Question

Problem 13-04A a1,b (Video) The following financial information is for Oriole Company. Oriole Company Balance Sheets December 31 2019 Assets Cash Debt investments (short-term) Accounts receivable Inventory Prepaid expenses Land Building and equipment (net) Total assets Liabilities and Stockholders' Equity Notes payable Accounts payable Accrued liabilities Bonds payable, due 2023 Common stock, $10 par Retained earnings Total liabilities and stockholders' equity 2020 $ 69,000$65,000 40,000 89,000 239,000 168,000 26,000 129,000 129,000 264,000 186,000 $888,000 $703,000 55,000 109,000 23,000 $169,000 $109,000 52,000 42,000 251,000 170,000 204,000 204,000 156,000 126,000 $703,000 66,000 42,000 $888,000

Answer 1

(a1) We need to calculate Current Ratio, Accounts Receivable Turnover, Inventory turnover ratio for 2019 and 2020 year and measure the % change.

Current Ratio is measured to assess whether current assets are sufficient to pay for current liabilities. Current Ratio is calculated by Current Assets/ Current Liabilities.

Current Assets for 2019 year is equal to $388000 ( $65000+$40000+$89000+$168000+$26000)

Current Liabilities for 2019 year are $203000 ($109000+$42000+$52000)

Accounts Receivable Turnover ratio is calculated by Net value of credit sales/ Average Accounts Receivable. All Sales are done on account. Average Accounts Receivable are calculated by beginning (Accounts Receivable + closing accounts receivable) / 2

Inventory turnover ratio is calculated by the Cost of goods sold/ Average Inventory during the period. Average Inventory is calculated by (beginning inventory + closing inventory) / 2

Following table shows the required Liquidity ratio for both year and measures the percentage change.

Liquidity Ratio	2019 year	2020 year	%Change
Current Ratio	1.91	1.78	0.068 (6.8%)
Accounts Receivable Turnover Ratio	8.98 times	9.11 times	- 0.014 (-1.4%)
Inventory Turnover Ratio	2.03 times	3.20 times	- 0.576 (-57.6%)

Calculation of Profitability Ratios

Profit Margin is calculated by dividing Net Profit earned during a year by the Net Sales Revenue * 100

Assets Turnover ratio is measured by the Net Sales divided by the Average Assets during the year ( Beginning assets + Closing assets during the year)

Returns on Assets are calculated by the Net Profit generated during the period divided by the Total assets during period

Earning Per Share is calculated by the Net Income divided by the total outstanding number of shares during the period. Following table shows the profitability ratio calculation along with the % Change

Profitability Ratio	2019 year	2020 year	% Change
Net Profit Margin	7.5%	6.76%	0.098 i.e. 9.8%
Assets Turnover	1.16 times	1.13 times	0.025 i.e 2.5%
Return on Assets (ROA)	8.53%	6.87%	0.19 (19%)
Earning per Share (EPS)	$2.94	$2.99	0.016 (1.6%)

(b) Based on the additional information given regarding amounts for the year 2021. We will calculate following ratios

Ratio	2020	2021	% Change
Return on common stock equity	0.299	0.14	0.53 i.e. 53%
Debt to assets ratio	0.59	0.39	0.33 i.e. 33%
Price earning ratio	3.01	9.28	2.08 i.e. 208%

Note*- Return on common stock equity is calculated by the Net income during the year divided by the total common stock equity value during the period

Debt to Assets ratio defines how much total assets are sourced by debt financing. Debt to Assets is calculated by the Total Debt divided by the total assets value during the year

Price earning ratio is measured by the market price of the common stock unit divided by the Earning per Share (EPS)