Question

1) Based on the balance sheet and income statement information given below, calculate the following financial ratios and explain briefly what the number you calculated means:

a) Current ratio

b) Acid-test ratio

c) Days in receivables

d) Debt ratio

e) Return on equity

Assets: Cash and marketable securities Accounts receivable Inventories Prepaid expenses Total current assets Fixed assets Less: accum. depr. Net fixed assets Total assets $600,000 900,000 1,500,000 75,000 $3,075,000 8,000,000 (2,075,000) $5,925,000 $9,000,000 Liabilities: Accounts payable Notes payable Accrued taxes Total current liabilities Long-term debt Owner's equity (1 million shares of common stock outstanding) Total liabilities and owner's equity $800,000 700,000 50,000 $1,550,000 2,500,000 4,950,000 $9,000,000 $10,000,000 (3,000,000) Net sales (all credit) Less: Cost of goods sold Selling and administrative expense Depreciation expense Interest expense Earnings before taxes Income taxes Net income (2,000,000) (250,000) (200,000) 4,550,000 (1,820,000 $2,730,000

Answer 1

Answer: Current ratio = Current Assets Current Liabilities Current ratio = $3,075,000/$1,550,000 Current ratio = 1.98 Acid Test ratio = (Total Current assets - Inventory - Prepaid exp.)/Current Liabilities Acid Test ratio = ($3,075,000 - 1,500,000 -75,000/ $1,550,000 Acid Test ratio = $1,500,000/$1,550,000 Acid Test ratio = 0.97 Days in Receivables = (Accounts receivables/Net Credit Sales)*365 Days in Receivables = ($900,000/$10,000,000)*365 Days in Receivables = 32.85 or 33 Days Debt Ratio = Total Liabilities/Total Assets Debt Ratio = $4,050,000 / $9,000,000 Debt Ratio = 0.45 Return on Equity = Net Income Shareholders Equity Return on Equity = $2,730,000/$4,950,000 Return on Equity = 0.55