Question

Problem 13-23A Ratio analysis LO 13-2, 13-3, 13-4, 13-5

The following financial statements apply to Vernon Company:

	Year 4				Year 3
Revenues
Net sales	$	210,400			$	176,900
Other revenues		8,500				5,900
Total revenues		218,900				182,800
Expenses
Cost of goods sold		124,400				101,900
Selling expenses		19,500				17,500
General and administrative expenses		10,200				9,200
Interest expense		2,700				2,700
Income tax expense		20,800				16,800
Total expenses		177,600				148,100
Net income	$	41,300			$	34,700
Assets
Current assets
Cash	$	5,100			$	6,700
Marketable securities		2,400				2,400
Accounts receivable		35,500				30,400
Inventories		102,000				95,200
Prepaid expenses		4,100				3,100
Total current assets		149,100				137,800
Plant and equipment (net)		105,800				105,800
Intangibles		20,400				0
Total assets	$	275,300			$	243,600
Liabilities and Stockholders’ Equity
Liabilities
Current liabilities
Accounts payable	$	38,300			$	55,700
Other		16,800				15,300
Total current liabilities		55,100				71,000
Bonds payable		65,400				66,400
Total liabilities		120,500				137,400
Stockholders’ equity
Common stock (45,000 shares)		113,600				113,600
Retained earnings		41,200				(7,400	)
Total stockholders’ equity		154,800				106,200
Total liabilities and stockholders’ equity	$	275,300			$	243,600

Required
Calculate the following ratios for Year 3 and Year 4. Since Year 2 numbers are not presented do not use averages when calculating the ratios for Year 3. Instead, use the number presented on the Year 3 balance sheet.

a. Net margin. (Round your answers to 2 decimal places.)
b. Return on investment. (Round your answers to 2 decimal places.)
c. Return on equity. (Round your answers to 2 decimal places.)
d. Earnings per share. (Round your answers to 2 decimal places.)
e. Price-earnings ratio (market prices at the end of Year 3 and Year 4 were $6.13 and $4.93, respectively). (Round your intermediate calculations and final answers to 2 decimal places.)
f. Book value per share of common stock. (Round your answers to 2 decimal places.)
g. Times interest earned. Exclude extraordinary income in the calculation as they cannot be expected to recur and, therefore, will not be available to satisfy future interest payments. (Round your answers to 2 decimal places.)
h. Working capital.
i. Current ratio. (Round your answers to 2 decimal places.)
j. Quick (acid-test) ratio. (Round your answers to 2 decimal places.)
k. Accounts receivable turnover. (Round your answers to 2 decimal places.)
l. Inventory turnover. (Round your answers to 2 decimal places.)
m. Debt-to-equity ratio. (Round your answers to 2 decimal places.)
n. Debt-to-assets ratio. (Round your answers to the nearest whole percent.)

Answer 1

a. Net Margin ratio = Net Income / Net sales

Net Margin ratio for Year 3 = $34,700 / $176,900

= 19.62 %.

Net Margin ratio for Year 4 = $41,300 / $210,400

= 19.63%.

b. Return on Investment = Net income / Total Assets

Return on Investment for Year 3 = $34,700 / $243,600

= 14.24%.

Return on Investment for Year 4 = $41,300 / $275,300

= 15.00%.

c. Return on Equity = Net Income / Shareholders' Equity

Return on Equity for Year 3 = $34,700 / $106,200

= 32.67%.

Return on Equity for Year 4 = $41,300 / $154,800

= 26.68%.

d. Earnings per share = Net Income / Number of shares outstanding

Earnings per share for Year 3 = $34,700 / 45,000 shares

= $0.77 per share

Earnings per share for Year 4 = $41,300 / 45,000 shares

= $0.92 per share.

e. Price Earnings ratio = Market Price per share / Earnings per share

Price Earnings ratio for Year 3 = $6.13 / $0.77

= 7.96 times.

Price Earnings ratio for Year 4 = $4.93 / $0.92

= 5.36 times.