Q26PGA Determining the effects of busin... [FREE SOLUTION]

Chapter 15: Q26PGA (page 844)

Determining the effects of business transactions on selected ratios Financial statement data of Style Traveler Magazine include the following items:
Cash
$ 23,000
Accounts Receivable, Net
81,000
Merchandise Inventory
185,000
Total Assets
635,000
Accounts Payable
99,000
Accrued Liabilities
37,000
Short-term Notes Payable
51,000
Long-term Liabilities
224,000
Net Income
68,000
Common Shares Outstanding
20,000 shares
Requirements
Compute Style 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
Purchased merchandise inventory of $49,000 on the account.
Borrowed $127,000 on a long-term note payable.
Issued 2,000 shares of common stock, receiving cash of $107,000.
Received cash on account, $5,000.

Short Answer

Expert verified

S. no.	Current Ratio	Debt ratio	Earnings per share
1	1.54	.64	$3.40
2a	1.43	.67	$3.40
2b	2.22	.70	$3.40
2c	2.12	.55	$3.09
2d	1.55	.65	$3.40

Step by step solution

Meaning of Current Ratio

The current ratio is the ratio that determines the efficiency of a business. The current ratio is one of the most helpful liquidity ratios in the financial analysis since it allows for assessing a company's liquidity situation.

(1) Computing various ratios

Preparing extract of Balance sheet

Company ST
Extract of balance sheet
Assets	Amount ($)	Liabilities	Amount ($)
Current asset:		Current liabilities:
Cash	23,000	Accounts payable	99,000
Account receivable	81,000	Accrued liabilities	37,000
Merchandise inventory	185,000	Short term payable	51,000
Total current asset	289,000	Total current liabilities	187,000
		Long term liabilities	224,000
		Total liabilities	411,000

Compute the current ratio for Company ST

$\begin{matrix} Current 鈥� ratio = \frac{颁耻谤谤别苍迟鈥塧蝉蝉别迟}{颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉} \\ = \frac{$ 289, 000}{$ 187, 000} \\ = 1.54 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} 顿别产迟鈥塺补迟颈辞 = \frac{罢辞迟补濒鈥塴颈补产颈濒颈迟颈别蝉}{罢辞迟补濒鈥塧蝉蝉别迟蝉} \\ = \frac{$ 411, 000}{$ 635, 000} \\ = 0.64 \end{matrix}$

Compute the earnings per share for Company ST

\begin{matrix} 贰补谤苍颈苍驳鈥塸别谤鈥塻丑补谤别 = \frac{狈别迟鈥塱苍肠辞尘别 鈭� 笔谤别蹿别谤谤别诲鈥塻丑补谤别}{奥别颈驳丑迟别诲鈥塧惫别谤补驳别鈥塶耻尘产别谤鈥塷蹿鈥塻丑补谤别蝉鈥塷耻迟蝉迟补苍诲颈苍驳} \\ = \frac{$ 68, 000 鈭� $ 0}{20, 000} \\ = $ 3.40 鈥塸别谤鈥塻丑补谤别 \end{matrix}

(2) Computing three ratios considering the effect in each transaction

a. Purchased merchandise inventory of $49,000 on the account.

Compute the current ratio of the or Company ST

$\begin{matrix} Current 鈥� ratio = \frac{颁耻谤谤别苍迟鈥塧蝉蝉别迟}{颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉} \\ = \frac{$ 289, 000 + $ 49, 000}{$ 187, 000 + $ 49, 000} \\ = \frac{$ 338, 000}{$ 236, 000} \\ = 1 .43 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} 顿别产迟鈥塺补迟颈辞 = \frac{罢辞迟补濒鈥塴颈补产颈濒颈迟颈别蝉}{罢辞迟补濒鈥塧蝉蝉别迟蝉} \\ = \frac{$ 411, 000 + $ 49, 000}{$ 635, 000 + $ 49, 000} \\ = \frac{$ 460, 000}{$ 684, 000} \\ = . 67 \end{matrix}$

