Question

The EastTN Company sells computer parts through a retail store that it operates. The firm's comparative income statement and balance sheet for the years 2016 and 2015 are shown below.

THE EASTTN COMPANY Comparative Income Statement For Years Ended December 31, 2016 and 2015
	Amounts
	2016		2015
Revenue
Sales	1,025,000		818,400
Less Sales Returns and Allowances	25,000		18,400
Net Sales	1,000,000		800,000
Cost of Goods Sold
Merchandise Inventory, January 1	90,000		88,800
Net Purchases	369,500		297,600
Total Merchandise Available for Sale	459,500		386,400
Less Merchandise Inventory, December 31	96,000		90,000
Cost of Goods Sold	363,500		296,400
Gross Profit on Sales	636,500		503,600
Operating Expenses
Selling Expenses
Sales Salaries Expenses	89,000		80,000
Payroll Tax Expense—Selling	9,000		8,800
Other Selling Expenses	31,600		24,000
Total Selling Expenses	129,600		112,800
General and Administrative Expenses
Officers Salaries Expense	156,000		121,600
Payroll Tax Expense—Administrative	17,000		11,200
Depreciation Expense	8,000		8,000
Other General and Administrative Expenses	16,000		11,200
Total General and Administrative Expenses	197,000		152,000
Total Operating Expenses	326,600		264,800
Net Income before Income Taxes	309,900		238,800
Income Tax Expense	92,970		71,640
Net Income after Income Taxes	216,930		167,160

THE EASTTN COMPANY Comparative Balance Sheet December 31, 2016 and 2015
	Amounts
	2016			2015
Assets
Current Assets
Cash		130,900			65,000
Accounts Receivable		117,000			107,000
Merchandise Inventory		96,000			90,000
Prepaid Expenses		11,500			6,000
Supplies		2,100			1,000
Total Current Assets		357,500			269,000
Property, Plant, and Equipment
Land		95,000			95,000
Building and Equipment		102,000			102,000
Less Accumulated Depreciation		(32,000)			(24,000)
Net Book Value—Building and Equipment		70,000			78,000
Total Property, Plant, and Equipment		165,000			173,000
Total Assets		522,500			442,000
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable		49,000			77,000
Sales Tax Payable		3,000			8,000
Payroll Taxes Payable		3,100			2,800
Income Taxes Payable		3,000			8,000
Total Current Liabilities		58,100			95,800
Long-Term Liabilities
Mortgage Payable		61,000			65,000
Total Long-Term Liabilities		61,000			65,000
Total Liabilities		119,100			160,800
Stockholders' Equity
Common Stock ($1 par, 10,000 shares authorized;     10,000 shares issued and outstanding)		10,000			10,000
Paid-in Capital—Common Stock		10,000			10,000
Retained Earnings		383,400			261,200
Total Stockholders' Equity		403,400			281,200
Total Liabilities and Stockholders' Equity		522,500			442,000

Assume all sales are credit sales.

Part I

1.	Calculate the current ratio for 2015 and 2016.

      

     

2.	Calculate the acid-test ratio for 2015 and 2016.

     

       

3.	Calculate the inventory turnover for 2015 and 2016.

       

4.	Calculate the return on sales for 2015 and 2016.

       

5.	Calculate the earnings per share of common stock for 2015 and 2016.

     

       

Answer 1

Ans. 1	Current ratio   =   Total current assets / Total current liabilities
	2015	$269,000 / $95,800	2.81 : 1
	2016	$357,500 / $58,100	6.15 : 1
Ans. 2	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	2015	($269,000 - $90,000 - $6,000) / $95,800		1.81 : 1
	2016	($357,500 - $96,000 - $11,500) / $58,100		4.30 : 1
Ans. 3	Inventory turnover = Cost of goods sold / Inventory
	2015	$296,400 / $90,000	3.29	times
	2016	$363,500 / $96,000	3.79	times
Ans. 4	Return on sales   =   Net income / Net sales * 100
	2015	$167,160 / $800,000 * 100	20.90%
	2016	$216,930 / $1,000,000 * 100	21.69%
Ans. 5	Earning per share =   Net income / no. of shares outstanding
	2015	$167,160 / 10,000	$16.72	per share
	2016	$216,930 / 10,000	$21.69	per share