Question

2-17 Horatio's Hot Dogs' current assets equal $260,000. The company's return on assets (ROA) is 4 percent, its net income is $140,000, its long- term debt equals $1,755,000, and 35 percent of its assets are financed with common equity. Horatio's has no preferred stock. Compute the company's current ratio. At the end of the year, Wrinkle Free Laundry (WFL) had $150,000 in total assets. (a) If wFL's total assets turnover was 2.0, what were its sales revenues? (b) If WFL's return on assets was 6 percent, what were its net income and net profit margin? 2-8

Answer 1

2-17

Current Ratio = Total Current Assets / Total Current Liabilities

Current Assets = $260,000

Current Liabilities:

Return on Total Assets (ROA) = Net Income / Total Assets

Total Assets = Net Income / ROA

= $140,000 / 0.04

= $3,500,000

Therefore, total assets is $3,500,000.

Total Assets = Total Liabilities + Total Stockholders' Equity

$3,500,000 = Total Liabilities + ($3,500,000 * 35/100)

$3,500,000 = Total Liabilities + $1,225,000

Total Liabilities = $3,500,000 - $1,225,000

= $2,275,000

Total Liabilities = Long-term Liabilities + Current Liabilities

$2,275,000 = $1,755,000 + Current Liabilities

Current Liabilities = $2,275,000 - $1,755,000

= $520,000

Therefore -

Current Ratio = Total Current Assets / Total Current Liabilities

= $260,000 / $520,000

= 0.5

Therefore, current ratio is 0.5.

Note: As per HOMEWORKLIB RULES, the first question is answered, hence, please post the second question separately.