Q33PGB Determining the effects of busin... [FREE SOLUTION]

Chapter 15: Q33PGB (page 849)

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
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.

Short Answer

Expert verified

Financial ratios

Current ratio	Debt ratio	Earnings per share
1.52 times	0.64 times	1.38 per share

2. Effect of each transaction on financial ratios:

Transaction	Current ratio	Debt Ratio	Earnings per share
a	1.42	0.66	1.38
b	1.52	0.70	1.38
c	2.07	0.55	1.25
d	1.59	0.63	1.38

Step by step solution

Definition of Financial Ratios

The figures that are calculated by comparing various line items of the financial statement to arrive at a conclusive decision regarding liquidity, solvency, and profitability are known as financial ratios.

Calculation of financial ratios:

Current ratio	Debt ratio	Earnings per share
$\begin{matrix} Current ratio = \frac{Current assets}{Current liabilities} \\ = \frac{$ 19, 000 + $ 82, 000 + $ 183, 000}{$ 102, 000 + $ 35, 000 + $ 50, 000} \\ = \frac{$ 284, 000}{$ 187, 000} \\ = 1.52 鈥� times \end{matrix}$	$\begin{matrix} Debt ratio = \frac{Total debt}{Total assets} \\ = \frac{$ 102, 000 + $ 35, 000 + $ 50, 000 + $ 221, 000}{$ 638, 000} \\ = \frac{$ 408, 000}{$ 638, 000} \\ = 0.64 times \end{matrix}$	$\begin{matrix} Earnings per share = \frac{Net income}{Common shares outstanding} \\ = \frac{$ 69, 000}{50, 000} \\ = 1.38 鈥� per share \end{matrix}$

Ratios after effect of transactions:

a. Purchased merchandise inventory of $42,000 on account.

Current ratio	Debt ratio	Earnings per share
$\begin{matrix} Current ratio = \frac{Current assets}{Current liabilities} \\ = \frac{$ 19, 000 + $ 82, 000 + $ 183, 000 + $ 42, 000}{$ 102, 000 + $ 35, 000 + $ 50, 000 + $ 42, 000} \\ = \frac{$ 326, 000}{$ 229, 000} \\ = 1.42 鈥� times \end{matrix}$	$\begin{matrix} Debt ratio = \frac{Total debt}{Total assets} \\ = \frac{$ 102, 000 + $ 35, 000 + $ 50, 000 + $ 221, 000 + $ 42, 000}{$ 638, 000 + $ 42, 000} \\ = \frac{$ 450, 000}{$ 680, 000} \\ = 0.66 times \end{matrix}$	$\begin{matrix} Earnings per share = \frac{Net income}{Common shares outstanding} \\ = \frac{$ 69, 000}{50, 000} \\ = 1.38 鈥� per share \end{matrix}$

b. Borrowed $121,000 on a long-term note payable.

Current ratio	Debt ratio	Earnings per share
$\begin{matrix} Current ratio = \frac{Current assets}{Current liabilities} \\ = \frac{$ 19, 000 + $ 82, 000 + $ 183, 000}{$ 102, 000 + $ 35, 000 + $ 50, 000} \\ = \frac{$ 284, 000}{$ 187, 000} \\ = 1.52 鈥� times \end{matrix}$	$\begin{matrix} Debt ratio = \frac{Total debt}{Total assets} \\ = \frac{$ 102, 000 + $ 35, 000 + $ 50, 000 + $ 221, 000 + $ 121, 000}{$ 638, 000 + $ 121, 000} \\ = \frac{$ 529, 000}{$ 759, 000} \\ = 0.70 times \end{matrix}$	$\begin{matrix} Earnings per share = \frac{Net income}{Common shares outstanding} \\ = \frac{$ 69, 000}{50, 000} \\ = 1.38 鈥� pershare \end{matrix}$

c. Issued 5,000 shares of common stock, receiving cash of $103,000.

Current ratio	Debt ratio	Earnings per share
$\begin{matrix} Current ratio = \frac{Current assets}{Current liabilities} \\ = \frac{$ 19, 000 + $ 82, 000 + $ 183, 000 + $ 103, 000}{$ 102, 000 + $ 35, 000 + $ 50, 000} \\ = \frac{$ 387, 000}{$ 187, 000} \\ = 2.07 鈥� times \end{matrix}$	$\begin{matrix} Debt ratio = \frac{Total debt}{Total assets} \\ = \frac{$ 102, 000 + $ 35, 000 + $ 50, 000 + $ 221, 000}{$ 638, 000 + $ 103, 000} \\ = \frac{$ 408, 000}{$ 741, 000} \\ = 0.55 times \end{matrix}$	$\begin{matrix} Earnings per share = \frac{Net income}{Common shares outstanding} \\ = \frac{$ 69, 000}{50, 000 + 5, 000} \\ = 1.25 鈥� pershare \end{matrix}$

d. Received cash on account, $5,000.

Current ratio	Debt ratio	Earnings per share
$\begin{matrix} Current ratio = \frac{Current assets}{Current liabilities} \\ = \frac{$ 19, 000 + $ 82, 000 + $ 183, 000 + $ 5, 000}{$ 102, 000 + $ 35, 000 + $ 50, 000 - $ 5, 000} \\ = \frac{$ 289, 000}{$ 182, 000} \\ = 1.59 鈥� times \end{matrix}$	$\begin{matrix} Debt ratio = \frac{Total debt}{Total assets} \\ = \frac{$ 102, 000 + $ 35, 000 + $ 50, 000 + $ 221, 000 - $ 5, 000}{$ 638, 000 + $ 5, 000} \\ = \frac{$ 403, 000}{$ 643, 000} \\ = 0.63 times \end{matrix}$	$\begin{matrix} Earnings per share = \frac{Net income}{Common shares outstanding} \\ = \frac{$ 69, 000}{50, 000} \\ = 1.38 鈥� per share \end{matrix}$

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Short Answer

Step by step solution

Definition of Financial Ratios

Calculation of financial ratios:

Ratios after effect of transactions:

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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