Chapter 4, Problem 18P

Requirement 1:

To determine

Determine the return on common equity ratio of Company H for 2013.

Explanation of Solution

Determine the return on common equity ratio of Company H for 2013.

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

$\begin{array}{c}\begin{array}{l}\text{Average total common}\\ \text{stockholders’ equity}\end{array}\}\text{=}\left\{\frac{\left[\begin{array}{l}\text{Total common stockholders' equity, ending+}\\ \text{Total common stockholders' equity, beginning+}\end{array}\right]}{2}\right\}\\ =\left\{\frac{\left[\$1,616.1\text{million}+\$1,048.4\text{million}\right]}{2}\right\}\\ =\frac{\$2,664.5}{2}\\ =\$1,332.25\text{ million}\end{array}$

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

$\begin{array}{c}\text{Return on common equity = }\frac{\text{Net income}}{\text{Average total common stocholders' equity}}\\ =\frac{\$820.5\text{million}}{\$1,332.25\text{ million}}\\ =0.616\end{array}$

Hence, the return on common equity ratio of Company H for 2013 is 0.616.

Comment:

Return on common equity ratio indicates that Company H generated a 61.6% return for its common shareholders.

Requirement 2:

To determine

Determine the debt-to-assets ratio of Company H for 2013.

Explanation of Solution

Determine the debt-to-assets ratio of Company H for 2013.

$\begin{array}{c}\text{Debt-to-assets ratio = }\frac{\text{Total liabilities}}{\text{Total assets}}\\ =\frac{\$3,741.4\text{million}}{\text{\$5,357}\text{.5}\text{million}}\\ =0.698\end{array}$

Hence, the debt-to-assets ratio of Company H for 2013 is 0.698.

Comment:

Debt-to-assets ratio indicates that Company H’s 69.8% of total assets are financed by its creditors.

Requirement 3:

To determine

Determine the debt-to-equity ratio of Company H for 2013.

Explanation of Solution

Determine the debt-to-equity ratio of Company H for 2013.

$\begin{array}{c}\text{Debt-to-equity ratio = }\frac{\text{Total liabilities}}{\text{Total common stocholders' equity}}\\ =\frac{\$3,741.4\text{million}}{\text{\$1,616}\text{.1}\text{million}}\\ =2.32\end{array}$

Hence, the debt-to- equity ratio of Company H for 2013 is 2.32.

Comment:

Debt-to-assets ratio indicates that Company H has $2.32 in total liabilities for every of $1.00 in equity.

Requirement 4:

To determine

Determine the current ratio of Company H for 2013.

Explanation of Solution

Determine the current ratio of Company H for 2013.

$\begin{array}{c}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$2,487.3\text{million}}{\text{\$1,408}\text{.0 million}}\\ =1.77\end{array}$

Hence, the current ratio of Company H for 2013 is 1.77.

Comment:

Current ratio indicates that Company H has $1.77 in current assets for every of $1.00 in current liabilities.

Requirement 5:

To determine

Determine the quick ratio of Company H for 2013.

Explanation of Solution

Determine the quick ratio of Company H for 2013.

$\begin{array}{c}\text{Quick ratio = }\frac{\text{Quick assets}}{\text{Current liabilities}}\\ =\frac{\left[\text{Cash and cash equivalents +Recceivables}\right]}{\text{Current liabilities}}\\ =\frac{\left[\$1,118.5\text{million}+\$477.9\text{million}\right]}{\text{\$1,408}\text{.0million}}\\ =1.13\end{array}$

Hence, the quick ratio of Company H for 2013 is 1.13.

Comment:

Quick ratio indicates that Company H has $1.13 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 Company H for 2013.

Explanation of Solution

Determine the inventory turnover in days of Company H for 2013.

Step 1: Calculate the average inventory.

$\begin{array}{c}\text{Average inventory=}\left(\frac{\text{Ending inventory +Beinning inventory}}{2}\right)\\ =\left(\frac{\text{\$659}\text{.5million + \$633}\text{.3million}}{2}\right)\\ =\left(\frac{\$1,292.8}{2}\right)\\ =\$646.4\text{ million}\end{array}$

Step 2: Calculate the inventory turnover.

$\begin{array}{c}\text{Inventory turnover= }\left[\frac{\text{Cost of goods sold}}{\text{Average inventory}}\right]\\ =\frac{\text{\$3,865}\text{.2}\text{million}}{\$646.4\text{ million}}\\ =5.979\text{ times}\end{array}$

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

$\begin{array}{c}\text{Inventory turnover days = }\frac{\text{365 days}}{\text{Inventory turnover}}\\ =\frac{365}{5.979\text{ times}}\\ =61\text{days}\end{array}$

Hence, the inventory turnover days of Company H for 2013 are 61 days.

Comment:

On an average Company H takes 61 days to convert inventory into sales in the operation cycle.

