is 1.10 times and 1.15 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Short-term solvency ratios:

Formula to calculate the current ratio:

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

Compute the current ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio for 2014}=\frac{\$68,074}{\$61,722}\\ =1.10\text{ times}\end{array}$

Hence, the current ratio for 2014 is 1.10 times

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio for 2015}=\frac{\$79,974}{\$69,426}\\ =1.15\text{ times}\end{array}$

Hence, the current ratio for 2015 is 1.15 times

Summary Introduction

To find: The financial quick ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The quick ratio for 2014 and 2015 is 0.65 and 0.68 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate Quick ratio:

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

Compute the quick ratio:

$\begin{array}{c}\text{Quick ratio for 2014}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$68,074-\$27,931\right)}{\$61,722}\\ =\frac{\$40,143}{\$61,722}\\ =0.65\text{times}\end{array}$

Hence, the quick ratio for 2014 is 0.65 times

$\begin{array}{c}\text{Quick ratio for 2015}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$79,974-\$32,586\right)}{\$69,426}\\ =\frac{\$47,388}{\$69,426}\\ =0.68\text{times}\end{array}$

Hence, the quick ratio for 2015 is 0.68 times.

Summary Introduction

To find: The financial cash ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The cash ratio for 2014 and 2015 is 0.43 times and 0.42 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the cash ratio:

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

Compute the cash ratio:

$\begin{array}{c}\text{Cash ratio for 2014}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$26,450}{\$61,722}\\ =0.43\text{ times}\end{array}$

Hence, the cash ratio for 2014 is 0.43 times

$\begin{array}{c}\text{Cash ratio for 2015}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$29,106}{\$69,426}\\ =0.42\text{ times}\end{array}$

Hence, the cash ratio for 2015 is 0.42 times

Summary Introduction

To find: The financial total asset turnover ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The total asset turnover ratio is 0.88 times.

Explanation of Solution

Asset utilization ratios:

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the total asset turnover ratio:

$\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}$

Compute the total asset turnover ratio:

$\begin{array}{c}\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$422,045}{\$478,319}\\ =0.88\text{times}\end{array}$

Hence, the total asset turnover ratio is 0.88 times.

Summary Introduction

To find: The inventory turnover ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The inventory turnover ratio is 8.93 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the inventory turnover ratio:

$\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}$

Compute the inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$291,090}{\$32,586}\\ =8.93\text{ times}\end{array}$

Hence, the inventory turnover ratio is 8.93 times.

Summary Introduction

To find: The receivables turnover ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The receivables turnover ratio is 23.09 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the receivables turnover ratio:

$\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}$

Compute the receivables turnover ratio:

$\begin{array}{c}\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}\\ =\frac{\$422,045}{\$18,282}\\ =23.09\text{ times}\end{array}$

Hence, the receivables turnover ratio is 23.09 times.

Summary Introduction

To find: The total debt ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The total debt ratio for 2014 is 0.37 timesand for 2015 is 0.38 times.

Explanation of Solution

Long-term solvency ratios:

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the total debt ratio:

$\text{Total debt ratio = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}$

Compute the total debt ratio:

$\begin{array}{c}\text{Total debt ratio for 2014 = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}\\ =\frac{\left(\$425,239-\$268,517\right)}{\$425,239}\\ =\frac{\$156,722}{\$425,239}\\ =0.37\text{times}\end{array}$

Hence, the total debt ratio for 2014 is 0.37 times.

$\begin{array}{c}\text{Total debt ratio for 2015 = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}\\ =\frac{\left(\$478,319-\$298,893\right)}{\$478,319}\\ =\frac{\$179,426}{\$425,239}\\ =0.38\text{times}\end{array}$

Hence, the total debt ratio for 2015 is 0.38 times.

Summary Introduction

To find: The debt equity ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The debt-equity ratio for the year 2014 is 0.58 timesand the debt-equity ratio for the year 2015 is 0.60 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the debt-equity ratio:

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

Compute the debt-equity:

$\begin{array}{c}\text{Debt-equity ratio for 2014}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$61,722+\$95,000}{\$268,517}\\ =\frac{\$156,722}{\$268,517}\\ =\$0.58\text{ times}\end{array}$

Hence, the debt-equity ratio for the year 2014 is 0.58 times.

$\begin{array}{c}\text{Debt-equity ratio for 2015}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$69,426+\$110,000}{\$298,893}\\ =\frac{\$179,426}{\$298,893}\\ =\$0.60\text{ times}\end{array}$

Hence, the debt-equity ratio for the year 2015 is 0.60 times.

