Chapter 3, Problem 35QP

SMOLIRA GOLF. INC. 2016 Income Statement
Sales	$205,227
Cost of goods sold	138,383
Depreciation	5,910
EBIT	$ 60,934
Interest paid	1,617
Taxable income	$ 59,317
Taxes	20,760
Net income	$ 38,557
Dividends	$14,300
Additions to retained earnings	24,257

Calculating Financial Ratios. Find the following financial ratios for Smolira Golf (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 ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the current ratio:

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

Compute the current ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio for 2015}=\frac{\$28,666}{\$6,319}\\ =4.54\text{ times}\end{array}$

Hence, the current ratio for 2015 is 4.54 times.

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio for 2016}=\frac{\$32,409}{\$7,427}\\ =4.36\text{ times}\end{array}$

Hence, the current ratio for 2016 is 4.36 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate Quick ratio:

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

Compute the quick ratio:

$\begin{array}{c}\text{Quick ratio for 2015}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$28,666-\$17,357\right)}{\$6,319}\\ =\frac{\$11,309}{\$6,319}\\ =1.79\text{times}\end{array}$

Hence, the quick ratio for 2015 is 1.79 times.

$\begin{array}{c}\text{Quick ratio for 2016}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$32,409-\$19,350\right)}{\$7,427}\\ =\frac{\$13,059}{\$7,427}\\ =1.76\text{times}\end{array}$

Hence, the quick ratio for 2016 is 1.76 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the cash ratio:

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

Compute the cash ratio:

$\begin{array}{c}\text{Cash ratio for 2015}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$4,607}{\$6,319}\\ =0.73\text{ times}\end{array}$

Hence, the cash ratio for 2015 is 0.73 times.

$\begin{array}{c}\text{Cash ratio for 2016}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$4,910}{\$7,427}\\ =0.66\text{ times}\end{array}$

Hence, the cash ratio for 2016 is 0.42 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

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:

$\begin{array}{c}\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$205,227}{\$109,219}\\ =1.88\text{times}\end{array}$

Hence, the total asset turnover ratio is 1.88 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the inventory turnover ratio:

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

Compute the inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$138,383}{\$19,350}\\ =7.15\text{ times}\end{array}$

Hence, the inventory turnover ratio is 7.15 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the receivables turnover ratio:

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

Compute the receivables turnover ratio:

$\begin{array}{c}\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}\\ =\frac{\$205,227}{\$8,149}\\ =25.18\text{ times}\end{array}$

Hence, the receivables turnover ratio is 25.18 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the total debt ratio:

$\text{Total debt ratio = }\frac{\left(\text{Current liabilities}+\text{Long term debt}\right)}{\text{Total assets}}$

Compute the total debt ratio:

$\begin{array}{c}\text{Total debt ratio for the year 2015 = }\frac{\left(\text{Current liabilities}+\text{Long term debt}\right)}{\text{Total assets}}\\ =\frac{\left(\$6,319+\$22,500\right)}{\$87,354}\\ =\frac{\$28,819}{\$87,354}\\ =0.33\text{times}\end{array}$

Hence, the total debt ratio for 2015 is 0.33 times.

$\begin{array}{c}\text{Total debt ratio for 2016 = }\frac{\left(\text{Current liabilities}+\text{Long term debt}\right)}{\text{Total assets}}\\ =\frac{\left(\$7,427+\$19,000\right)}{\$109,219}\\ =\frac{\$26,427}{\$109,219}\\ =0.24\text{times}\end{array}$

Hence, the total debt ratio for 2016 is 0.24 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the debt-equity ratio:

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

Compute the debt-equity:

$\begin{array}{c}\text{Debt-equity ratio for 2015}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$6,319+\$22,500}{\$58,533}\\ =\frac{\$28,819}{\$58,533}\\ =0.49\text{ times}\end{array}$

Hence, the debt-equity ratio for the year 2015 is 0.49 times.

$\begin{array}{c}\text{Debt-equity ratio for 2016}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$7,427+\$19,000}{\$82,792}\\ =\frac{\$26,427}{\$82,792}\\ =0.32\text{ times}\end{array}$

Hence, the debt-equity ratio for the year 2016 is 0.32 times.

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

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the equity multiplier:

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

Compute the equity multiplier ratio for the year 2015:

$\begin{array}{c}\text{Equity multiplier ratio for 2015}=1+\text{debt-equity ratio}\\ =1+0.49\\ =1.49\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2015 is 1.49 times.

$\begin{array}{c}\text{Equity multiplier ratio for 2016}=1+\text{debt-equity ratio}\\ =1+0.32\\ =1.32\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2016 is 1.32 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

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:

$\begin{array}{c}\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}\\ =\frac{\$60,934}{\$1,617}\\ =37.68\text{ times}\end{array}$

Hence, the times interest earned is 37.68 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

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:

$\begin{array}{c}\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}\\ =\frac{\$60,934+\$5,910}{\$1,617}\\ =\frac{\$66,844}{\$1,617}\\ =41.34\text{ times}\end{array}$

Hence, the cash coverage ratio is 41.34 times.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the profit margin ratio:

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

Compute the profit margin:

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\\ =\frac{\$38,557}{\$205,227}\\ =0.1879\text{ or 18}\text{.79}\%\end{array}$

Hence, the profit margin is 18.79%.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formula to calculate the Return on assets (ROA):

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

Compute the Return on assets (ROA):

$\begin{array}{c}\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}\\ =\frac{\$38,557}{\$109,219}\\ =0.3530\end{array}$

Hence, the return on assets is 35.30%.

Summary Introduction

To find: The financial ratios 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 the ratio analysis.

Explanation:

Given information:

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

• The total assets for the year 2015 are $87,354 and for 2016 is $109,219.
• The total liabilities and equity for the year 2015 are $87,354 and for 2016 is $109,219.
• The cash at the beginning and end of the year are $4,607 and $4,910 respectively.
• The accounts receivable for the year 2015 and 2016 are $6,702 and $8,149 respectively.
• The inventory for the year 2015 and 2016 are $17,357 and $19,350 respectively.
• The fixed asset for the year 2015 and 2016 are $58,688 and $76,810 respectively.
• The accounts payable for the year 2015 and 2016 are $3,413 and $3,846 respectively.
• The other current liabilities for the year 2015 and 2016 are $138 and $165 respectively.
• The notes payable for the year 2015 and 2016 are $2,768 and $3,416 respectively.
• The long-term debt for the year 2015 and 2016 are $22,500 and $19,000.
• The common stock and paid in surplus for 2015 are $38,000 and for 2016 are $38,000.
• The accumulated retained earnings for 2015 are $20,535 and 2016 are $44,792.
• The net income is $38,557.
• The depreciation is $5,910.
• The dividend paid is $14,300.
• The cost of goods sold amounts to $138,383.
• The sales are $205,227.
• The earnings before interest and taxes are $60,934.
• The interest paid is $1,617.
• The addition to retained earnings is $24,257.
• The taxable income is $59,317.

Explanation of Solution

Formulae to calculate the Return on equity (ROE):

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

Compute the Return on equity (ROE):

$\begin{array}{c}\text{ROE}=\frac{\text{Net income}}{\text{Total equity}}\\ =\frac{\$38,557}{\$82,792}\\ =0.4657\end{array}$

Hence, the return on equity is 0.4657 or 46.57%.