Question

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they choos htsP wy ate oe Prie Eamnge Ratio Page 2 of s Comparative financial statements for ABC, a merchandising company for the calendar year ended 12/31/18 are below. The Company did not issue any new common stock during the year. A total of 800,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%o, the income tax rate was 40% and the dividend per share of common stock was $.40. The market value of the company's common stock at the end of the year was $18. All of the Company's sales are on account. Graded problem Chapter 14-Financial Accounting Required: Using the information above and below as needed, calculate, or comment as appropriate, regarding the following ratios for the CURRENT YEAR: 1. Working Capital 2. Current Ratio 3. Acid-Test (Quick) Ratio 4. Briefly comment (one or two sentences) about the collective information provided by the ratios 1-3 5. Accounts Receivable Turnover 6. Average Collection Period (Days Sales Outstanding in Receivables) 7. Briefly comment (one or two sentences) about the information in 5 & 6. If credit terms are 2/10;n 30, would you be concerned? Why or why not?

Answer 1

Solution :   

1) Gross Margin = Net Sales ( Cost of Goods Sold)/ Gross Margin

( Current Year) ( Last Year)  

= 52000/27000 = 48000/26000

= 1.93 = 1.84

2) Return On Assets = Net Income/ Total Assets

( Current Year ) ( Last Year)  

= 3540/50280 = 3840/45960

= 0.07 =0.08

3)Return on Equity = Net Income / Shareholders Equity

( Current Year ) ( Last Year)  

=3540/34880 = 3840/31660

=0.10 =0.12

4) No they would not choose to invest in the company as the current return on investment is very less compared to outside investment.