Question

Chapter 14 Financial Statement Analysis 4-5, LO14-7 3.6A ment Shown below is selected information from the financial statements of furniture store From the balance sheet: Cash... Accounts receivable ... Inventory Plant assets (net of accumulated depreciation)... Current liabilities ..... Total stockholders' equity Total assets .... From the income statement: Net sales Cost of goods sold.. . Operating expenses..... Interest expense ..... Income tax expense .... Net income .......... 300 1.000.00 $1.500.000 1.080. 315.000 84.000 15.000 $ 40.000 (46.000 From the statement of cash flows: Net cash provided by operating activities (including interest paid of $79,000).... Net cash used in investing activities ..... Financing activities: Amounts borrowed .. Repayment of amounts borrowed ........ Dividends paid ....................... Net cash provided by financing activities ... Net increase in cash during the year .... $50,000 (14,000 (20,000) Instructions a. Explain how the interest expense shown in the income statement could be $8. nt could be $84.000 de b. Compute the following (round to one decimal place): 1. Current ratio 2. Quick ratio 3. Working capital 4. Debt ratio c. Comment on these measurements and evaluate Dickson, Inc.'s short-term d. Compute the following ratios (assume that the year-end amounts ou stockholders' equity also represent the average amounts throughout the 1. Return on assets 2. Return on equity m debt-page s of total assets

Answer 1

a) the interest expense of $84000 shown in the income statement means total interest expense of the year and it does not affect whether it is actually paid or not,that means accounts are prepared on acrual basis,but in the case of cash flow statement only the actuallly paid and received amounts will include it will never consider the acrued amounts,hence in present case it means out of total interest payable of $84000 only $79000 is paid actually during the year and balance is payable and it will appear in balance sheet as liability.

b)

1) current ratio=current asset/current liability=380000/150000=2.53

current asset:

cash-30000

account receivables-150000

inventory-200000

total current assets=380000

2)quick ratio=quick asset/current liability=180000/150000=1.2

quick assets=current assets-inventory=380000-200000=180000

3)working capital=current assets-current liability=380000-150000=230000

4)debt ratio=total liabilities/total assets=150000/1000000=15%

c)current ratio measures a company's ability to pay its short term obligations.if it is lessthan 1,it means company is in a position not able to meet its short term obligations if it due at same time.in present case the ratio is more than and hence the company is able to meet current obligations if it due together.

quick ratio shows that company's ability to meet its short term liabilities by using its most liquid assets.as discussed in the current ratio analysis it is also same if the quick ratio is less than 1 means company is in a position which  is not able to meet current obligatios by using quick assets.

working capitalmeans the defference between current assets and current liabilies.it shows howmuch fund is available for the company's day to day expenses.

debt ratio shows that portion of total assets which is financed by debt fund.

d)

1)return on assets=net income/total assets=15000/1000000=1.5%

2)return on equity=net income/average shareholders equity=15000/300000=5%