Question

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Canfield, Inc. Comparative Income Statement Years Ended December 31, 2018 and 2017 2018 2017 Net Sales Revenue $ 458,000 $ 427,000 Cost of Goods Sold 234,000 217,000 Gross Profit 224,000 210,000 Operating Expenses 134,000 132,000 Income From Operations 90,000 78,000 Interest Expense 13,000 17,000 Income Before Income Tax 77,000 61,000 Income Tax Expense 20,000 24,000 Net Income $ 57,000 $ 37,000 Print Done

Answer 1

1. The ratios will be calculated in the following manner:

Ratio	Formulae	2018	2017
Current Ratio	Current Assets/Current Liabilities	1.59	1.54
Cash Ratio	(Cash+Marketable Securities)/Current Liabilities	0.25	0.23
Times Interest Earned Ratio	Earnings before interest & tax/Interest Expense	6.92	4.59
Inventory Turnover	Cost of Goods Sold/Average Inventory	1.51	1.18
Gross Profit Ratio	Gross Profit/Net Sales	48.91%	49.18%
Debt to equity	Total Liabilities/Total Equity	1.53	1.58
Rate of return on common stockholders' equity	Net Income/Total Equity	24.78%	17.13%
Earnings per share of common stock	Net Income-pref dividends/shares outstanding	0.40	0.28
Price earnings ratio	market price/earnings per share	Market price not available hence ratio not calculated

2.

a) Canfield's ability to pay debt had improved during 2018 since the debt to equity ratio has dropped from 1.58 or 158% in 2017 to 1.53 or 153% in 2018.

The company's ability to sell inventory has also improved since the Inventory Turnover ratio has improved from 1.18 times in 2017 to 1.51 times in 2018.

b.With an improvement in earnings per share and rate of return on equity, the investment attractiveness of the common stock has increased in 2018 versus 2017.

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Workings

Ratio Current Ratio Cash Ratio Times Interest Earned Ratio Inventory Turnover Gross Profit Ratio Debt to equity Rate of return on common stockholders' equity Earnings per share of common stock Price earnings ratio Formulae Current Assets/Current Liabilities (Cash+Marketable Securites)/Current Liabilities Earnings before interest & tax/Interest Expense Cost of Goods Sold/Average Inventory Gross Profit/Net Sales Total Liabilities/Total Equity Net Income/Total Equity Net Income-pref dividends/shares outstanding market price/earnings per share 2018 =364000/229000 =90000/364000 =90000/13000 =234000/((147000+163000)/2) =224000/458000 =352000/(136000+94000) =57000/(136000+94000) =(57000-(94000*3%)/136000 Market price not available hence ratio not calculated 2017 =380000/246000 =88000/380000 =78000/17000 =217000/((163000+204000)/2) =210000/427000 =342000/(94000+122000) =37000/(94000+122000) =(37000-(94000*3%)/122000