Shown below are selected data from the financial statements of Rentsch, Inc., a retail furniture store.
From the balance sheet: |
|
Cash | $ 30,000 |
Accounts receivable | 150,000 |
Inventory | 200,000 |
Plant assets (net of accumulated depreciation) | 500.000 |
Current liabilities | 150,000 |
Total stockholders’ equity | 300,000 |
Total assets | 1,000,000 |
From the income statement: |
|
Net sales | $1,500,000 |
Cost of goods sold | 1,080,000 |
Operating expenses | 315,000 |
Interest expense | 84,000 |
Income tax expense | 6,000 |
Net income | 15.000 |
From the statement of cash flows: |
|
Net cash provided by operating activities |
|
(including interest paid of $79,000) | $ 40,000 |
Net cash used in investing activities | (46.000) |
Financing activities: |
|
Amounts borrowed | $ 50,000 |
Repayment of amounts borrowed | (14,000) |
Dividends paid | (20,000) |
Net cash provided by financing activities | 16,000 |
Net increase in cash during the year | $ 10,000 |
Instructions
a. Explain how the interest expense shown in the income statement could be $84,000, when the interest payment appearing in the statement of cash flows is only $79,000.
b. Compute the following (round to one decimal place):
1. Current ratio
2. Quick ratio
3. Working capital
4. Debt ratio
c. Comment on these measurements and evaluate Rentsch, Inc.’s short-term debt-paying ability.
d. Compute the following ratios (assume that the year-end amounts of total assets and total stockholders’ equity also represent the average amounts throughout the year.):
1. Return on assets
2. Return on equity,
e. Comment on the company’s performance under these measurements. Explain why the return on assets and return on equity are so different.
f. Discuss (1) the apparent safety of long-term creditors’ claims and (2) the prospects for Rentsch, Inc., continuing its dividend payments at the present level.
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