Question

The financial statements for Delta Industries for the year ended December 31^st, 2018 are as follows:

Delta Industries

Statement of Income

For the years ended December 31, 2018 and 2017

		2018	2017
Sales revenue		$351,500	$310,000
Cost of goods sold		201,000	155,000
Gross margin		150,500	155,000
Operating expenses:		65,000	71,000
Operating income		85,500	84,000
Interest expense		26,000	20,000
Income before income tax		59,500	64,000
Income tax expense		19,000	22,500
Operating income		$40,500	$41,500

Delta Industries

Statement of Financial Position

December 31^st, 2018 and 2017

	2018	2017
Current assets
Cash	$21,000	$25,000
Accounts receivable(net)	116,000	80,500
Inventory	149,000	137,000
Prepaid expenses	6,000	9,000
Total current assets	292,000	251,500
Property, plan t and equipment (net)	154,500	143,500
Total assets	$446,500	$395,000
Current liabilities	$141,000	$138,500
Long-term liabilities	114,500	121,000
Total liabilities	255,500	259,500
Shareholders’ equity
Preferred shares ($1.50)	30,000	30,000
Common shares	75,000	60,000
Retained earnings	86,000	45,500
Total shareholders’ equity	191,000	135,500
Total liabilities and shareholders’ equity	$446,500	$395,000

Additional information:

1. The market price of Delta Industries’ common shares was $19.00 on December 31^st,2018 and $300 on December 31^st, 2017.
2. The weighted average of common shares outstanding was 15,000 during 2018 and 12,000 during 2017.
3. There are 2,000 preferred shares outstanding
4. All sales are on credit

Required:

1. Compute the following ratios for 2018 and 2017:
   • Current ratio
   • Inventory turnover
   • Accounts receivable turnover
   • Time-interest earned ratio
   • Return on assets
   • Return on common shareholders’ equity
   • Earnings per common share
   • Price-earnings ratio
2. Determine whenter Delta Industries ability to pay its debts and to sell inventory improved or deteriorated during 2018.
3. Would you be interested in purchasing common shares in Delta Industries? Explain

Answer 1

Particular	2018	2017
Current Ratio ( Current Assets / Current Liabilities )	$ 292,000 / $ 141,000 = 2.07 : 1	$ 251,500 / $ 138,500 = 1.82 : 1
Inventory Turnover ( Cost of Goods Sold / Inventory)	$ 201,000 / $ 149,000 = 1.35	$ 155,000 / $ 137,000 = 1.13
Accounts Receivable Turnover ( Sales / Accounts Receivable)	$ 351,500/ $ 116,000 = 3.03	$ 310,000 / $ 80,500 = 3.85
Time-interest Earned Ratio ( EBIT / Interest Expenses)	$ 85,500 / $ 26,000 = 3.29 times	$ 84,000 / $ 20,000 = 4.2 times