Question

13.178 (LO 4) Ratio Computation a l S December 31, 2000, presented the following balance sheet c h abernoperating for several years, SINGLETON COMPANY BALANCE SHEET DROEMERE 31.21 Cash $40.000 20.000 Receivables Inventories Plants $ 20,000 37.500 47.500 110.000 215 mm Accounts payable Mortgage payable Common stock (51 par) Retained eaming (net) $215.000 The net income for 2020 was $12.500. Assume that totales are the same in 2019 and 2020. Instructions Compute each of the following ration. For each of the four indicate the manner in which it is computed and its significance as a tool in the analysis of the financial soundness of the company (a) Current ratio. (c) Debt to total assets. (b) Acid-test ratio. (d) Rate of return on assets.

Answer 1

	1	Current ratio
		Current ratio=	Current asset
			Current liabilities
		Current ratio=	105,000
			40,000
		Current ratio=	2.63
		Current assets
		Cash	20,000
		Receivable	37,500
		Inventory	47,500
		Total Current asset	105,000
		Current liabilities
		Accounts Payable	40,000
		Total Current liabilities	40,000
		Significance as a tool in financial analysis
		Current ratio measures the liquidity of the company that means how much current assets it has to meet current liability, current ratio of 1.5 to 3 times is a desires current ration which might differ from industry to industry
		In the given answer the company has current ratio no if 2.63 which means the current assets are 2.63 times the current liabilities so the company has a good liquidity position
	2	Acid Test ratio
		Acid Test ratio=	Cash+Accounst receivable+marketable securities
			Current liabilities
		Acid Test ratio=	=20,000+37,500
			40,000
		Acid Test ratio=	57500
			40,000
		Acid Test ratio=	1.44
		Significance as a tool in financial analysis
		Acid test ration measures the ability of the company to convert its cash, trace receivable and marketable security into cash in satisfy the imamate liability
		Acid test ration of more that is preferred as it means the that company can quickly convert it s assets to pay the immediate liabilities
		In the given answer the company has an acid test ration of 1.44 which means it has favorable quick ration which is good sign to the company
	3	Debt to total asset ratio
		Debt to asset ratio =	Short term debt+ long term debt
			Total assets
			Or
		There is only note payable as debt	Total debt (i.e. Mortgage payable)
			Total assets
		Debt to asset ratio =	70,000
			215,000
		Debt to asset ratio =	0.33
		Significance as a tool in financial analysis
		Debt to total asset ration indicates the financial leverage of the Company and it indicates the total assets financed by the creditors
		Debt to total asset ration of more than 1 indicates that the total assets are majorly financed by the creditors which is not good sign for the company
		In the given case the ration is 0.33 times which means 33% of the total assets are financed by the creditors which a good sign for the Company
	4	Rate of return on assets
		Rate of return on assets=	Net Income
			Total assets
		Rate of return on assets=	12500
			215,000
		Rate of return on assets=	6%
		Significance as a tool in financial analysis
		The return on asset ratio measure how efficiently the company is using the its assets to generate the return and normally investors and stockholders of the company prefer the high return on assets
		in the given case the company has return on asset of 6% which need to be improved by the Company