Question

PROBLEM 1-8 Financial Statement Ratio Analysis The balance sheet and income statement for Chico Electronics are reproduced below (tax rate is 40%) CHICO ELECTRONICS Balance Sheet($thousands) As of December 31 Year 4 Year 5 $ 683 1.490 1,415 $ 325 3,599 2,423 13 6,360 1,541 $8,058 $ 875 116 Assets Current assets Cash Accounts receivable.. Inventories.......... Prepaid expenses ........ Total current assets ....... Property, plant and equipment, net. Other assets.. Total assets .... . Liabilities and Shareholders' Equity Current liabilities Notes payable to bank ....... Current portion of long-term debt Accounts payable ..... Estimated income tax liability Accrued expenses ----- Customer advance payments ... Total current liabilities Long-term debt ... Other liabilities Total liabilities Shareholders' equity Common stock $1.00 par value; 1,000,000 shares authorized 550,000 and £29.000 outstanding, respectively.... Preferred stock Series A 10%, 525 par value: 25,000 authorized 20,000 and 18.000 outstanding, respectively. Additional paid-i capital. Retained earnings Total shareholders' uity ------------ Total liabilities and shareholders' equity. 933 472 586 1.721 963 3,945 179 131 4.255 ....... 550 829 575 1.949 $8,058

Answer 1

First 4 parts are being answered here.

(a) Formula for acid test ratio is:

Acid test ratio = Current assets – Inventories – Prepaid expenses / Current liabilities

For year 5:

Current assets = $6360, Current liabilities = $3945, Inventories = $2423, Prepaid expenses = $13

Putting these values in the above formula, we get,

Acid test ratio = ($6360 - $2423 - $13) / $3945

Acid test ratio = $3924 / $3945 = 0.99

(b) Formula for return on assets ratio is:

Return on assets (ROA) = Net income / Average total assets * 100

where, Average total assets = Beginning assets + Ending assets / 2

For year 5:

Beginning assets = Assets in year 4 = $4792, Ending assets = $8058

So, Average assets = ($4792 + $8058) / 2 = $12850 / 2 = $6425

Net income = $1265

Now, putting these values in the above ROA formula, we get,

Return on assets (ROA) = $1265 / $6425 * 100 = 19.69%

(c) Formula for return on common equity is:

Return on equity = Net income / Average shareholder's equity * 100

where, Average total shareholder's equity = Beginning equity + Ending equity / 2

For year 5:

Beginning equity = Shareholder's equity in year 4 = $2868, Ending equity = $3803

So, Average equity = ($2868 + $3803) / 2 = $6671 / 2 = $3335.5

Net income = $1265

Now, putting these values in the above Return on equity formula, we get,

Return on equity = $1265 / $3335.5 * 100 = 37.93%

(d) Formula for earnings per share is:

Earnings per share = Net income / Average number of shares outstanding

where, Average number of common shares outstanding = Beginning common stock + Ending common stock / 2

For year 5:

Beginning common stock = 550000, Ending common stock = 829000

So, Average number of common shares outstanding = (550000 + 829000) / 2 = 1379000 / 2 = 689500

Net income = $1265000

Now, putting these values in the above earnings per share formula, we get,

Earnings per share = $1265000 / 689500 * 100 = 1.83 per share.