P15-33B Determining the effects of business transactions on selected ratios
Learning Objective 4
1. Earnings per Share $1.38
Financial statement data of Modern Traveler’s Magazine include the following items:
Cash $ 19,00
0
Accounts Receivable,
Net
82,000
Merchandise Inventory 183,000
Total Assets 638,000
Accounts Payable 102,000
Accrued Liabilities 35,000
Short-term Notes Payable 50,000
Long-term Liabilities 221,000
Net Income 69,000
Common Shares
Outstanding
50,000
shares
Requirements
1. Compute Modern Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios
to two decimal places, and use the following format for your answer:
Current Ratio Debt Ratio Earnings per Share
2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider
each transaction separately.
a. Purchased merchandise inventory of $42,000 on account.
b. Borrowed $121,000 on a long-term note payable.
c. Issued 5,000 shares of common stock, receiving cash of $103,000.
d. Received cash on account, $5,000.
P15-33B, cont.
SOLUTION
Requirement 1
P15-34B Using ratios to evaluate a stock investment
Learning Objective 4
1. 2017: e. 50.2%
Comparative financial statement data of Garfield, Inc. follow:
P15-34B, cont.
1. Market price of Garfield’s common stock: $69.36 at December 31, 2018, and $38.04 at
December 31, 2017.
2. Common shares outstanding: 14,000 on December 31, 2018 and 12,000 on December 31,
2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
a. Current ratio
b. Cash ratio
c. Times-interest-earned ratio
d. Inventory turnover
e. Gross profit percentage
P15-34B . cont.
f. Debt to equity ratio
g. Rate of return on common stockholders’ equity
h. Earnings per share of common stock
i. Price/earnings ratio
2. Decide (a) whether Garfield’s ability to pay debts and to sell inventory improved or
deteriorated during 2018 and (b) whether the investment attractiveness of its common stock
appears to have increased or decreased.
SOLUTION
Requirement 1
P15-34B . cont.
Requirement 2
P15-35B Using ratios to decide between two stock investments
Learning Objective 4
1c. Green Zone 38 days
Assume that you are purchasing an investment and have decided to invest in a company in the
digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone, Inc.
and have assembled the following data.
Selected income statement data for the current year:
All Digital Green Zone
Net Sales Revenue (all on credit) $ 417,925 $ 493,115
Cost of Goods Sold 209,000 258,000
Interest Expense 0 14,000
Net Income 58,000 72,000
P15-35B, cont.
Selected balance sheet and market price data at the end of the current year:
All Digital Green Zone
Current Assets:
Cash $ 23,000 $ 18,000
Short-term Investments 37,000 17,000
Accounts Receivable, Net 39,000 49,000
Merchandise Inventory 64,000 102,000
Prepaid Expenses 21,000 17,000
Total Current Assets $ 184,000 $ 203,000
Total Assets $ 263,000 $ 326,000
Total Current Liabilities 105,000 99,000
Total Liabilities 105,000 134,000
Common Stock:
$1 par (10,000 shares) 10,000
$2 par (14,000 shares) 28,000
Total Stockholders’ Equity 158,000 192,000
Market Price per Share of Common Stock 92.80 128.50
Dividends Paid per Common Share 1.20 0.90
Selected balance sheet data at the beginning of the current year:
All Digital Green Zone
Balance Sheet:
Accounts Receivable, Net $ 41,000 $ 54 000
Merchandise Inventory 81,000 89,000
Total Assets 258,000 277,000
Common Stock:
$1 par (10,000 shares) 10,000
$2 par (14,000 shares) 28,000
Your strategy is to invest in companies that have low price/earnings ratios but appear to be in
good shape financially. Assume that you have analyzed all other factors and that your decision
depends on the results of ratio analysis.
P15-35B, cont.
Requirements
1. Compute the following ratios for both companies for the current year:
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy.
SOLUTION
Requirement 1
P15-35B, cont.
Requirement 2