Chapter 15
1. Using the information provided above, compute the following for each company at December 31, Year 1:
A. Current Ratio
B. Quick Ratio
2. Comment briefly on the liquidity of each of these two companies. Which company appears to be the most liquid?
150. The following information was obtained from the Year 2 (Y2) and Year 1 (Y1) financial statements of James
Company, Norris Corporation, and Zorro Company:
(In millions) James Norris Zorro
Accounts receivable 12/31/Y2 $ 33,000 $ 22,000 $ 41,500
12/31/Y1 30,000 12,800 42,600
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Inventory 12/31/Y2 $ 2,600 $ 12,600 $ 54,200
12/31/Y1 23,900 32,800 44,000
Net sales (Credit) Year 2 $620,000 $320,000 $510,000
Year 1 610,000 310,000 760,000
Cost of goods sold Year 2 $211,000 $406,000 $311,000
Year 1 156,000 200,000 310,000
Compare the three companies and answer the following:
A. Compute the accounts receivable turnover ratio for each company for Year 2.
B. Which company appears to have the best liquidity position based solely on the accounts receivable turnover?
Explain.
151. The following information was obtained from the Year 2 (Y2) and Year 1 (Y1) financial statements of James
Company, Norris Corporation, and Zorro Company:
(In millions) James Norris Zorro
Accounts receivable 12/31/Y2 $ 33,000 $ 22,000 $ 41,500
12/31/Y1 30,000 12,800 42,600
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Inventory 12/31/Y2 $ 2,600 $ 12,600 $ 54,200
12/31/Y1 23,900 32,800 44,000
Net sales (Credit) Year 2 $620,000 $320,000 $510,000
Year 1 610,000 310,000 760,000
Cost of goods sold Year 2 $211,000 $406,000 $311,000
Year 1 156,000 200,000 310,000
Compare the three companies and answer the following:
A. Compute the number of days inventory is held before being sold for each company for Year 2.
B. Which company appears to have the best liquidity position based solely on the inventory analysis? Explain.
152. Financial statements for Grange Company appear below:
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Grange Company
Comparative Balance Sheet
December 31, Year 2 and Year 1
Year 2 Year 1
Current assets:
Cash and marketable securities $180,000 $160,000
Accounts receivable, net 150,000 120,000
Inventory 100,000 100,000
Prepaid expenses 40,000 50,000
Total current assets $470,000 $430,000
Noncurrent assets:
Plant & equipment, net 1,390,000 1,320,000
Total assets $1,860,000 $1,750,000
Current liabilities:
Accounts payable $130,000 $130,000
Accrued liabilities 60,000 80,000
Notes payable, short term 100,000 100,000
Total current liabilities $290,000 $310,000
Noncurrent liabilities:
Bonds payable 270,000 300,000
Total liabilities $560,000 $610,000
Stockholders’ equity:
Preferred stock, $5 par, 5% $100,000 $100,000
Common stock, $5 par 220,000 220,000
Additional paid-in capital—common stock 190,000 190,000
Retained earnings 790,000 630,000
Total stockholders’ equity 1,300,000 1,140,000
Total liabilities & stockholders’ equity $1,860,000 $1,750,000
Grange Company
Income Statement
For the Year Ended December 31, Year 2
Sales (all on account) $2,400,000
Cost of goods sold 1,680,000
Gross margin $720,000
Operating expenses 280,000
Net operating income $440,000
Interest expense 30,000
Net income before taxes $410,000
Income taxes (30%) 123,000
Net income $287,000
Dividends during Year 2 totaled $127,000, of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, Year 2, was $100.
