Expert answer:ACC: 205 Financial ratios
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B
Financial Ratios
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close
of business on July 10:
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
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?
2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:
Net credit sales
Cost of goods sold
Cash, Dec. 31
Average Accounts receivable
Average Inventory
Accounts payable, Dec. 31
20X5
$832,000
530,000
125,000
205,000
70,000
115,000
20X4
$760,000
400,000
110,000
156,000
50,000
108,000
Instructions
a. Compute the accounts receivable and inventory turnover ratios for
20X5. Alaska rounds all calculations to two decimal places.
3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock
outstanding. The company reported the following information for 20X7:
B
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’ equity
500,000
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.
4. Horizontal analysis. Mary Lynn Corporation has been operating for several years.
Selected data from the 20X1 and 20X2 financial statements follow.
Current Assets
20X2
$86,000
20X1
$80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
Current Liabilities
Long-Term Liabilities
Stockholders’ Equity
Net Sales
Cost of Goods Sold
Operating Expenses
25,000
40,800
153,000
16,200
500,000
322,500
93,500
50,000
48,000
160,000
12,000
500,000
350,000
85,000
a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results
of your work.
5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the
20X1 and 20X2 financial statements follow.
Current Assets
Property, Plant, and Equipment (net)
Intangibles
20X2
$86,000
99,000
25,000
20X1
$80,000
80,000
50,000
B
Current Liabilities
Long-Term Liabilities
Stockholders’ Equity
Net Sales
Cost of Goods Sold
Operating Expenses
40,800
153,000
16,200
500,000
322,500
93,500
48,000
150,000
12,000
500,000
350,000
85,000
a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.
6. Ratio computation. The financial statements of the Lone Pine Company follow.
LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2
20X1
Assets
Current Assets
$400
3,000
3,000
$6,400
$600
2,400
2,300
$5,300
Buildings and Equipment (net)
$1,700
1,500
$500
1,000
Total Property, Plant, and Equipment
$3,200
$1,500
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
$9,600
$6,800
Accounts Payable
$2,800
1,100
$3,900
$1,700
1,900
$3,600
4,100
$8,000
2,100
$5,700
Cash and Short-Term Investments
Accounts Receivable (net)
Inventories
Total Current Assets
Property, Plant, and Equipment
Land
Notes Payable
Total Current Liabilities
Long-Term Liabilities
Bonds Payable
Total Liabilities
Stockholders’ Equity
Total Stockholders’ Equity
$200
1,400
$1,600
$200
900
$1,100
Total Liabilities and Stockholders’ Equity
$9,600
$6,800
Common Stock
Retained Earnings
B
LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales*
$36,000
Less: Cost of Goods Sold
$20,000
Selling Expense
6,000
Administrative Expense
4,000
Interest Expense
400
Income Tax Expense
2,000
32,400
Net Income
$3,600
Retained Earnings, Jan. 1
900
Ending Retained Earnings
$4,500
Cash Dividends Declared and Paid
3,100
Retained Earnings, Dec. 31
$1,400
*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
h. Debt-to-total assets
i. Number of times that interest is earned
…
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