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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- 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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- 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 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 |
$600 |
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Accounts Receivable (net) |
3,000 |
2,400 |
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Inventories |
3,000 |
2,300 |
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Total Current Assets |
$6,400 |
$5,300 |
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Property, Plant, and Equipment |
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Land |
$1,700 |
$500 |
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Buildings and Equipment (net) |
1,500 |
1,000 |
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Total Property, Plant, and Equipment |
$3,200 |
$1,500 |
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Total Assets |
$9,600 |
$6,800 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities |
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Accounts Payable |
$2,800 |
$1,700 |
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Notes Payable |
1,100 |
1,900 |
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Total Current Liabilities |
$3,900 |
$3,600 |
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Long-Term Liabilities |
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Bonds Payable |
4,100 |
2,100 |
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Total Liabilities |
$8,000 |
$5,700 |
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Stockholders’ Equity |
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Common Stock |
$200 |
$200 |
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Retained Earnings |
1,400 |
900 |
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Total Stockholders’ Equity |
$1,600 |
$1,100 |
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Total Liabilities and Stockholders’ Equity |
$9,600 |
$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* |
$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 |
$3,600 |
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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. |
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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
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