Required: Compute the following liquidity ratios for Year 2:
A. current ratio
B. quick ratio
C. accounts receivable turnover ratio
D. inventory turnover ratio
E. inventory turnover in days
Chapter 15
153. Financial statements for Grange Company appear below:
Grange Company
Comparative Balance Sheet
December 31,Year 2 and Year 1
Year 2 Year1
Current assets:
Cash and marketable securities $180,000 $160,000
Accounts receivable, net 150,000 120,000
Inventory 100,000 100,000
Prepaid expenses 40,000 50,000
Total current assets $470,000 $430,000
Noncurrent assets:
Plant & equipment, net 1,390,000 1,320,000
Total assets $1,860,000 $1,750,000
Current liabilities:
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Accounts payable $130,000 $130,000
Accrued liabilities 60,000 80,000
Notes payable, short term 100,000 100,000
Total current liabilities $290,000 $310,000
Noncurrent liabilities:
Bonds payable 270,000 300,000
Total liabilities $560,000 $610,000
Stockholders’ equity:
Preferred stock, $5 par, 5% $100,000 $100,000
Common stock, $5 par 220,000 220,000
Additional paid-in capital—common stock 190,000 190,000
Retained earnings 790,000 630,000
Total stockholders’ equity $1,300,000 $1,140,000
Total liabilities & stockholders’ equity $1,860,000 $1,750,000
Grange Company
Income Statement
For the Year Ended December 31,Year 2
Sales (all on account) $2,400,000
Cost of goods sold 1,680,000
Gross margin $720,000
Operating expenses 280,000
Net operating income $440,000
Interest expense 30,000
Net income before taxes $410,000
Income taxes (30%) 123,000
Net income $287,000
Dividends during Year 2 totaled $127,000, of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, Year 2, was $100.
Required:
Compute the following leverage ratios for Year 2:
A. times-interest-earned ratio
B. debt ratio
C. debt-to-equity ratio
Chapter 15
154. Financial statements for Grange Company appear below:
Grange Company
Comparative Balance Sheet
December 31,Year 2 and Year 1
Year 2 Year1
Current assets:
Cash and marketable securities $180,000 $160,000
Accounts receivable, net 150,000 120,000
Inventory 100,000 100,000
Prepaid expenses 40,000 50,000
Total current assets $470,000 $430,000
Noncurrent assets:
Plant & equipment, net 1,390,000 1,320,000
Total assets $1,860,000 $1,750,000
Current liabilities:
Accounts payable $130,000 $130,000
Accrued liabilities 60,000 80,000
Notes payable, short term 100,000 100,000
Total current liabilities $290,000 $310,000
Noncurrent liabilities:
Bonds payable 270,000 300,000
Total liabilities $560,000 $610,000
Stockholders’ equity:
Preferred stock, $5 par, 5% $100,000 $100,000
Common stock, $5 par 220,000 220,000
Additional paid-in capital—common stock 190,000 190,000
Retained earnings 790,000 630,000
Total stockholders’ equity $1,300,000 $1,140,000
Total liabilities & stockholders’ equity $1,860,000 $1,750,000
Grange Company
Income Statement
For the Year Ended December 31,Year 2
Sales (all on account) $2,400,000
Cost of goods sold 1,680,000
Gross margin $720,000
Operating expenses 280,000
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Net operating income $440,000
Interest expense 30,000
Net income before taxes $410,000
Income taxes (30%) 123,000
Net income $287,000
Dividends during Year 2 totaled $127,000, of which $5,000 were preferred dividends.
The market price of a share of common stock on December 31, Year 2, was $100.
Required:
Compute the following profitability ratios for
Year 2
:
A. Return on Sales
B. Return on Total Assets
C. Return on Common Stockholders’ Equity
D. Earnings per share
155. Smith Inc. is a wholesaler of snow skiing gear. During the current year, Smith expanded its retail business by adding
over 50 shops. The following information is obtained from the comparative financial statements included in the company’s
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current annual report.