Compute the earning per ratio for Company ST

$\begin{matrix} 贰补谤苍颈苍驳鈥塸别谤鈥塻丑补谤别 = \frac{狈别迟鈥塱苍肠辞尘别鈭� 笔谤别蹿别谤谤别诲鈥塻丑补谤别}{奥别颈驳丑迟别诲鈥塧惫别谤补驳别鈥塶耻尘产别谤鈥塷蹿鈥塻丑补谤别蝉鈥塷耻迟蝉迟补苍诲颈苍驳} \\ = \frac{$ 68, 000 鈭� $ 0}{20, 000} \\ = $ 3 .40 鈥塸别谤鈥塻丑补谤别 \end{matrix}$

b. Borrowed $127,000 on a long-term note payable

Compute the current ratio of the or Company ST

$\begin{matrix} Current 鈥� ratio = \frac{颁耻谤谤别苍迟鈥塧蝉蝉别迟}{颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉} \\ = \frac{$ 289, 000 + $ 127, 000}{$ 187, 000} \\ = \frac{$ 416, 000}{$ 187, 000} \\ = 2 .22 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} 顿别产迟鈥塺补迟颈辞 = \frac{罢辞迟补濒鈥塴颈补产颈濒颈迟颈别蝉}{罢辞迟补濒鈥塧蝉蝉别迟蝉} \\ = \frac{$ 411, 000 + $ 127, 000}{$ 635, 000 + $ 127, 000} \\ = \frac{$ 538, 000}{$ 762, 000} \\ = . 70 \end{matrix}$

Compute the earning per ratio for Company ST

c. Issued 2,000 shares of common stock, receiving cash of $107,000

Compute the current ratio of the or Company ST

$\begin{matrix} Current 鈥� ratio = \frac{颁耻谤谤别苍迟鈥塧蝉蝉别迟}{颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉} \\ = \frac{$ 289, 000 + $ 107, 000}{$ 187, 000} \\ = 2 .12 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} 顿别产迟鈥塺补迟颈辞 = \frac{罢辞迟补濒鈥塴颈补产颈濒颈迟颈别蝉}{罢辞迟补濒鈥塧蝉蝉别迟蝉} \\ = \frac{$ 411, 000}{$ 635, 000 + $ 107, 000} \\ = . 55 \end{matrix}$

Compute the earning per ratio for Company ST

$\begin{matrix} 贰补谤苍颈苍驳鈥塸别谤鈥塻丑补谤别 = \frac{狈别迟鈥塱苍肠辞尘别鈭� 笔谤别蹿别谤谤别诲鈥塻丑补谤别}{奥别颈驳丑迟别诲鈥塧惫别谤补驳别鈥塶耻尘产别谤鈥塷蹿鈥塻丑补谤别蝉鈥塷耻迟蝉迟补苍诲颈苍驳} \\ = \frac{$ 68, 000 鈭� $ 0}{20, 000 + 2, 000} \\ = $ 3 .09 鈥塸别谤鈥塻丑补谤别 \end{matrix}$

d. Received cash on account, $5,000

Compute the current ratio of the or Company ST

Note: Received $5,000 cash on account increases the cash balance and decreases the accounts receivable by $5000. Cash and accounts receivable are current assets, so this transaction's effect is NIL on current assets.

Compute the debt ratio for Company ST

$\begin{matrix} 顿别产迟鈥塺补迟颈辞 = \frac{罢辞迟补濒鈥塴颈补产颈濒颈迟颈别蝉}{罢辞迟补濒鈥塧蝉蝉别迟蝉} \\ = \frac{$ 411, 000}{$ 635, 000} \\ = 0 .65 \end{matrix}$

Compute the earning per ratio for Company ST

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	THE PADDLE COMPANY Comparative Financial Statements Years Ended December 31			RECREATIONAL LIFE VESTS Comparative Financial Statements Years Ended December 31
Income statement	2019	2018	2017	2019	2018	2017
Net sales revenue	\(430,489	\)425,410		\(410,570	\)383,870
Cost of goods sold	258,756	256,797		299,110	280,190
Gross profit	171,733	168,613		111,460	103,680
Operating expenses	153,880	151,922		78,290	70,830
Operating income	17,853	16,691		33,170	32,850
Interest expenses	865	788		2,780	2,980
Income before income tax	16,988	15,903		30,390	29,870
Income tax expenses	5,137	4,809		8,780	8,630
Net income	\(11,851	\)11,094		\(21,610	\)21,240
Balance sheet

Assets
Cash & Cash Equivalents	\(69,159	\)70,793		\(65,730	\)55,270
Accounts Receivable	44,798	44,452	\(44,104	39,810	38,650	\)36,460
Merchandise Inventory	79,919	66,341	76,363	68,500	65,230	59,930
Other Current Assets	15,494	16,264		24,450	37,630
Total Current Assets	209,370	197,850		198,490	196,780
Long-term Assets	89,834	90,776		116,760	116,270
Total Assets	\(299,204	\)288,626	\(276,482	\)315,250	$$313,050	\(310,640

Liabilities
Current Liabilities	\)69,554	\(60,232		\)90,810	\(90,010
Long-term Liabilities	31,682	29,936		96,310	105,890
Total Liabilities	101,236	90,168		187,120	195,900

Stockholders鈥� Equity
Common Stock	72,795	80,885		111,530	102,480
Retained Earnings	125,173	117,573		16,600	14,670
Total Stockholders鈥� Equity	197,968	198,458		128,130	117,150	103,840
Total Liabilities and Stockholder鈥檚 Equity	\)299,204	\(288,626		\)315,250	\(313,050

Other data
Market price per share	\)21.38	\(33.82		\)46.37	$51.64
Annual dividend per share	0.32	0.30		0.53	0.45
Weighted average number of shares outstanding	9,000	8,000		9,000	8,000

a. Current ratio	h. Profit margin ratio
b. Cash ratio	i. Asset turnover ratio
c. Inventory turnover	j. Rate of return on common stockholders鈥� equity
d. Accounts receivable turnover	k. Earnings per share
e. Gross profit percentage	l. Price/earnings ratio
f. Debt ratio	m. Dividend yield
g. Debt to equity ratio	n. Dividend payout

	All digital	Green Zone
Net sales revenue (all on credit)	\(417,925	\)493,115
Cost of goods sold	209,000	258,000
Interest expenses	0	14,000
Net income	58,000	72,000

	All digital	Green Zone
Current assets:
Cash	\(23,000	\)18,000
Short-term investment	37,000	17,000
Accounts receivables, Net	39,000	49,000
Merchandise inventory	64,000	102,000
Prepaid expenses	21,000	17,000
Total current assets	\(184,000	\)203,000
Total assets	\(263,000	\)326,000
Total current liabilities	105,000	99,000
Total liabilities	105,000	134,000
Common stock:
\(1 par (10,000 shares)	10,000
\)2 par (14,000 shares)		28,000
Total stockholder鈥檚 equity	158,000	192,000
Market price per share of common stock	92.80	128.50
Dividend paid per common share	1.20	0.90

	All digital	Green Zone
Balance sheet:
Accounts receivables, Net	\(41,000	\)54,000
Merchandise inventory	81,000	89,000
Total assets	258,000	277,000
Common stock:
\(1 par (10,000 shares)	10,000
\)2 par (14,000 shares)		28,000

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Short Answer

Step by step solution

Meaning of Current Ratio

(1) Computing various ratios

(2) Computing three ratios considering the effect in each transaction

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Cash	\( 23,000
Accounts Receivable, Net	81,000
Merchandise Inventory	185,000
Total Assets	635,000
Accounts Payable	99,000
Accrued Liabilities	37,000
Short-term Notes Payable	51,000
Long-term Liabilities	224,000
Net Income	68,000
Common Shares Outstanding	20,000 shares

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