Question

Question B5 Statements of Financial Position and Income Statement of Lincoln Company are shown below: Lincoln Company Statements of Financial Position 31 December ($ in thousand) Lincoln Company Income Statement for the year ended 31 December 2019 (S in thousand) 2019 190 2018 160 3.540 (2.100) 120 100 Cash Supplies Prepaid expenses Accounts receivable Inventory Plant & Equipment (net) 310 298 Net sales Cost of goods sold Gross profit Operating expenses Operating profit Interest expense Profit before taxes Income taxes (20%) Net profit $40 1.140 2310 220 160 140 Accounts payable Income Tax payable Dividend payable Notes payable (due on 30 June 2020) Long-term liabilities Ordinary shares, $5 par Retained earnings 230 800 472 800 540 2,240 7041 2,310 Additional information: (1) The market price of the ordinary shares as at 31 December 2019 is $25 per share. (2) The Company had paid interim dividend of $80,000 in August 2019, and declared a final dividend of $160,000 on 31 December 2019, which is payable on 29 February 2020. (3) Credit sales totalled 80% of net sales. Required: (a) Calculate the following ratios of the company for the year ended 31 December 2019. State your answer in the appropriate expression, e.g., debt ratio has to be expressed in %. Show your workings (Round ALL answers to 2 decimal places. (1) Return on equity (1.5 marks) (ii) Return on assets (1.5 marks) (iii) Accounts receivable turnover (1.5 marks) (iv) Inventory tumover (1.5 marks)

Answer 1

Calculate the following ratio

1. Return on equity = Income available for equity share holders / Average Equity

Income available for equity share holders = Net profit = $404

Average Equity = ( beginning equity + ending equity ) / 2

beginning equity = 800 + 540 = 1340

ending equity = 800 + 704 = 1504

Average Equity = (1340 + 1504) / 2 = 1422

Return on equity = 404 / 1422 = 0.2841    = 28.41%

2. Return on Assets = Net profit / Average assets

Where,

Net profit = 404

Average assets = ( beginning Assets + ending Assets) / 2

Average assets = ( 2240 + 2310 ) / 2 = $2275

Return on Assets = 404 / 2275 = 0.1776 = 17.76%

3. Accounts receivable turnover = Credit Sales / Average Accounts Receivables

Credit Sales = 80% of net total sales of 3540 = $3540 * 80% = $2832

Average Accounts Receivables = ( beginning + ending ) / 2

Average Accounts Receivables = (298 + 310) / 2 = 608 / 2 = $304

Accounts receivable turnover = 2832 / 304 = 9.32 times

4. Inventory turnover = Cost of goods sold / Average inventory

Cost of goods sold = 2100

  Average inventory = (570 + 540 ) / 2 = 1110 / 2 = $555

Inventory turnover = 2100 / 555 =   3.78 times

5. Price earning ratio = Market price of share   / earning per share

  Market price of share = $25 per share

  earning per share       = Income available to shareholders / number of share outstanding

Income available to shareholders = Net profit = 404

number of share outstanding = total Book value of ordinary share / par value of share

  total Book value of ordinary share = 800

  par value of share = $5 par

number of share outstanding = 800 / 5 = 160   (thousands)

  earning per share   = 404 / 160 = $2.525 per share

Price earning ratio = 25 / 2.525 = 9.90 times

6. Dividend yield ratio = Annual dividend / income available to share holders

  Annual dividend = 80000 + 160000 = 240000 which means 240 ( thousand for calculation)

income available to share holders = net profit = $404

Dividend yield ratio = 240 / 404 = 0.5941 = 59.41%

7. Quick ratio = quick assets / current liabilities

  quick assets = cash + Accounts receivables

  quick assets = 190 + 310 = 500

  Current liabilities = 220 + 36 + 160 + 160 = 576

Quick ratio = 500 / 576 = 0.87 times

8. Debt ratio = Total debt / Total assets

   Total debt = current liabilities + long term liabilities

   Total debt = 576 + 230 = 806

   Total assets = 2310

Debt ratio = 806 / 2310 = 0.3489 = 34.89%