Chapter 4, Problem 16P

Requirement 1:

To determine

Determine the return on common equity ratio of C&C Incorporation for 2013.

Explanation of Solution

Determine the return on common equity ratio of C&C Incorporation for 2013.

Step 1: Calculate the average total common stockholders’ equity.

$\begin{array}{c}\begin{array}{l}\text{Average total common}\\ \text{stockholders’ equity}\end{array}\}\text{=}\left\{\frac{\left[\begin{array}{l}\text{Total common stocholders' equity, ending+}\\ \text{Total common stocholders' equity, beginning+}\end{array}\right]}{2}\right\}\\ =\left\{\frac{\left[\begin{array}{l}\$1,947.7\text{million}+\\ \$1,700.2\text{million}\end{array}\right]}{2}\right\}\\ =\frac{\$3,647.9}{2}\\ =\$1,823.95\end{array}$

Step 2: Calculate the return on common equity ratio of C&C Incorporation for 2013.

$\begin{array}{c}\text{Return on common equity = }\left(\frac{\text{Net income}}{\text{Average total common stocholders' equity}}\right)\\ =\left(\frac{\$389.0\text{million}}{\$1,823.95}\right)\\ =0.213\end{array}$

Hence, the return on common equity ratio of C&C Incorporation for 2013 is 0.213.

Comment:

Return on common equity ratio indicates that C&C Incorporation generated a 21.3% return for its common shareholders.

Requirement 2:

To determine

Determine the debt-to-assets ratio of C&C Incorporation for 2013.

Explanation of Solution

Determine the debt-to-assets ratio of C&C Incorporation for 2013.

$\begin{array}{c}\text{Debt-to-assets ratio = }\frac{\text{Total liabilities}}{\text{Total assets}}\\ =\frac{\$2,502.0\text{million}}{\text{\$4,449}\text{.7}\text{million}}\\ =0.562\end{array}$

Hence, the debt-to-assets ratio of C&C Incorporation for 2013 is 0.562.

Comment:

Debt-to-assets ratio indicates that C&C Incorporation’s 56.2% of total assets are financed by its creditors.

Requirement 3:

To determine

Determine the debt-to-equity ratio of C&C Incorporation for 2013.

Explanation of Solution

Determine the debt-to-equity ratio of C&C Incorporation for 2013.

$\begin{array}{c}\text{Debt-to-equity ratio = }\frac{\text{Total liabilities}}{\text{Total common stocholders' equity}}\\ =\frac{\$2,502.0\text{million}}{\text{\$1,947}\text{.7}\text{million}}\\ =1.28\end{array}$

Hence, the debt-to- equity ratio of C&C Incorporation for 2013 is 1.28.

Comment:

Debt-to-assets ratio indicates that C&C Incorporation has $1.28 in total liabilities for every of $1.00 in equity.

Requirement 4:

To determine

Determine the current ratio of C&C Incorporation for 2013.

Explanation of Solution

Determine the current ratio of C&C Incorporation for 2013.

$\begin{array}{c}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$1,370.2\text{million}}{\text{\$1,063}\text{.1}\text{million}}\\ =1.29\end{array}$

Hence, the current ratio of C&C Incorporation for 2013 is 1.29.

Comment:

Current ratio indicates that C&C Incorporation has $1.29 in current assets for every of $1.00 in current liabilities.

Requirement 5:

To determine

Determine the quick ratio of C&C Incorporation for 2013.

Explanation of Solution

Determine the quick ratio of C&C Incorporation for 2013.

$\begin{array}{c}\text{Quick ratio = }\frac{\text{Quick assets}}{\text{Current liabilities}}\\ =\frac{\left[\text{Cash and cash equivalents +Recceivables}\right]}{\text{Current liabilities}}\\ =\frac{\left[\$63\text{million}+\$495.5\text{million}\right]}{\text{\$1,063}\text{.1}\text{million}}\\ =0.53\end{array}$

Hence, the quick ratio of C&C Incorporation for 2013 is 0.53.

Comment:

Quick ratio indicates that C&C Incorporation has $0.53 in quick assets (cash and receivables) for every of $1.00 in current liabilities.

Requirement 6:

To determine

Determine the inventory turnover in days of C&C Incorporation for 2013.

Explanation of Solution

Determine the inventory turnover in days of C&C Incorporation for 2013.

Step 1: Calculate the average inventory.

$\begin{array}{c}\text{Average inventory=}\left(\frac{\text{Ending inventory +Beinning inventory}}{2}\right)\\ =\left(\frac{\text{\$676}\text{.9million + \$615}\text{.0million}}{2}\right)\\ =\left(\frac{\$1,291.9}{2}\right)\\ =\$645.95\text{ million}\end{array}$

Step 2: Calculate the inventory turnover.

$\begin{array}{c}\text{Inventory turnover= }\left[\frac{\text{Cost of goods sold}}{\text{Average inventory}}\right]\\ =\frac{\text{\$2,457}\text{.6}\text{million}}{\$645.95\text{ million}}\\ =3.80\text{ times}\end{array}$

Step 3: Calculate the inventory turnover in days of C&C Incorporation for 2013.

$\begin{array}{c}\text{Inventory turnover days = }\left(\frac{\text{365 days}}{\text{Inventory turnover}}\right)\\ \text{= }\left(\frac{\text{365 days}}{\text{3}\text{.80 times}}\right)\\ =95.93\text{days}\end{array}$

Hence, the inventory turnover days of C&C Incorporation for 2013 are 95.93 days.

Comment:

On an average C&C Incorporation takes 100 days to convert inventory into sales in the operation cycle.