Dec. 31, current Dec. 31, prior
Total liabilities $26,000,000 $18,000,000
Total stockholders’ equity 34,000,000 38,000,000
FOR THE FISCAL YEARS ENDED
Dec. 31, current Dec. 31, prior
Depreciation expense $ 2,000,000 $ 6,000,000
Interest expense 3,400,000 3,200,000
Income tax expense 12,600,000 18,100,000
Net income 6,000,000 15,000,000
Net cash provided by operations 41,000,000 (400,000)
Total dividends paid 2,000,000 12,000,000
Cash used to purchase plant assets 32,000,000 18,000,000
Payments on long-term debt 1,600,000 1,800,000
1. Using the information provided above, compute the following for both years:
A. Debt-to-equity ratio (at each year-end)
B. Times-interest-earned ratio
2. Briefly explain the implications of your findings with respect to these two leverage ratios.
Chapter 15
156. The income statement for Ray Company for last year ended December 31 appears below.
Sales $610,000
Cost of goods sold 380,000
Gross margin $230,000
Expenses 170,000*
Net income $ 60,000
*Includes $30,000 of interest expense and $18,000 of income tax expense.
Additional information:
1. Common stock outstanding during the yeartotaled 45,000 shares.
2. The market price of Ray’s stock was $15 at the end of the year.
3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred stockholders.
Required: Compute the following ratios for the year:
A. earnings per share.
B. price-earnings.
C. times-interest-earned ratio.
Chapter 15
157. The following information is available from the balance sheets at the end of Year 1 and Year 2 for Shelley Company:
Year 2 Year 1
Accounts payable $ 80,000 $ 40,000
Accrued liabilities 65,000 25,000
Taxes payable 10,000 20,000
Short-term notes payable -0- 60,000
Bonds payable due within next year 200,000 200,000
Total current liabilities $355,000 $345,000
Bonds payable $800,000 $300,000
Common stock, $5 par $1,000,000 $1,000,000
Retained earnings 695,000 55,000
Total stockholders’ equity $1,695,000 $1,055,000
Total liabilities and stockholders’ equity $2,850,000 $1,700,000
Net income for Year 2 and Year 1 was $340,000 and $300,000, respectively. Interest expense was $45,000 for Year 2 and
the tax rate is 30%. Answer the following:
A. Calculate the return on common stockholders’ equity ratio for Year 2.
B. Calculate the return on total assets ratio for Year 2.
C. What is the difference between the return on stockholders’ equity and the return on assets?
Chapter 15
158. The following ratios have been computed for Gilbert Company for Year 2.
Return on sales 20%
Times-interest-earned ratio 15
Accounts receivables turnover ratio 5
Acid-test ratio 1.60 : 1
Current ratio 3 : 1
Debt ratio 26%
Gilbert Company’s Year 2 financial statements with missing information follow:
GILBERT COMPANY
Comparative Balance Sheet
December 31, Year 2
Assets Year 2 Year 1
Cash $ 25,000 $ 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) ? (6) 60,000
Inventory ? (8) 50,000
Property, plant, and equipment (net) 200,000 150,000
Total assets $ ? (9) $310,000
Liabilities and stockholders’ equity
Accounts payable $ ? (7) $ 25,000
Short-term notes payable 35,000 30,000
Bonds payable ? (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total liabilities and stockholders’ equity $ ? (11) $310,000
GILBERT COMPANY
Income Statement
For the Year Ended December 31, Year 2
Net sales $250,000
Cost of goods sold 125,000
Gross profit $125,000
Expenses:
Depreciation expense $ ? (5)
Interest expense 5,000
Selling expenses 10,000
Administrative expenses 15,000
Total expenses ? (4)
Income before income taxes $ ? (2)
Income tax expense ? (3)
Net income $ ? (1)
Required: Use the above ratios and information from the Gilbert Company financial statements to fill in the missing
information on the financial statements. Follow the sequence indicated. Show computations that support your answers.
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Let X = Average receivables.
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Chapter 15
159. Winter Corporation has issued common stock only. The company has been successful and has a gross profit rate of
20%. The information shown below was taken from the company’s financial statements.
Beginning inventory $ 482,000
Purchases 5,636,000
Ending inventory ?
Average accounts receivable 700,000
Average common stockholders’ equity 3,500,000
Sales (all on credit) 7,000,000
Net income 525,000
Required: Compute the following:
A. Receivables turnover and the average collection period.
B. Inventory turnover and the days in inventory.
C. Return on common stockholders’ equity.