Question

.    Compute the following ratios based on the following financial statements

Glory company Balance sheet December 31,2010

Cash                                 100,000              Account payable               300,000

Marketable securities       300,000              Other current liabilities     200,000

Account receivable          600,000              Long term debit                500,000

Inventory                         1,000,000           Owner`s equity                 2,000,000

Net fixed asset                 4,000,000           Retained earning               3,000,000

Total                                6,000,000           Total                                  6,000,000

Income statement

For the year ended Dec. 31,2010

Sales                                12,000,000

Cost of goods sold           10,800,000         Including depreciation expense 800,000) Operating expense           150,000

Interest                             50,000

Tax                                   30%

Required

a.   Current ratio and quick ratio

b.   Net profit margin

c.   ROA

d.   Days sales outstanding

e.   Operating cycle

f.    ROE

g.   Times interest earned

h.   Total asset turn over

i.    Inventory turn over

Answer 1

Answer of Part a:

Current Assets = Cash + Marketable Securities + Accounts Receivable + Inventory
Current Assets = $100,000 + $300,000 + $600,000 + $1,000,000
Current Assets = $2,000,000

Current Liabilities = Accounts Payable + Other Current Liabilities
Current Liabilities = $300,000 + $200,000
Current Liabilities = $500,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $2,000,000 / $500,000
Current Ratio = 4:1

Quick Ratio = (Current Assets –Inventory) / Current Liabilities
Quick Ratio = ($2,000,000 - $1,000,000) / $500,000
Quick Ratio = $1,000,000 / $500,000
Quick Ratio = 2:1

Answer of Part b:

EBT = Sales – Cost of Goods Sold – Operating Expenses – Interest
EBT = $12,000,000 - $10,800,000 - $150,000 - $50,000
EBT = $1,000,000

Net Income = EBT – EBT*tax rate
Net Income = $1,000,000 - $1,000,000*30%
Net Income = $1,000,000 - $300,000
Net Income = $700,000

Net Profit Margin = Net Income / Sales *100
Net Profit Margin = $700,000 / $12,000,000 *100
Net Profit Margin = 5.83%

Answer of Part c:

Return on Assets , ROA = Net Income / Total Assets *100
Return on Assets, ROA = $700,000 / $6,000,000 *100
Return on Assets, ROA = 11.67%

Answer of Part d:

Days Sales Outstanding = 365 days * Accounts Receivable / Sales
Days Sales Outstanding = 365 * $600,000 / $12,000,000
Days Sales Outstanding = 18.25 days

Answer of Part e:

Days Sales Inventory = 365 days * Inventory / Cost of Goods Sold
Days Sales Inventory = 365 * $1,000,000 / $10,800,000
Days Sales Inventory = 33.80 days

Operating Cycle = Days Sales iNventory + Days Sales Outstanding
Operating Cycle = 33.80 days + 18.25 days
Operating Cycle = 52.05 days