Week Five Exercise Assignment CJACKS Essay

Submitted By channy0808
Words: 924
Pages: 4

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


a. 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?

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
Total Current Assets
12,800
13,300
13,800









Edison
Stagg
Thornton
Accounts Payable
200
200
200
Notes Payable: short term
3100
3100
3100
Accrued Payables
300
300
300
Total Current Liabilities
3600
3600
3600

In my opinion Thornton has the most liquid due to the fact that they have larger inventory and can move it quickly.
Edison


Current ratio
$12,800/3,600
3.69
Quick ration
($6,000 + 3,000 + 2,000) / 3,600
3.06

Stagg


Current ratio
$13,300/3,600
3.69
Quick ration
($5,000 + 2,500 + 2,500) / 3,600
2.78

Thornton


Current ratio
$13,800/3,600
3.83
Quick ratio
($4,000 + 2,000 + 3,000) / 3,600
2.5

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.

Accounts receivable turnover ratio = Net credit sales/average accounts receivable
$832,000/180,500 = 4.60

Inventory turnover ratio = cost of goods sold /average inventory
$530,000/60,000 = 8.83

($ 205,000 + 156,000) / 2 = $180,500
($70,000 + 50,000) / 2 = 60,000

 
 
 

 
 
 
 


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




a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places
Profit margin on sales = net income/net sales
= 130,000/1,750,000
= 7.43%
Rate of return on assets = net income/average assets
= 130,000/1,200,000
= 10.83%
Return on common stockholders’ equity
= net income/average common stockholders’ equity
= 130,000/500,000
= 26%

b. Does the firm have positive or negative financial leverage? Briefly ex­plain.
Debt capital ratio is high and they have a interest expense of $120,000 which means they are in debt and basically operating off of borrowed funds.



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.

Mary Lynn Corporation
 
20X2
20X1
Increase / Decrease
 
 
 
Amount
Percentage
Current Assets
86,000
80,000
6,000
7.50%
Property, Plant, and