Note: The total debt is calculated by adding the total-long term debt and total current liabilities.

Summary Introduction

To find: The equity multiplier ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The equity multiplier ratio for the year 2014 is 1.58 timesand the equity multiplier ratio for the year 2015 is 1.60 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the equity multiplier:

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

Compute the equity multiplier ratio for the year 2015:

$\begin{array}{c}\text{Equity multiplier ratio for 2014}=1+\text{debt-equity ratio}\\ =1+0.58\\ =1.58\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2014 is 1.58 times.

$\begin{array}{c}\text{Equity multiplier ratio for 2015}=1+\text{debt-equity ratio}\\ =1+0.60\\ =1.60\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2015 is 1.60 times.

Summary Introduction

To find: The times interest earned of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The times interest earned is 5.73 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the times interest earned ratio:

$\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}$

Compute the times interest earned ratio:

$\begin{array}{c}\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}\\ =\frac{\$93,902}{\$16,400}\\ =5.73\text{ times}\end{array}$

Hence, the times interest earned is 5.73 times.

Summary Introduction

To find: The cash coverage ratio of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The cash coverage ratio is 7.99 times.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the cash coverage ratio:

$\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}$

Compute the cash coverage ratio:

$\begin{array}{c}\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}\\ =\frac{\$93,902+\$37,053}{\$16,400}\\ =\frac{\$130,955}{\$16,400}\\ =7.99\text{ times}\end{array}$

Hence, the cash coverage ratio is 7.99 times.

Summary Introduction

To find: The profit margin of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The profit margin is 11.94%.

Explanation of Solution

Profitability ratios:

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the profit margin ratio:

$\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}$

Compute the profit margin:

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\\ =\frac{\$50,376}{\$422,045}\\ =0.1194\text{ or }11.94\%\end{array}$

Hence, the profit margin is 11.94%.

Summary Introduction

To find: The return on assets of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The return on assets is 0.1194.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the Return on assets (ROA):

$\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}$

Compute the Return on assets (ROA):

$\begin{array}{c}\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}\\ =\frac{\$50,376}{\$478,319}\\ =0.1194\end{array}$

Hence, the return on assets is 0.1194 or 11.94%.

Summary Introduction

To find: The return on equity of Company SG

Introduction:

The process of analyzing and calculating the financial ratios for the evaluation of the performance of the firm and to find the actions that are necessary to improve the firm’s performance is ratio analysis.

Answer to Problem 26QP

The return on equity is 0.1685.

Explanation of Solution

Given information:

The balance sheet of the Company SG shows the following information:

• The total assets for the year 2014 is $425,239 and for 2015 is $478,319
• The total liabilities and equity for the year 2014 is 425,239 and for 2015 is $478,319
• The cash at the beginning and end of the year are $26,450 and $29,106 respectively.
• The accounts receivable for the year 2014 and 2015 are $13,693 and $18,282 respectively.
• The inventory for the year 2014 and 2015 are $27,931 and $32,586 respectively.
• The fixed asset for the year 2014 and 2015 are $357,165 and $398,345 respectively.
• The accounts payable for the year 2014 and 2015 are $30,602 and $35,485 respectively.
• The other current liabilities for the year 2014 and 2015 are $15,280 and $20,441 respectively.
• The notes payable for the year 2014 and 2015 are $15,840 and $13,500 respectively.
• The long-term debt for the year 2014 and 2015 are $95,000 and $110,000.
• The common stock and paid in surplus for 2014 is $45,000 and for 2015 is $45,000
• The accumulated retained earnings for 2014 is $223,517 and 2015 is $253,893
• The net income is $50,376.
• The depreciation is $37,053.
• The dividend paid is $20,000.
• The cost of goods sold amounts to $291,090
• The sales is $422,045
• The earnings before interest and taxes is $93,902
• The interest paid is $16,400
• The retained earnings is $30,376
• The taxable income is $77,502

Formula to calculate the Return on equity (ROE):

$\text{ROE}=\frac{\text{Net income}}{\text{Total equity}}$

Compute the Return on equity (ROE):

$\begin{array}{c}\text{ROE}=\frac{\text{Net income}}{\text{Total equity}}\\ =\frac{\$50,376}{\$298,893}\\ =0.1685\end{array}$

Hence, the return on equity is 0.1685 or 16.85%.