Requirement 7:

To determine

Determine the accounts receivable turnover in days of C&C Incorporation for 2013.

Explanation of Solution

Determine the accounts receivable turnover in days of C&C Incorporation for 2013.

Step 1: Calculate the average accounts receivable.

$\begin{array}{c}\text{Average accounts receivable =}\left(\frac{\begin{array}{l}\text{Ending accounts receivable }\\ \text{+Beinning accounts receivable}\end{array}}{2}\right)\\ =\left(\frac{\$495.5\text{million +\$465}\text{.9million}}{2}\right)\\ =\left(\frac{\$961.4}{2}\right)\\ =\$480.7\text{ million}\end{array}$

Step 2: Calculate the accounts receivable turnover.

$\begin{array}{c}\text{Accounts receivable turnover= }\frac{\text{Total credit sales}}{\text{Average accounts receivable}}\\ =\frac{\text{\$4,123}\text{.4}\text{million}}{\$480.7\text{ million}}\\ =8.577\text{ times}\end{array}$

Step 3: Calculate the accounts receivable turnover in days of C&C Incorporation for 2013.

$\begin{array}{c}\text{Accounts receivable turnover days = }\frac{\text{365 days}}{\text{Accounts receivable turnover}}\\ =\frac{\text{365 days}}{8.577\text{ times}}\\ =42.6\text{days}\end{array}$

Hence, the accounts receivable turnover days of C&C Incorporation for 2013 are $\boxed{\text{42}\text{.6 days}}$.

Comment:

On an average C&C Incorporation takes 43 days to collect its receivables from its customers.

Requirement 8:

To determine

Determine the accounts payable turnover in days of C&C Incorporation for 2013.

Explanation of Solution

Determine the accounts payable turnover in days of C&C Incorporation for 2013.

Step 1: Determine the amount of inventory purchases.

$\begin{array}{c}\text{Inventory purchases = Cost of goods sold + Change in inventory}\\ \text{=Cost of goods sold +}\left(\text{Ending inventory}-\text{Beginning inventory}\right)\\ =\$2,457.6\text{million +}\left(\$676.9\text{million}-\$615.0\text{million}\right)\\ =\$2,519.5\text{million}\end{array}$

Step 2: Calculate the average accounts payable.

$\begin{array}{c}\text{Average accounts payable =}\left(\frac{\begin{array}{l}\text{Ending accounts receivable }\\ \text{+Beinning accounts receivable}\end{array}}{2}\right)\\ =\left(\frac{\$387.3\text{million +\$375}\text{.8million}}{2}\right)\\ =\frac{\$763.1}{2}\\ =\$381.55\text{ million}\end{array}$

Step 3: Calculate the accounts payable turnover.

$\begin{array}{c}\text{Accounts payable turnover = }\left[\frac{\text{Inventory purchases}}{\text{Average accounts receivable}}\right]\\ =\left[\frac{\text{\$2,519}\text{.5}\text{million}}{\$381.55\text{ million}}\right]\\ =6.60\text{ times}\end{array}$

Step 4: Determine the accounts payable turnover in days.

$\begin{array}{c}\text{Accounts payable turnover days = }\frac{\text{365 days}}{\text{Accounts payable turnover}}\\ =\frac{\text{365 days}}{6.60\text{ times}}\\ =55.3\text{days}\end{array}$

Hence, the accounts payable turnover in days of C&C Incorporation for 2013 is 55.3 days.

Comment:

On an average C&C Incorporation takes 55 days to pay its payables to its suppliers.

Requirement 9:

To determine

Determine the operating cycle in days of C&C Incorporation for 2013.

Explanation of Solution

Determine the operating cycle in days of C&C Incorporation for 2013.

$\begin{array}{c}\text{Operating cycle}\left(\text{in days}\right)\text{ =}\left[\begin{array}{l}\text{Inventory turnover days+}\\ \text{Accounts receivable turnover days}-\\ \text{Accounts payables turnover days}\end{array}\right]\\ =95.9\text{days +42}\text{.6days}-55.3\text{days}\\ \text{=83}\text{.2days}\end{array}$

Hence, the operating cycle in days of C&C Incorporation for 2013 is 83.2 days.

Comment:

C&C Incorporation takes 83.2days to complete an operating cycle (the purchase of inventory and collection of cash from accounts receivable).

Requirement 10:

To determine

Determine the total assets turnover ratio of C&C Incorporation for 2013.

Explanation of Solution

Determine the total assets turnover ratio of C&C Incorporation for 2013.

Step 1: Calculate average total assets.

$\begin{array}{c}\text{Average total assets =}\left[\frac{\left(\begin{array}{l}\text{Beginning total assets }\\ \text{+Ending total assets}\end{array}\right)}{2}\right]\\ =\left[\frac{\left(\begin{array}{l}\text{\$4,449}\text{.7million }\\ \text{+\$4,165}\text{.4million}\end{array}\right)}{2}\right]\\ =\left(\frac{\$8,615.1}{2}\right)\\ =\$4,307.55\text{ million}\end{array}$

Step 2: Calculate the total assets turnover ratio of C&C Incorporation for 2013.

$\begin{array}{c}\text{Total assets turnover ratio = }\frac{\text{Total revenues}}{\text{Average total assets}}\\ =\frac{\text{\$4,123}\text{.4million}}{\$4,307.55\text{ million}}\\ =0.96\end{array}$

Hence, the total assets turnover ratio of C&C Incorporation for 2013 is 0.96.

Comment:

Total assets turnover ratio indicates that C&C Incorporation has generated $0.96 in sales for every of $1.00 in assets