Question

Liquidity Ratios

Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.

Kepler Company
Comparative Balance Sheets
		This Year		Last Year
Assets
Current assets:
Cash		$ 50,000		$100,000
Accounts receivable, net		300,000		150,000
Inventory		600,000		400,000
Prepaid expenses		25,000		30,000
Total current assets		$ 975,000		$680,000
Property and equipment, net		125,000		150,000
Total assets		$1,100,000		$830,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$ 400,000		$290,000
Short-term notes payable		200,000		60,000
Total current liabilities		$ 600,000		$350,000
Long-term bonds payable, 12%		100,000		150,000
Total liabilities		$ 700,000		$500,000
Stockholders' equity:
Common stock (100,000 shares)		200,000		200,000
Retained earnings		200,000		130,000
Total liabilities and stockholders' equity		$1,100,000		$830,000

Kepler Company
Comparative Income Statements
		This Year		Last Year
Sales		$ 950,000		$ 900,000
Less: Cost of goods sold		500,000		490,000
Gross margin		$ 450,000		$ 410,000
Less: Selling and administrative expenses		275,000		260,000
Operating income		$ 175,000		$ 150,000
Less: Interest expense		12,000		18,000
Income before taxes		$ 163,000		$ 132,000
Less: Income taxes		65,200		52,800
Net income		$ 97,800		$ 79,200
Less: Dividends		27,800		19,200
Net income, retained		$ 70,000		$ 60,000

When required, round your intermediate computations and answers to two decimal places. Assume that the ending balance of last year's accounts receivable and inventory is the average for last year computations. Assume 365 days per year.

Required:

1. Compute the following ratios for each year:

	This Year	Last Year
a. Current ratio
b. Quick ratio
c. Receivables turnover	days	days
d. Inventory turnover	days	days

Answer 1

		Current Year	Calculation	Last Year	Calculation
a	Current Ratio(Current Assets/Current liabilities)	1.63	$975,000 / $600,000	1.94	$680,000 / $350,000
b	Acid-test Ratio[(Current Assets - Inventories - Prepaid expenses)/Current laibilities]	0.58	($975,000-600,000-20,000)/$600,000	0.71	($680,000-400,000-30,000)/$350,000
c	Average accounts receivable =(Beginning Accounts Receivable+Clsoing Accounts Receivable)/2	$2,25,000	($150,000+$300,000)/2	$1,50,000
	Accounts receivable turnover =Net sales / Average accounts receivable	4.22	$950,000/$225,000	6.00	$900,000/$150,000
	Average collection period =365 days/Accounts receivable turnover	86.49 days	365 days / 4.22	60.83 days	365 days / 6.00
d	Average Inventory =(Opening Inventory + Closing Inventory)/2	$5,00,000	($400,000+$600,000)/2	$4,00,000
	Inventory Turnover ratio =Cost of goods sold / Average Inventory	1.00	$500,000/$500,000	1.23	$490,000/$400,000
	Avearage Sales period =365 days / Inventory Turnover ratio	365 days	365 days / 1	296.75 days	365 days / 1.23

Answer 2

1. Express each item in the asset section of the balance sheet as a percentage of total assets for each year. (Note: Enter a decrease as a negative number if applicable. Round all percentages to one decimal place.)

Kepler Company

Comparative Balance Sheets

1		This Year	This Year	Last Year	Last Year
2	Assets
3	Current assets:
4	Cash	$50,000.00		$100,000.00
5	Accounts Receivable, net	300,000.00		150,000.00
6	Inventory	600,000.00		400,000.00
7	Prepaid expenses	25,000.00		30,000.00
8	Total current assets	$975,000.00		$680,000.00
9	Property and equipment, net	125,000.00		150,000.00
10	Total assets	$1,100,000.00		$830,000.00	100

2. Express each item in the liabilities and equity section as a percentage of total liabilities and equity for each year. (Note: Enter a decrease as a negative number if applicable. Round all percentages to one decimal place.)

Kepler Company

Comparative Balance Sheets

1		This Year	This Year	Last Year	Last Year
2	Liabilities and Stockholders’ Equity
3	Current liabilities:
4	Accounts payable	$400,000.00	✔	$290,000.00	✔
5	Short-term notes payable	200,000.00	✔	60,000.00	✔
6	Total current liabilities	$600,000.00	✔	$350,000.00	✔
7	Long-term bonds payable, 12%	100,000.00	✔	150,000.00	✔
8	Total liabilities	$700,000.00	✔	$500,000.00	✔
9	Stockholders’ equity:
10	Common stock (100,000 shares)	200,000.00	✔	200,000.00	✔
11	Retained earnings	200,000.00	✔	130,000.00	✔
12	Total liabilities and stockholders’ equity	$1,100,000.00	✔	$830,000.00	✔

Answer 3

First Post didnt keep the anwers.. idk how to delete it..

4.5%

1	This Year	Last Year
4 Cash	12.0%
	27.3	18.1
	54.5	48.2
	2.3	3.6
	88.6	81.9
	11.4	18.1
10 Total	100%	100%

	This Year	Last Year
4 Acc Pay	36.4%	34.9%
	18.2	7.2
	54.5	42.2
	9.1	18.1
	63.6	60.2
	18.2	24.1
	18.2	15.7
12 Tot Lia Stoc Equi	100%	100%