Question

E13.19 (LO 4) (Ratio Computations and Effect of Transactions) Presented below is information related to Carver Inc.

Carver Inc. Balance Sheet December 31, 2020
Cash		$ 45,000	Notes payable (short-term)	$ 50,000
Receivables	$110,000		Accounts payable	32,000
Less: Allowance	15,000	95,000	Accrued liabilities	5,000
Inventory		170,000	Common stock (par $5)	260,000
Prepaid insurance		8,000	Retained earnings	141,000
Land		20,000
Equipment (net)		150,000
		$488,000		$488,000

Carver Inc. Income Statement For the Year Ended December 31, 2020
Sales revenue		$1,400,000
Cost of goods sold
Inventory, Jan. 1, 2020	$200,000
Purchases	790,000
Cost of goods available for sale	990,000
Inventory, Dec. 31, 2020	(170,000)
Cost of goods sold		820,000
Gross profit on sales		580,000
Operating expenses		170,000
Net income		$410,000

Instructions

a.   Compute the following ratios or relationships of Carver Inc. Assume that the ending account balances are representative unless the information provided indicates differently.

1.   Current ratio.

2.   Inventory turnover.

3.   Accounts receivable turnover.

4.   Earnings per share.

5.   Profit margin on sales.

6.   Return on assets on December 31, 2020.

b.   Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31, 2020.

1.   Write off an uncollectible account receivable, $2,200.

2.   Purchase additional capital stock for cash.

3.   Pay $40,000 on notes payable (short-term).

4.   Collect $23,000 on accounts receivable.

5.   Buy equipment on account.

6.   Give an existing creditor a short-term note in settlement of account.

Answer 1

Answer:

a (1) Calculation of current ratio

Current ratio = Current assets/ Current liabilities

Current assets = Cash+receivables+ inventory + prepaid insurance

= $45000+$95000+$170000+$8000 = $318000

Current liabilities = notes payable+accounts payable+accrued liabilities

= $50000+$32000+$5000 = $87000

Current ratio = $318000/$87000 = 3.65

(2) Calculation of inventory turnover

Inventory turnover = cost of goods sold/average inventory

Average inventory = (opening inventory + closing inventory )/2 = ($200000+$170000)/2 = $185000

Inventory turnover = $820000/$185000 = 4.43

(3) Calculation of accounts receivable turnover

Accounts receivable turnover = net credit sales/ average accounts receivable

since there is no information with respect to opening balance of accounts receivable , closing balance is taken as average accounts receivable.

  accounts receivable turnover = $1400000/$95000 = 14.74

(4) Calculation of Earning per share

Earning per share = Net income/ total no of shares

= $410000/52000 = $7.88

(5) Calculation of profit margin on sales

Gross profit margin = $580000/$1400000 = 41.43%

Net profit margin = $410000/$1400000 = 29.29%

(6) Calculation of return on assets

Return on assets = net income/ total assets = $410000/$488000 = 0.84

b. (1) No effect on the current ratio

(2) No effect on the current ratio

(3) Improves the current Ratio

(4) No effect on the current ratio

(5) Weakens the current ratio

(6) Improves the current Ratio