Question

Presented here are the comparative balance sheets of Hames, Inc., at December 31, 2017 and 2016. Sales for the year ended December 31, 2017, totaled $580,000. HAMES, INC., Balance Sheets December 31, 2017 and 2016 2017 2016 Assets Cash $ 23,000 $ 19,000 Accounts receivable 78,000 72,000 Merchandise inventory 103,000 99,000 Total current assets $ 204,000 $ 190,000 Land 50,000 40,000 Plant and equipment 125,000 110,000 Less: Accumulated depreciation (65,000 ) (60,000 ) Total assets $ 314,000 $ 280,000 Liabilities Short-term debt $ 18,000 $ 17,000 Accounts payable 65,600 75,000 Other accrued liabilities 20,000 18,000 Total current liabilities $ 103,600 $ 110,000 Long-term debt 22,000 30,000 Total liabilities $ 125,600 $ 140,000 Stockholders’ Equity Common stock, no par, 100,000 shares authorized 40,000 and 25,000 shares issued, respectively $ 74,000 $ 59,000 Retained earnings: Beginning balance $ 81,000 $ 85,000 Net income for the year 53,400 1,000 Dividends for the year (20,000 ) (5,000 ) Ending balance $ 114,400 $ 81,000 Total stockholders’ equity $ 188,400 $ 140,000 Total liabilities and stockholders’ equity $ 314,000 $ 280,000 e. Calculate the acid-test ratio at December 31, 2017. (Round your answer to 2 decimal places.) f. Assume that on December 31, 2017, the treasurer of Hames, Inc., decided to pay $15,000 of accounts payable. What impact, if any, this receipt will have on the answers you calculated for requirements a-d (increase, decrease, or no effect) a. ROI for the year ended December 31, 2017: No effect Decrease Increase b. ROE for the year ended December 31, 2017: No effect Increase Decrease c.Working capital as at December 31, 2017: Increase No effect Decrease d. Current ratio as at December 31, 2017: Increase Decrease No effect g. Assume that instead of paying $15,000 of accounts payable on December 31, 2017. Hames, Inc., collected $15,000 of accounts receivable. What impact, if any, this receipt will have on the answers you calculated for requirements a-d (increase, decrease, or no effect) a. ROI for the year ended December 31, 2017: Increase Decrease No effect b. ROE for the year ended December 31, 2017: No effect Increase Decrease c. Working capital as at December 31, 2017: Decrease No effect Increase d. Current ratio as at December 31, 2017: Increase Decrease No effect

Answer 1

(A) Return on Investment (ROI):

For the year ended December 31, 2017:

Return on Investment = Net Income / Capital Employed or Cost of Investment

Where, Net Income = Gross Profit - Expenses

Capital Employed / Cost of Investment = Long Term Funds Employed (Equity Stock + Long Term Liabilities)

Net Income = $ 53,400

Capital Employed = $ 210,400 ($ 188,400 + $ 22,000)

ROI = 25.38% ($ 53,400 / $ 210,400 *100)

For the year ended December 31, 2016:

Net Income = $ 1,000

Capital Employed = $ 170,000 ($ 140,000 + $ 30,000)

ROI = 0.59% ($ 1,000 / $ 170,000 *100)

On the basis of above calculation, there is 24.79% increase in the return on investment during the year ended December 31, 2017.

(B) Return on Equity (ROE):

For the year ended December 31, 2017:

Return on Equity = Net Income / Total Equity or Shareholders Fund

Net Income = $ 53,400

Total Equity = $ 188,400

ROI = 28.34% ($ 53,400 / $ 188,400 *100)

For the year ended December 31, 2016:

Net Income = $ 1,000

Total Equity = $ 140,000

ROI = 0.71% ($ 1,000 / $ 140,000 *100)

On the basis of above calculation, there is 27.63% increase in the return on equity during the year ended December 31, 2017.

(C) Working Capital:

As at December 31, 2017:

Working Capital = Current Assets - Current Liabilities

Current Assets = $ 204,000

Current Liabilities = $ 103,600

Working Capital = $ 100,400 ($204,000 - $ 103,600)

As at December 31, 2016:

Current Assets = $ 190,000

Current Liabilities = $ 110,000

Working Capital = $ 80,000 ($190,000 - $ 110,000)

On the basis of above calculation, there is $ 20,400 increase in the working capital during the year ended December 31, 2017.

(D) Current Ratio:

As at December 31, 2017:

Current Ratio = Current Assets / Current Liabilities

Current Assets = $ 204,000

Current Liabilities = $ 103,600

Current Ratio = 1.97 ($204,000 / $ 103,600)

As at December 31, 2016:

Current Assets = $ 190,000

Current Liabilities = $ 110,000

Current Ratio = 1.73 ($190,000 / $ 110,000)

On the basis of above calculation, there is 0.24 times increase in the current ratio during the year ended December 31, 2017.

(D) Acid Test Ratio:

As at December 31, 2017:

Acid Test Ratio = Liquid Assets / Current Liabilities

Liquid Assets = Current Assets - Inventory

Liquid Assets = $ 101,000 ($ 204,000 - $ 103,000)

Current Liabilities = $ 103,600

Acid Test Ratio = 0.97 ($101,000 / $ 103,600)

As at December 31, 2016:

Liquid Assets = $ 91,000 ($ 190,000 - $ 99,000)

Current Liabilities = $ 110,000

Current Ratio = 0.83 ($91,000 / $ 110,000)

On the basis of above calculation, there is 0.14 times increase in the current ratio during the year ended December 31, 2017.