(1) (a)
Ratio analysis
Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.
To Determine: (a)
(1) (a)
Answer to Problem 3.17E
Determine the current ratio of Corporation BB’s.
Hence, the current ratio is 1.437.
Explanation of Solution
Current ratio
Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. Current assets of the company include cash,
Formula:
(1) (b)
the acid test ratio of Corporation BB’s
(1) (b)
Answer to Problem 3.17E
Hence, the Acid test ratio is 0.64.
Explanation of Solution
Acid test ratio
Acid test ratio is a ratio which is likely to be modifying the current ratioto consider only the current assets which are ready to pay current liabilities. Acid test ratio is calculated by excluding the inventories, prepaid expenses, restricted cash and
Formula:
(1) (c)
the debt to equity ratio of corporation BB’s
(1) (c)
Answer to Problem 3.17E
Hence, the debt to equity ratio is 2.09.
Explanation of Solution
Debt equity ratio
Debt equity ratio is a financial ratio indicating relative proportion of shareholders’ equity and total liabilities (i.e. current and long term liabilities).
Formula:
(1) (d)
the times interest earned ratio of corporation BB’s
(1) (d)
Answer to Problem 3.17E
Hence, the times interest earned ratio 17.38 times.
Explanation of Solution
Times interest earned ratio
Times interest earnedratio quantifies the number of times the earnings before interest and taxes the business pay for the interest expense. Use the following formula to calculate times-interest-earned ratio:
Formula:
(2)
To assess: Corporation BB’s liquidity and solvency relative to its industry.
(2)
Answer to Problem 3.17E
- Current ratio is higher than the industry average.
- Acid test ratio is also higher than the industry average.
- Debt to equity ratio is significantly higher than the industry average because company assets are primarily financed with liabilities instead of equity.
- Times interest earned ratio is also significantly higher than the industry average.
Corporation BB’s seems to be little capable of meeting the interest obligations on its debt.
Explanation of Solution
Liquidity ratio measures the short-term capacity of a company to pay its maturing obligations and to meet unanticipated requirements for cash. Liquidity ratios are current ratio,
Solvency ratio
Solvency ratio measures the capacity of a company to sustain over a long period of time. Solvency ratios are debt to assets ratio, time interest earned ratio, and debt to equity ratio, and more.
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Chapter 3 Solutions
INTERMEDIATE ACCOUNTING (LL) W/CONNECT
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Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning