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Chapter 15: Q19E (page 841)

Big Beautiful Photo Shop has asked you to determine whether the company鈥檚 ability to pay current liabilities and total liabilities improved or deteriorated during 2018. To answer this question, you gather the following data:

2018

2017

Cash

\(58,000

\)47,000

Short-term Investments

34,000

0

Net Accounts Receivable

140,000

124,000

Merchandise Inventory

217,000

272,000

Total Assets

530,000

565,000

Total Current Liabilities

288,000

205,000

Long-term Notes Payable

40,000

50,000

Income from Operations

165,000

158,000

Interest Expense

55,000

41,000

Compute the following ratios for 2018 and 2017, and evaluate the company鈥檚 ability to pay its current liabilities and total liabilities:

a. Current ratio

b. Cash ratio

c. Acid-test ratio

d. Debt ratio

e. Debt to equity ratio

Short Answer

Expert verified

S.no.

Ratios

2018

2017

a

Current ratio

1.56

2.16

b

Cash ratio

0.20

0.23

c

Acid-test ratio

0.81

0.83

d

Debt ratio

61.9%

45.1%

e

Debt to equity ratio

1.62

0.82

Step by step solution

01

Meaning of Ratio Analysis

Financial data points from a company's financial statements are used in ratio analysis to assess several factors, including profitability, liquidity, and solvency.

02

(1) Computing current ratio

2018

颁耻谤谤别苍迟鈥剅补迟颈辞=罢辞迟补濒鈥刢耻谤谤别苍迟鈥刟蝉蝉别迟罢辞迟补濒鈥刢耻谤谤别苍迟鈥刲颈补产颈濒颈迟颈别蝉=$58,000+$34,000+$140,000+$217,000$288,000=$449,000$288,000=1.56

2017

颁耻谤谤别苍迟鈥剅补迟颈辞=罢辞迟补濒鈥刢耻谤谤别苍迟鈥刟蝉蝉别迟罢辞迟补濒鈥刢耻谤谤别苍迟鈥刲颈补产颈濒颈迟颈别蝉=$47,000+$124,000+$272,000$205,000=$443,000$205,000=2.16

03

(2) Computing cash ratio

2018

颁补蝉丑鈥剅补迟颈辞=Cash+颁补蝉丑鈥别辩耻颈惫补濒别苍迟罢辞迟补濒鈥刢耻谤谤别苍迟鈥刲颈补产颈濒颈迟颈别蝉=$58,000+$0$288,000=0.20

2017

颁补蝉丑鈥剅补迟颈辞=Cash+颁补蝉丑鈥别辩耻颈惫补濒别苍迟罢辞迟补濒鈥刢耻谤谤别苍迟鈥刲颈补产颈濒颈迟颈别蝉=$47,000+$0$205,000=0.23

04

(3) Computing acid-test ratio

2018

础肠颈诲-迟别蝉迟鈥剅补迟颈辞=Cash+厂丑辞谤迟-迟别谤尘鈥刬苍惫别蝉迟尘别苍迟+狈别迟鈥塩耻谤谤别苍迟鈥剅别肠别颈惫补产濒别蝉罢辞迟补濒鈥刢耻谤谤别苍迟鈥刲颈补产颈濒颈迟颈别蝉=$58,000+$34,000+$140,000$288,000=0.81

2017

础肠颈诲-迟别蝉迟鈥剅补迟颈辞=Cash+厂丑辞谤迟-迟别谤尘鈥刬苍惫别蝉迟尘别苍迟+狈别迟鈥塩耻谤谤别苍迟鈥剅别肠别颈惫补产濒别蝉罢辞迟补濒鈥刢耻谤谤别苍迟鈥刲颈补产颈濒颈迟颈别蝉=$47,000+$0+$124,000$205,000=0.83

05

(4) Computing debt ratio

2018

顿别产迟鈥剅补迟颈辞=罢辞迟补濒鈥刲颈补产颈濒颈迟颈别蝉罢辞迟补濒鈥刟蝉蝉别迟蝉=$288,000+$40,000$530,000=61.9%

2017

顿别产迟鈥剅补迟颈辞=罢辞迟补濒鈥刲颈补产颈濒颈迟颈别蝉罢辞迟补濒鈥刟蝉蝉别迟蝉=$205,000+$50,000$565,000=45.1%

06

(5) Computing debt to equity ratio

2018

顿别产迟鈥则辞鈥别辩耻颈迟测鈥剅补迟颈辞=罢辞迟补濒鈥刲颈补产颈濒颈迟颈别蝉罢辞迟补濒鈥别辩耻颈迟测=$288,000+$40,000$530,000鈭�$328,000=1.62

2017

顿别产迟鈥则辞鈥别辩耻颈迟测鈥剅补迟颈辞=罢辞迟补濒鈥刲颈补产颈濒颈迟颈别蝉罢辞迟补濒鈥别辩耻颈迟测=$205,000+$50,000$565,000鈭�$255,000=$255,000$310,000=0.82

07

Analysis of the ratio

The corporation appears to have the liquidity to satisfy these obligations because the current ratio and quick ratio are both very high. The corporation is not overly indebted because both the debt-to-equity ratio and the debt ratio are at ordinary levels. All ratios declined in 2018 compared to 2017, which decreased the company's capacity to pay short-term and long-term obligations.

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Most popular questions from this chapter

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss鈥檚 accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company鈥檚 financial statements. Moss鈥檚 bank closely examines cash flow from operating activities. Daniel Peavey, Moss鈥檚 controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?

2. Under what condition would the reclassification of the receivables be ethical? Unethical?

Briefly describe the ratios that can be used to evaluate a company鈥檚 ability to sell merchandise inventory and collect receivables.

The Klein Department Stores, Inc. chief executive officer (CEO) has asked you tocompare the company鈥檚 profit performance and financial position with the averages for the industry. The CEO has given you the company鈥檚 income statement and balance sheet as well as the industry average data for retailers.

Requirements

1.Prepare a vertical analysis for Klein for both its income statement and balance sheet.

2.Compare the company鈥檚 profit performance and financial position with the averagefor the industry.

Determining the effects of business transactions on selected ratios

Financial statement data of Modern Traveler鈥檚 Magazine include the following items:

Cash

\(19,000

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鈥檚 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.

The financial statements of Valerie鈥檚 Natural Foods include the following items:

Compute the following ratios for the current year:

  1. Current ratio

  2. Cash ratio

  3. Acid-test ratio

  4. Inventory turnover

  5. Day鈥檚 sales in inventory

  6. Day鈥檚 sales in receivables

  7. Gross profit percentage
See all solutions

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