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 |
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Cash |
$6,000 |
$5,000 |
$4,000 |
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Short-term investments |
3,000 |
2,500 |
2,000 |
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Accounts receivable |
2,000 |
2,500 |
3,000 |
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Inventory |
1,000 |
2,500 |
4,000 |
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Prepaid expenses |
800 |
800 |
800 |
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Accounts payable |
200 |
200 |
200 |
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Notes payable: short-term |
3,100 |
3,100 |
3,100 |
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Accrued payables |
300 |
300 |
300 |
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Long-term liabilities |
3,800 |
3,800 |
3,800 |
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a. 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 activity ratios. The following data relate to Alaska Products, Inc: |
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20X5 |
20X4 |
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Net credit sales |
$832,000 |
$760,000 |
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Cost of goods sold |
530,000 |
400,000 |
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Cash, Dec. 31 |
125,000 |
110,000 |
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Average Accounts receivable |
205,000 |
156,000 |
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Average Inventory |
70,000 |
50,000 |
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Accounts payable, Dec. 31 |
115,000 |
108,000 |
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Instructions a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places. |
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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:
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Net sales |
$1,750,000 |
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Interest expense |
120,000 |
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Income tax expense |
80,000 |
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Preferred dividends |
25,000 |
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Net income |
130,000 |
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Average assets |
1,200,000 |
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Average common stockholders’ equity |
500,000 |
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a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly explain.
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4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. |
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20X2 |
20X1 |
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Current Assets |
$86,000 |
$80,000 |
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Property, Plant, and Equipment (net) |
99,000 |
90,000 |
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Intangibles |
25,000 |
50,000 |
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Current Liabilities |
40,800 |
48,000 |
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Long-Term Liabilities |
153,000 |
160,000 |
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Stockholders’ Equity |
16,200 |
12,000 |
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Net Sales |
500,000 |
500,000 |
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Cost of Goods Sold |
322,500 |
350,000 |
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Operating Expenses |
93,500 |
85,000 |
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a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work. |
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5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
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20X2 |
20X1 |
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Current Assets |
$86,000 |
$80,000 |
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Property, Plant, and Equipment (net) |
99,000 |
80,000 |
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Intangibles |
25,000 |
50,000 |
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Current Liabilities |
40,800 |
48,000 |
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Long-Term Liabilities |
153,000 |
150,000 |
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Stockholders’ Equity |
16,200 |
12,000 |
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Net Sales |
500,000 |
500,000 |
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Cost of Goods Sold |
322,500 |
350,000 |
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Operating Expenses |
93,500 |
85,000 |
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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 Pine Company follow. |
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LONE PINE COMPANY |
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Comparative Balance Sheets |
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December 31, 20X2 and 20X1 ($000 Omitted) |
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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 |
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$600 |
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Accounts Receivable (net) |
3,000 |
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2,400 |
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Inventories |
3,000 |
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2,300 |
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Total Current Assets |
$6,400 |
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$5,300 |
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Property, Plant, and Equipment |
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Land |
$1,700 |
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$500 |
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Buildings and Equipment (net) |
1,500 |
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1,000 |
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Total Property, Plant, and Equipment |
$3,200 |
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$1,500 |
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Total Assets |
$9,600 |
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$6,800 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities |
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Accounts Payable |
$2,800 |
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$1,700 |
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Notes Payable |
1,100 |
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1,900 |
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Total Current Liabilities |
$3,900 |
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$3,600 |
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Long-Term Liabilities |
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Bonds Payable |
4,100 |
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2,100 |
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Total Liabilities |
$8,000 |
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$5,700 |
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Stockholders’ Equity |
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Common Stock |
$200 |
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$200 |
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Retained Earnings |
1,400 |
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900 |
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Total Stockholders’ Equity |
$1,600 |
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$1,100 |
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Total Liabilities and Stockholders’ Equity |
$9,600 |
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$6,800 |
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LONE PINE COMPANY |
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Statement of Income and Retained Earnings |
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For the Year Ending December 31,20X2 ($000 Omitted) |
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Net Sales* |
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$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 |
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Net Income |
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$3,600 |
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Retained Earnings, Jan. 1 |
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900 |
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Ending Retained Earnings |
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$4,500 |
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Cash Dividends Declared and Paid |
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3,100 |
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Retained Earnings, Dec. 31 |
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$1,400 |
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*All sales are on account. |
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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
h. Debt-to-total assets
i. Number of times that interest is earned
DQ’S
- Ratios
Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?
Guided Response:
Let at least two of your peers know how debt service ratios can be used by a lender in determining whether or not to lend money to a company. - Profit Margin
Year Ending December 2012
Year Ending December 2011
Year Ending December 2010
Revenues
40,000
35,000
33,000
Operating Expenses
Salaries
15,000
10,000
9,000
Maintenance and Repairs
6,000
9,000
10,000
Rental Expense
2,500
2,500
2,500
Depreciation
2,000
2,000
2,000
Fuel
4,000
3,500
2,500
Total Operating Expenses
29,500
27,000
26,000
Operating Income
10,500
8,000
7,000
Sales and Administrative Expenses
6,000
4,000
3,000
Interest Expense
2,500
2,000
1,000
Net Income
2,000
2,000
3,000
Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend.
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