Question

Financial Ratios

Financial statements for Paulson's Pet Store are shown.

Paulson's Pet Store Income Statement For Year Ended December 31, 20--
Revenue from sales:
Sales			$326,030
Less: Sales returns and allowances			5,360
Net sales				$320,670
Cost of goods sold:
Merchandise inventory, January 1, 20--		$29,100
Estimated returns inventory, January 1, 20--		900	$30,000
Purchases		$162,650
Less: Purchases returns and allowances	$4,080
Less: Purchases discounts	3,200	7,280
Net purchases		$155,370
Add freight-in		1,600
Cost of goods purchased			156,970
Goods available for sale			$186,970
Less: Merchandise inventory, December 31, 20--		$24,900
Less: Estimated returns inventory, December 31, 20--		1,100	26,000
Cost of goods sold				160,970
Gross profit				$159,700
Operating expenses:
Wages expense			$69,500
Advertising expense			1,200
Supplies expense			800
Phone expense			2,736
Utilities expense			2,864
Insurance expense			1,600
Depreciation expense-building			10,000
Depreciation expense-store equipment			1,800
Miscellaneous expense			600
Total operating expenses				91,100
Income from operations				$68,600
Other expenses:
Interest expense				630
Net income				$67,970

Paulson's Pet Store Statement of Owner’s Equity For Year Ended December 31, 20--
B. Paulson, capital, January 1, 20--		$485,040
Add additional investments		20,000
Total investment		$505,040
Net income for the year	$67,970
Less: Withdrawals for the year	4,700
Increase in capital		63,270
B. Paulson, capital, December 31, 20--		$568,310

Paulson's Pet Store Balance Sheet December 31, 20--
Assets
Current assets:
Cash		$23,430
Accounts receivable		59,360
Merchandise inventory		24,900
Estimated returns inventory		1,100
Supplies		2,300
Prepaid insurance		1,800
Total current assets			$112,890
Property, plant, and equipment:
Land		$90,000
Building	$350,000
Less: Accumulated depreciation	20,000	330,000
Store Equipment	$120,000
Less: Accumulated depreciation	3,600	116,400	536,400
Total assets			$649,290
Liabilities
Current liabilities:
Note payable	$1,900
Accounts payable	59,550
Customer refunds payable	1,700
Wages payable	1,100
Sales tax payable	3,430
Total current liabilities		$67,680
Long-term liabilities:
Note payable	$15,200
Less: Current portion	1,900	13,300
Total liabilities			$80,980
Owner's Equity
B. Paulson, capital			568,310
Total liabilities and owner's equity			$649,290

All sales are credit sales. The Accounts Receivable balance on January 1, 20--, was $10,100.

Required:

Compute the financial ratios. Round answers to one decimal place.

Financial Ratios
Current ratio	to 1
Quick ratio	to 1
Working capital	$
Return on owner's equity	%
Accounts receivable turnover
Average number of days to collect receivables	days
Inventory turnover
Average number of days to sell inventory	days

Answer 1

Answer of Part a:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $112,890 / $67,680
Current Ratio = 1.67

Answer of Part b:

Quick Ratio =(Current Assets – Merchandise Inventory – Estimated Returns Inventory – Prepaid Expense) / Current Liabilities
Quick Ratio = ($112,890 - $24,900 - $1,100 - $1,800) / $67,680
Quick Ratio = $85,090 / $67,680
Quick Ratio = 1.26:1

Answer of Part c:

Working Capital = Current Assets – Current Liabilities
Working Capital= $112,890 - $67,680
Working Capital = $45,210

Answer of Part d:

Return on Owners Equity = Net Income / Owners Equity *100
Return on Owners Equity = $67,970 / $568,310 *100
Return on Owners Equity = 11.96%

Answer of Part e:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable)/2
Average Accounts Receivable = ($10,100 + $59,360) / 2
Average Accounts Receivable= $34,730

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $320,670 / $34,730
Accounts Receivable Turnover = 9.23 times