Browse over 20 million
homework answers & study documents

Accounting

Week Five Exercise Assignment (Financial Ratios)

Type

Homework

Rating

Showing Page:
1/10
Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Cash $6,000
Short-term investments 3,000
Accounts receivable 2,000
Inventory 1,000
Prepaid expenses 800
Accounts payable 200
Notes payable: short-term 3,100
Accrued payables 300
Long-term liabilities 3,800
1. 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?
Answer
Current ratio = Current assets / Current Liabilities
3.56 3.69
Net credit sales $832,000
Cost of goods sold
530,000
Cash, Dec. 31 125,000
Average Accounts receivable 205,000
Average Inventory 70,000
Accounts payable, Dec. 31 115,000
Instructi ons
a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.
Accounts Receivable Turnover = Net Credit Sales / Average account receivable
4.06
Inventory Turnover = COGS / Average Inventory
7.57
3. Profitability ratios, trading
on the equity. Digital Relay has both preferred and common stock outstanding. The com-pany reported the following information for 20X7:
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
2,500
3,000
2,500
4,000
800
800
Edison
Stagg
$5,000
$4,000
2,500
2,000
3,800
3,800
2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:
20X5
20X4
$760,000
200
200
3,100
3,100
300
300
400,000
110,000
156,000
50,000
108,000

Sign up to view the full document!

lock_open Sign Up
Average common stockholders' equity
500,000
1. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
Net Profit Ratio = Net Profit / Net Sales
7.43%
Rate of return on commonstock holders equity = (Earnings after tax - Preferred stock dividend) / Average Stock holder's equity amount
21.00%
Rate of Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets
20.83%
2. Does the firm have positive or negative financial
leverage? Briefly ex-plain.
Financial Leverage = Return on equity / Return on total assets
1.008
The firm has positive finacial leverage
Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also known as trading on equity.
A positive financial leverage means that the assets acquired with the funds provided by creditors and preferred stockholders generate a rate of return that is higher than the rate of interest or dividend payable to the providers of funds.
Positive financial leverage is beneficial for common stockholders.
Current Assets $80,000
Property, Plant, and Equipment (net) 90,000
Intangibles 50,000
Current Liabilities 48,000
Long-Term Liabilities 160,000
Stockholders’ Equity 12,000
Net Sales 500,000
Cost of Goods Sold 350,000
Operating Expenses 85,000
Change
Current Assets $80,000
$6,000
Property, Plant, and Equipment (net) 90,000
$9,000
Intangibles 50,000
($25,000)
Current Liabilities 48,000
($7,200)
Long-Term Liabilities 160,000
($7,000)
Stockholders’ Equity 12,000
$4,200
Net Sales 500,000
$0
Cost of Goods Sold 350,000
($27,500)
Operating Expenses 85,000
$8,500
Current Assets have increased by 7.5% as compared to last year ended 20X1
Property, Plant, and Equipment (net) have also incresed by 10% as compared to last year. May be there was an addition to fixed assets.
20X2
20X1
$86,000
99,000
93,500
322,500
93,500
25,000
40,800
153,000
16,200
500,000
322,500
20X2
20X1
$86,000
99,000
25,000
40,800
153,000
16,200
500,000

Sign up to view the full document!

lock_open Sign Up

Sign up to view the full document!

lock_open Sign Up

Unformatted Attachment Preview

Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:EdisonCashShort-term investmentsAccounts receivableInventoryPrepaid expensesAccounts payableNotes payable: short-termAccrued payablesLong-term liabilities$6,0003,0002,0001,0008002003,1003003,800Stagg$5,0002,5002,5002,5008002003,1003003,800$4,0002,0003,0004,0008002003,1003003,8001. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the mostAnswerCurrent ratio = Current assets / Current Liabilities3.562.3.69Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:20X5Net credit salesCost of goods sold20X4$832,000$760,000530,000400,000Cash, Dec. 31125,000110,000Average Accounts receivable205,000156,000Average InventoryAccounts payable, Dec. 3170,00050,000115,000108,000Instructionsa. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.Accounts Receivable Turnover = Net Credit Sales / Average account receivable4.06Inventory Turnover = COGS / Average Inventory7.573. Profitability ratios, tradingon the equity. Digital Relay has both preferred and common stock outstanding. The com-pany reported the following informNet salesInterest expenseIncome tax expensePreferred dividend ...
Purchase document to see full attachment

Anonymous
I was on a very tight deadline but thanks to Studypool I was able to deliver my assignment on time.

Anonymous
Heard about Studypool for a while and finally tried it. Glad I did caus this was really helpful.

Anonymous
I always get good papers on this site. They are detailed and address all the requirements I need.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4