Homework Answers
| Ratio | Year 1 | Year 2 | Which year is better |
|
Current ratio (Current assets ÷ current liabilities) |
$205000÷$41500 =4.94 times |
$174000÷$89950 =1.93 times |
Higher current ratio is favourable so, year 1 is better. |
|
Quick ratio [(Current assets-inventory)÷current liabilities] |
$(205000-151000)÷$41500 =1.30 times |
$(174000-127000)÷$89950 =0.52 times |
Ratio higher than 1 is ideal. So, year 1 is better. |
| Acid test ratio | same as quick ratio | Same as quick ratio | |
|
Debt to equity ratio (Total liabilities ÷ total equity) |
$343100÷$567700 =0.604 times |
$410000÷$610000 =0.672 times |
Year 2 is better as it has a higher ratio |
|
Times interest earned ratio (EBIT÷ Interest expense) |
$(36000+4000)÷$4000 =10 times |
$(51000+5000)÷$5000 =11.2 times |
Year 2 is better as it has a higher ratio of income compared to interest expense. |
|
Inventory turnover ratio (Cost of goods sold ÷ average inventory) |
$1026000 ÷ [$(100000 + 151000) ÷ 2] =$1026000 ÷ $125500 =8.17 times |
$1129000 ÷ [$(151000 + 127000)÷ 2] = $1129000 ÷ $139000 = 8.12 times |
Higher ratio is favourable. So, year 1 is better. |
| Average number of days for Inventory to turn over (days in a year ÷ Inventory turnover ratio) |
=365 ÷ 8.17 = 44.68 days |
=365 ÷ 8.12 = 44.95 days |
Year 1 is better as it takes less days to convert inventory into sales. |
| Accounts receivable turnover ratio (net credit sales ÷ average accounts receivable) |
=($1250000×10%)÷($5000÷2) =125000÷2500 =50 times |
=($1465000×10%)÷[($30000 + 5000)÷2] = 146500÷17500 =8.37 times |
Higher ratio is favourable. So, year 1 is better. |
| Average number of days to receive payment from credit sales (no. of days in a year ÷ accounts receivable turnover ratio) |
= 365 ÷ 50 = 7.3 days |
= 365 ÷ 8.37 = 43.6 days |
Year 1 is better as it takes lesser number of days to encash its credit sales. |
| Accounts payable turnover ratio (credit purchases ÷ average accounts payable) |
= [$(1077000×25%) ÷ $(20000÷2)] = 269250 ÷ 10000 = 26.925 times |
=[$(1105000×25%) ÷ $(53000+20000)÷2] = 276250 ÷ 36500 = 7.57 times |
Lower ratio is favourable. So, year 2 is better. |
| Average number of days to pay bills (no. of days in a year÷ accounts payable turnover ratio) |
= 365 ÷ 26.925 = 13.56 days |
= 365 ÷ 7.57 = 48.22 days |
Year 2 is better as it gets more time to pay off its bills. |
|
Return on investment ratio (EBIT ÷ Capital employed) Here capital employed = total assets - current liabilities |
=[$(36000+4000)÷$(910800-41500) =40000 ÷ 869300 = 4.60% |
=[$(51000+5000)÷$(1020000-89950) = 56000 ÷ 930050 = 6.02% |
Higher return is better. So, year 2 is better. |
| Return on owner's equity (net income ÷ shareholders equity) |
=$30000 ÷ $567700 = 5.28% |
=$42300 ÷ $610000 =6.93% |
Year 2 is better as it has higher returns. |
| Profit as a percentage of sales (profit ÷ sales × 100) |
=$(30000 ÷ 1250000) × 100 = 2.4% |
=$(42300 ÷ 1465000) × 100 = 2.9% |
Year 2 is better as it has higher returns. |
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