Question

The following financial information is for Pharoah Company. PHAROAH COMPANY Balance Sheets December 31...

The following financial information is for Pharoah Company.

PHAROAH COMPANY
Balance Sheets
December 31

Assets

2017

2016

Cash

$ 72,000

$ 69,000

Debt investments (short-term)

54,000

39,000

Accounts receivable

107,000

90,000

Inventory

236,000

162,000

Prepaid expenses

30,000

27,000

Land

133,000

133,000

Building and equipment (net)

260,000

188,000

Total assets

$892,000

$708,000

Liabilities and Stockholders’ Equity

Notes payable

$170,000

$106,000

Accounts payable

65,000

54,000

Accrued liabilities

42,000

42,000

Bonds payable, due 2020

250,000

171,000

Common stock, $10 par

209,000

209,000

Retained earnings

156,000

126,000

Total liabilities and stockholders’ equity

$892,000

$708,000

PHAROAH COMPANY
Income Statements
For the Years Ended December 31

2017

2016

Sales revenue

$898,000

$789,000

Cost of goods sold

647,000

575,000

Gross profit

251,000

214,000

Operating expenses

194,000

160,000

Net income

$ 57,000

$ 54,000


Additional information:
1. Inventory at the beginning of 2016 was $115,000.
2. Accounts receivable (net) at the beginning of 2016 were $89,000.
3. Total assets at the beginning of 2016 were $633,000.
4. No common stock transactions occurred during 2016 or 2017.
5. All sales were on account.
Your answer is correct.
Compute the liquidity and profitability ratios of Pharoah Company for 2016 and 2017. (Round current ratio and asset turnover to 2 decimal places, e.g 1.83 and all other answers to 1 decimal place, e.g. 1.8 or 1.8%. If % change is a decrease show the numbers as negative, e.g. -1.83% or (1.83%).)

2017

2016

% Change

LIQUIDITY

Current ratio

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:1

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:1

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%
Accounts receivables turnover

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times

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times

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%
Inventory turnover

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times

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times

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%

2017

2016

% Change

PROFITABILITY

Profit margin

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%

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%

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%
Asset turnover

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times

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times

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%
Return on assets

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%

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%

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%
Earnings per share $

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$

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%

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(b)

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. 20,000 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 $895,000. 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

%
0 0
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Answer #1
Calculation of liquidity ratio Formula 2017 2016 change
Current ratio CA/CL CA
Cash 72,000 69,000
Short term investment 54,000 39,000
A/R 1,07,000 90,000
Inventory 2,36,000 1,62,000
Pre-Paid expenses 30,000 27,000
4,99,000 3,87,000
CL
Notes payable 1,70,000 1,06,000
Accounts payable 65,000 54,000
Accrued liabilities 42,000 42,000
2,77,000 2,02,000
Current ratio 1.80 1.92 -5.97%
1.8:1 1.92:1
Calculation of liquidity ratio Formula 2017 2016 change
Accounts receivable turn over ratio (ARTOR) Net credit sales/average accounts receivable Oening Receivalbe 90,000 89000
Closing Receivable 1,07,000 90,000
Average A/R 98500 89500
Sales 8,98,000 7,89,000
ARTOR 9.1 8.8 0.3
Calculation of liquidity ratio Formula 2017 2016 change
Inventroy Turn over ratio Cost of goods sold/Average Inventory Cost of goods sold 6,47,000 5,75,000
Oening Inventory 1,62,000 1,15,000
Closing Inventory 2,36,000 1,62,000
Average inventory 199000 138500
Inventroy Turn over ratio 3.3 4.2 -0.9
Calculation of Profitablility ratio Formula 2017 2016 change
Profit margin GP/Sales GP 2,51,000 2,14,000
Sales 8,98,000 7,89,000
Profit margin 28.0% 27.1% 0.8%
Asset turn over ratio (ATOR) Total sales/Average assets Sales 8,98,000 7,89,000
Opening assets 7,08,000 6,33,000
Closing assets 8,92,000 7,08,000
Average assets 800000 670500
ATOR 1.12 1.18 -0.05
Return on assets Net Income/Total Assets Net Income 57,000 54,000
Total Assets 8,92,000 7,08,000
Return on assets 6.4% 7.6% -1.2%
Earning per share Net Income/No. of shares Net Income 57,000 54,000
No. of shares 20,900 20,900
Earning per share 2.7 2.6 0.1
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