Question

The following financial information is for Oriole Company. ORIOLE COMPANY Balance Sheets December 31 Assets 2017 2016 Cash $ 70,000 $ 69,000 Debt investments (short-term) 51,000 40,000 Accounts receivable 107,000 92,000 Inventory 234,000 167,000 Prepaid expenses 26,000 23,000 Land 135,000 135,000 Building and equipment (net) 261,000 184,000 Total assets $884,000 $710,000 Liabilities and Stockholders’ Equity Notes payable $172,000 $106,000 Accounts payable 66,000 52,000 Accrued liabilities 42,000 42,000 Bonds payable, due 2020 251,000 170,000 Common stock, $10 par 204,000 204,000 Retained earnings 149,000 136,000 Total liabilities and stockholders’ equity $884,000 $710,000 ORIOLE COMPANY Income Statements For the Years Ended December 31 2017 2016 Sales revenue $882,000 $781,000 Cost of goods sold 641,000 574,000 Gross profit 241,000 207,000 Operating expenses 190,000 160,000 Net income $ 51,000 $ 47,000 Additional information: 1. Inventory at the beginning of 2016 was $117,000. 2. Accounts receivable (net) at the beginning of 2016 were $88,000. 3. Total assets at the beginning of 2016 were $631,000. 4. No common stock transactions occurred during 2016 or 2017. 5. All sales were on account.

The following are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2017, and (2) as of December 31, 2018, after giving effect to the situation. (Round all answers to 1 decimal places, e.g. 1.8 or 1.8%. If % change is a decrease show the numbers as negative, e.g. -1.83% or (1.83%).) Situation Ratio 1. 19,000 shares of common stock were sold at par on July 1, 2018. Net income for 2018 was $55,000. Return on common stockholders’ equity 2. All of the notes payable were paid in 2018. All other liabilities remained at the same levels as at December 31, 2018. At December 31, 2018, total assets were $885,000. Debt to assets ratio 3. The market price of common stock was $9 and $12 on December 31, 2017 and 2018, respectively. Net income for 2018 was $55,000. Price-earnings ratio 2018 2017 % Change Return on common stockholders’ equity % % % Debt to assets ratio % % % Price earnings ratio times times %

Answer 1

Net Income (annual) Return on Common Stockholders' equity = Average Shareholders' Equity Total Debts Debt to Asset ratio Total Assets Market price of common stock Price-earning ratio Earnings per shsre Computation of Average Stockholders' equity Particulars 2018 2017 Stockholder's equity at Beginning $2,04,000.00 $2,04,000.00 Add: Issues during the year (19000 shares @$10 par) 19000 x 10 Stockholder's equity at Ending $1,90,000.00 $3,94,000.00 $2,04,000.00 (204000 (204000 Average Equity (Beginning+Ending)/2 394000)/2 $2,99,000.00 $2,04,000.00 204000)/2 1. Computation of Return on Common Stockholders' equity Particulars 2018 2017 $55,000.00 $ 51,000.00 $2,99,000.00 $2,04,000.00 A Net Income (Annual) B Average Stockholders' equity Return on Stockholders' equity (A/Bx100) 18.4% 25.0% 2. Total Debts for 2018 Notes payable + Accounts payable Accrued Liabilities = +Bonds payable = 172000+ 66000 42000 251000 5,31,000.00 =

Total Debts for 2018 Opening Total Debts -Notes Payable paid = (172000 + 66000 + 42000 251000) - 172000 = $531,000 -$172,000 $ 3,59,000.00 Computation of Return on Debts to Asset Ratio Particulars 2018 2017 $3,59,000.00 $5,31,000.00 $8,85,000.00 $8,84,000.00 A Total Debts B Total Assets 60.1% Debts to Asset Ratio (A/B x100) 40.6% 3. Computation of Earning per share Particulars 2018 2017 $55,000.00 $ 51,000.00 A Net Income B Number of shares outstanding 39400 20400 1.40 $ Earning per share (A/B) 2.50 Computation of Price Earning ratio Particulars 2018 2017 $ A Market price of common stock 12.00 $ 9.00 B Earnings per share 1.40 $ 2.50 Price Earning Ratio (A/B) ( in times) 8.6 2.0 Statement Showing change Return on Common Stockholders' equity Debt to Asset ratio Price Earning Ratio Change 2018 2017 (6.61) % (19.50) % 18.4% 25.0% 40.6% 60.1% 6.6 times 8.6 2.0

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