Question description

Week Five Exercise Assignment
Financial Ratios

1. 
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

a.  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
Week_Five_Exercise_Assignment_B.docx 

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