Requirement 7:

To determine

Determine the accounts receivable turnover in days of Company H for 2013.

Explanation of Solution

Determine the accounts receivable turnover in days of Company H for 2013.

Step 1: Calculate the average accounts receivable.

$\begin{array}{c}\text{Average accounts receivable =}\left(\frac{\begin{array}{l}\text{Ending accounts receivable }\\ \text{+Beinning accounts receivable}\end{array}}{2}\right)\\ =\left(\frac{\$477.9\text{million +\$461}\text{.4million}}{2}\right)\\ =\left(\frac{\$939.3}{2}\right)\\ =\$469.65\text{million}\end{array}$

Step 2: Calculate the accounts receivable turnover.

$\begin{array}{c}\text{Accounts receivable turnover= }\frac{\text{Total credit sales}}{\text{Average accounts receivable}}\\ =\frac{\text{\$7,146}\text{.1}\text{million}}{\$469.65\text{ million}}\\ =15.21\text{ times}\end{array}$

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

$\begin{array}{c}\text{Accounts receivable turnover days = }\frac{\text{365 days}}{\text{Accounts receivable turnover}}\\ =\frac{\text{365 days}}{15.21\text{ times}}\\ =24\text{days}\end{array}$

Hence, the accounts receivable turnover days of Company H for 2013 are 24 days.

Comment:

On an average Company H takes 24 days to collect its receivables from its customers.

Requirement 8:

To determine

Determine the accounts payable turnover in days of Company H for 2013.

Explanation of Solution

Determine the accounts payable turnover in days of Company H for 2013.

Step 1: Determine the amount of inventory purchases.

$\begin{array}{c}\text{Inventory purchases = Cost of goods sold + Change in inventory}\\ \text{=Cost of goods sold +}\left(\text{Ending inventory}-\text{Beginning inventory}\right)\\ =\$3,865.2\text{million +}\left(\$659.5\text{million}-\$633.3\text{million}\right)\\ =\$3,891.4\text{million}\end{array}$

Step 2: Calculate the average accounts payable.

$\begin{array}{c}\text{Average accounts payable =}\left(\frac{\begin{array}{l}\text{Ending accounts receivable }\\ \text{+Beginning accounts receivable}\end{array}}{2}\right)\\ =\left(\frac{\$461.5\text{million +\$442}\text{.0million}}{2}\right)\\ =\frac{\$903.5}{2}\\ =\$451.75\text{ million}\end{array}$

Step 3: Calculate the accounts payable turnover.

$\begin{array}{c}\text{Accounts payable turnover = }\left[\frac{\text{Inventory purchases}}{\text{Average accounts receivable}}\right]\\ =\left[\frac{\text{\$3,891}\text{.4}\text{million}}{\$451.75\text{ million}}\right]\\ =8.61\text{times}\end{array}$

Step 4: Determine the accounts payable turnover in days.

$\begin{array}{c}\text{Accounts payable turnover days = }\frac{\text{365 days}}{\text{Accounts payable turnover }}\\ =\frac{\text{365 days}}{8.61\text{ times}}\\ =42\text{days}\end{array}$

Hence, the accounts payable turnover in days of Company H for 2013 is 42 days.

Comment:

On an average Company H takes 42 days to pay its payables to its suppliers.

Requirement 9:

To determine

Determine the operating cycle in days of Company H for 2013.

Explanation of Solution

Determine the operating cycle in days of Company H for 2013.

$\begin{array}{c}\text{Operating cycle}\left(\text{in days}\right)\text{ =}\left[\begin{array}{l}\text{Inventory turnover days+}\\ \text{Accounts receivable turnover days}-\\ \text{Accounts payables turnover days}\end{array}\right]\\ =61\text{days +24days}-42\text{days}\\ \text{=43days}\end{array}$

Hence, the operating cycle in days of Company H for 2013 is 43 days.

Comment:

Company H takes 43days 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 Company H for 2013.

Explanation of Solution

Determine the total assets turnover ratio of Company H for 2013:

Step 1: Calculate average total assets.

$\begin{array}{c}\text{Average total assets =}\left[\frac{\left(\text{Beginning total assets+Ending total assets}\right)}{2}\right]\\ =\left[\frac{\left(\text{\$5,357}\text{.5million+\$4,754}\text{.8million}\right)}{2}\right]\\ =\left(\frac{\$10,112.3}{2}\right)\\ =\$5,056.15\text{ million}\end{array}$

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

$\begin{array}{c}\text{Total assets turnover ratio = }\frac{\text{Total revenues}}{\text{Average total assets}}\\ =\frac{\text{\$7,146}\text{.1million}}{\$5,056.15\text{ million}}\\ =1.41\end{array}$

Hence, the total assets turnover ratio of Company H for 2013 is 1.41.

Comment:

Total assets turnover ratio indicates that Company H has generated $1.41 in sales for every of $1.00 in assets.