Posted: November 25th, 2015

Accounting

Accounting

Financial Ratios

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

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:

20X5
20X4
Net credit sales
$832,000
$760,000

Cost of goods sold
530,000
400,000

Cash, Dec. 31
125,000
110,000

Average Accounts receivable
205,000
156,000

Average Inventory
70,000
50,000

Accounts payable, Dec. 31
115,000
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:

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

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.

4.      Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2
20X1
Current Assets
$86,000
$80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
153,000
160,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
322,500
350,000
Operating Expenses
93,500
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.

20X2
20X1
Current Assets
$86,000
$80,000
Property, Plant, and Equipment (net)
99,000
80,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
153,000
150,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
322,500
350,000
Operating Expenses
93,500
85,000

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

Cash and Short-Term Investments
$400

$600

Accounts Receivable (net)
3,000

2,400

Inventories
3,000

2,300

Total Current Assets
$6,400

$5,300

Property, Plant, and Equipment

Land
$1,700

$500

Buildings and Equipment (net)
1,500

1,000

Total Property, Plant, and Equipment
$3,200

$1,500

Total Assets
$9,600

$6,800

Liabilities and Stockholders’ Equity

Current Liabilities

Accounts Payable
$2,800

$1,700

Notes Payable
1,100

1,900

Total Current Liabilities
$3,900

$3,600

Long-Term Liabilities

Bonds Payable
4,100

2,100

Total Liabilities
$8,000

$5,700

Stockholders’ Equity

Common Stock
$200

$200

Retained Earnings
1,400

900

Total Stockholders’ Equity
$1,600

$1,100
Total Liabilities and Stockholders’ Equity
$9,600

$6,800

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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