Question

Sprague Company has been operating for several years, and on December 31, 2020, presented the following balance sheet. SPRAGUE COMPANY BALANCE SHEET DECEMBER 31, 2020 $40,000 Accounts payable $80,000 140,000 Cash Receivables 75,000 Mortgage payable 95,000 Common stock ($1 par) 150,000 Inventory Plant assets (net) 220.000 Retained earnings 60,000 $430,000 $430,000 The net income for 2020 was $25,000. Assume that total assets are the same in 2019 and 2020. (a) Compute each of the following ratios. (Round answers to 2 decimal places, e.g. 1.59 or 45.87%.) (a) Current ratio (b) Acid-test ratio (c) Debt to assets ratio (d) Return on assets

Answer 1

a) Current assets= Cash+Receivables+Inventory

= $40000+75000+95000= $210000

Current liabilities= Accounts payable= $80000

Current ratio= Current assets/Current liabilities

= $210000/80000= 2.63

b) Quick assets= Cash+Receivables

= $40000+75000= $115000

Acid-test ratio= Quick assets/Current liabilities

= $115000/80000= 1.44

c) Total debts= Accounts payable+Mortgage payable

= $80000+140000= $220000

Debt to assets ratio= Total debts*100/Total assets

= $220000*100/430000= 51.16%

d) Average total assets= $(430000+430000)/2= $430000

Return on assets= Net income*100/Average total assets

= $25000*100/430000= 5.81%