Week Five Exercise Assignment
Financial Ratios
1.
Liquidity ratios. Edison, Stagg, and Thornton
have the following financial information at the close of business on July 10:
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Edison |
Stagg |
Thornton |
|
|
Cash |
$6,000 |
$5,000 |
$4,000 |
|
Short-term investments |
3,000 |
2,500 |
2,000 |
|
Accounts receivable |
2,000 |
2,500 |
3,000 |
|
Inventory |
1,000 |
2,500 |
4,000 |
|
Prepaid expenses |
800 |
800 |
800 |
|
Accounts payable |
200 |
200 |
200 |
|
Notes payable: short-term |
3,100 |
3,100 |
3,100 |
|
Accrued payables |
300 |
300 |
300 |
|
Long-term liabilities |
3,800 |
3,800 |
3,800 |
- Compute the current and
quick ratios for each of the three companies. (Round calculations to two
decimal places.) Which firm is the most liquid? Why?
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2. Computation and evaluation of |
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20X5 |
20X4 |
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Net |
$832,000 |
$760,000 |
|
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Cost |
530,000 |
400,000 |
|
|
Cash, |
125,000 |
110,000 |
|
|
Average |
205,000 |
156,000 |
|
|
Average |
70,000 |
50,000 |
|
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Accounts |
115,000 |
108,000 |
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Instructions a. |
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3. Profitability
ratios, trading on the equity. Digital Relay has both
preferred and common stock outstanding. The company reported the following
information for 20X7:
|
Net sales |
$1,750,000 |
|
Interest expense |
120,000 |
|
Income tax expense |
80,000 |
|
Preferred dividends |
25,000 |
|
Net income |
130,000 |
|
Average assets |
1,200,000 |
|
Average common stockholders’ |
500,000 |
- Compute the profit
margin on sales ratio, the return on equity and the return on assets,
rounding calculations to two decimal places. - Does the firm have
positive or negative financial leverage? Briefly explain.
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4. Horizontal analysis. Mary Lynn Corporation has |
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20X2 |
20X1 |
|
|
Current Assets |
$86,000 |
$80,000 |
|
Property, Plant, and Equipment |
99,000 |
90,000 |
|
Intangibles |
25,000 |
50,000 |
|
Current Liabilities |
40,800 |
48,000 |
|
Long-Term Liabilities |
153,000 |
160,000 |
|
Stockholders’ Equity |
16,200 |
12,000 |
|
Net Sales |
500,000 |
500,000 |
|
Cost of Goods Sold |
322,500 |
350,000 |
|
Operating Expenses |
93,500 |
85,000 |
|
a. |
5.Vertical analysis. Mary Lynn Corporation has been operating for several
years. Selected data from the 20X1 and 20X2 financial statements follow.
|
20X2 |
20X1 |
|
|
Current Assets |
$86,000 |
$80,000 |
|
Property, Plant, and Equipment (net) |
99,000 |
80,000 |
|
Intangibles |
25,000 |
50,000 |
|
Current Liabilities |
40,800 |
48,000 |
|
Long-Term Liabilities |
153,000 |
150,000 |
|
Stockholders’ Equity |
16,200 |
12,000 |
|
Net Sales |
500,000 |
500,000 |
|
Cost of Goods Sold |
322,500 |
350,000 |
|
Operating Expenses |
93,500 |
85,000 |
a. Prepare a vertical analysis for 20X1 and
20X2. Briefly comment on the results of your work.
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6. Ratio computation. The financial statements of the Lone |
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LONE PINE COMPANY |
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Comparative Balance Sheets |
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December 31, 20X2 and 20X1 |
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20X2 |
20X1 |
|
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Assets |
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Current Assets |
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|
Cash and Short-Term Investments |
$400 |
$600 |
|
Accounts Receivable (net) |
3,000 |
2,400 |
|
Inventories |
3,000 |
2,300 |
|
Total Current Assets |
$6,400 |
$5,300 |
|
Property, Plant, and Equipment |
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Land |
$1,700 |
$500 |
|
Buildings and Equipment (net) |
1,500 |
1,000 |
|
Total Property, Plant, and Equipment |
$3,200 |
$1,500 |
|
Total Assets |
$9,600 |
$6,800 |
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Liabilities and Stockholders’ |
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Current Liabilities |
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Accounts Payable |
$2,800 |
$1,700 |
|
Notes Payable |
1,100 |
1,900 |
|
Total Current Liabilities |
$3,900 |
$3,600 |
|
Long-Term Liabilities |
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Bonds Payable |
4,100 |
2,100 |
|
Total Liabilities |
$8,000 |
$5,700 |
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Stockholders’ Equity |
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Common Stock |
$200 |
$200 |
|
Retained Earnings |
1,400 |
900 |
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Total Stockholders’ Equity |
$1,600 |
$1,100 |
|
|
$9,600 |
$6,800 |
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LONE PINE COMPANY |
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Statement of Income and |
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For the Year Ending December |
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Net Sales* |
$36,000 |
|
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Less: Cost of Goods Sold |
$20,000 |
|
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Selling Expense |
6,000 |
|
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Administrative Expense |
4,000 |
|
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Interest Expense |
400 |
|
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Income Tax Expense |
2,000 |
32,400 |
|
Net Income |
$3,600 |
|
|
Retained Earnings, Jan. 1 |
900 |
|
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Ending Retained Earnings |
$4,500 |
|
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Cash Dividends Declared and Paid |
3,100 |
|
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Retained Earnings, Dec. 31 |
$1,400 |
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*All sales are on account. |
Instructions
Compute the following items
for Lone Pine Company for 20X2, rounding all calculations to two decimal
places when necessary:
a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d.
Accounts-receivable-turnover ratio
e. Return-on-assets ratio
f. Net-profit-margin ratio
g.
Return-on-common-stockholders’ equity
i. Number of times that
interest is earned
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