Week Five Exercise Assignment
Financial Ratios
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Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
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Edison
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Stagg
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Thornton
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Cash
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$6,000
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$5,000
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$4,000
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Short-term investments
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3,000
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2,500
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2,000
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Accounts receivable
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2,000
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2,500
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3,000
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Inventory
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1,000
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2,500
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4,000
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Prepaid expenses
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800
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800
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800
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Accounts payable
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200
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200
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200
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Notes payable: short-term
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3,100
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3,100
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3,100
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Accrued payables
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300
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300
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300
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Long-term liabilities
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3,800
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3,800
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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
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20X4
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Net credit sales
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$832,000
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$760,000
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Cost of goods sold
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530,000
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400,000
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Cash, Dec. 31
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125,000
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110,000
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Average Accounts receivable
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205,000
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156,000
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Average Inventory
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70,000
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50,000
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Accounts payable, Dec. 31
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115,000
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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
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$1,750,000
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Interest expense
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120,000
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Income tax expense
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80,000
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Preferred dividends
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25,000
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Net income
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130,000
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Average assets
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1,200,000
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Average common stockholders’ equity
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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
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20X1
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Current Assets
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$86,000
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$80,000
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Property, Plant, and Equipment (net)
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99,000
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90,000
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Intangibles
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25,000
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50,000
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Current Liabilities
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40,800
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48,000
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Long-Term Liabilities
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153,000
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160,000
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Stockholders’ Equity
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16,200
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12,000
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Net Sales
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500,000
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500,000
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Cost of Goods Sold
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322,500
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350,000
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Operating Expenses
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93,500
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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
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20X1
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Current Assets
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$86,000
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$80,000
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Property, Plant, and Equipment (net)
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99,000
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80,000
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Intangibles
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25,000
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50,000
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Current Liabilities
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40,800
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48,000
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Long-Term Liabilities
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153,000
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150,000
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Stockholders’ Equity
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16,200
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12,000
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Net Sales
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500,000
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500,000
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Cost of Goods Sold
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322,500
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350,000
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Operating Expenses
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93,500
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85,000
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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
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20X1
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Assets
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Current Assets
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Cash and Short-Term Investments
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$400
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$600
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Accounts Receivable (net)
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3,000
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2,400
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Inventories
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3,000
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2,300
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Total Current Assets
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$6,400
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$5,300
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Property, Plant, and Equipment
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Land
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$1,700
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$500
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Buildings and Equipment (net)
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1,500
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1,000
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Total Property, Plant, and Equipment
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$3,200
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$1,500
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Total Assets
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$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
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$2,800
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$1,700
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Notes Payable
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1,100
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1,900
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Total Current Liabilities
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$3,900
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$3,600
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Long-Term Liabilities
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Bonds Payable
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4,100
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2,100
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Total Liabilities
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$8,000
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$5,700
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Stockholders’ Equity
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Common Stock
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$200
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$200
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Retained Earnings
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1,400
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900
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Total Stockholders’ Equity
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$1,600
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$1,100
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Total Liabilities and Stockholders’ Equity
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$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
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$20,000
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Selling Expense
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6,000
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Administrative Expense
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4,000
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Interest Expense
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400
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Income Tax Expense
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2,000
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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
