Question

Comparative financial statements for Wildhorse and Novak Ltd. are shown below.

WILDHORSE AND NOVAK LTD. Income Statement Year Ended December 31
		2021			2020
Net sales		$900,000			$840,000
Cost of goods sold		625,000			575,000
Gross profit		275,000			265,000
Operating expenses		154,000			150,000
Profit from operations		121,000			115,000
Other revenues and expenses
Interest expense		30,000			20,000
Profit before income tax		91,000			95,000
Income tax expense		27,000			20,000
Profit		$64,000			$75,000

WILDHORSE AND NOVAK LTD. Balance Sheet December 31
Assets		2021		2020		2019
Cash		$94,000		$84,000		$10,000
Accounts receivable		112,000		112,000		110,000
Inventories		140,000		135,000		96,000
Prepaid expenses		25,000		23,000		114,000
Land, buildings, and equipment		390,000		305,000		300,000
Total assets		$761,000		$659,000		$630,000
Liabilities and Shareholders’ Equity
Liabilities
Notes payable		$110,000		$100,000		$100,000
Accounts payable		43,000		40,000		50,000
Accrued liabilities		32,000		40,000		30,000
Bonds payable, due 2024		190,000		150,000		181,000
Total liabilities		375,000		330,000		361,000
Shareholders’ equity
Common shares (20,000 issued)		200,000		200,000		200,000
Retained earnings		186,000		129,000		69,000
Total shareholders’ equity		386,000		329,000		269,000
Total liabilities and shareholders’ equity		$761,000		$659,000		$630,000

Additional information:

1.		Seventy-five percent of the sales were on account.
2.		The allowance for doubtful accounts was $3,000 in 2021, $5,000 in 2020, and $2,500 in 2019.
3.		In 2021 and 2020, dividends of $3,000 and $9,000, respectively, were paid to the common shareholders.
4.		Cash provided by operating activities was $103,500 in 2021 and $129,000 in 2020.
5.		Cash used by investing activities was $115,500 in 2021 and $32,000 in 2020.

(a)

Calculate all possible liquidity, solvency, and profitability ratios for 2021 and 2020. (Round answers for Collection period, Days sales in inventory, Operating cycle and Free cash flow to 0 decimal places, e.g. 125. Round answer for Earnings per share to 2 decimal places, e.g. 12.50. Round all other answers to 1 decimal place, e.g. 12.5 or 12.5%. Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

					2021			2020
Liquidity Ratios
	1.		Current ratio			: 1			: 1
	2.		Acid-test ratio			: 1			: 1
	3.		Receivables turnover			times			times
	4.		Collection period			days			days
	5.		Inventory turnover			times			times
	6.		Days sales in inventory			days			days
	7.		Operating cycle			days			days
Solvency Ratios
	8.		Debt to total assets			%			%
	9.		Interest coverage			times			times
	10.		Free cash flow		$			$
Profitability Ratios
	11.		Gross profit margin			%			%
	12.		Profit margin			%			%
	13.		Asset turnover			times			times
	14.		Return on assets			%			%
	15.		Return on equity			%			%
	16.		Earnings per share		$			$
	17.		Payout ratio			%			%

Answer 1

The ratios for both years 2021 and 2020, alongwith all the calculations are shown in the table below:

			2021	2020
S.No.	Ratios	Formula	Calculation	Result	Calculation	Result
	Liquidity ratios
1	Current ratio	Current assets/Current liabilities	(94000+112000+140000+25000)/(110000+43000+32000)	2.01	(84000+112000+135000+23000)/(100000+40000+40000)	1.97
2	Acid-test ratio	(Cash&cash equivalents + marketable securities + Accounts receivable)/Current liabilities	(94000+112000)/(110000+43000+32000)	1.11	(84000+112000)/(100000+40000+40000)	1.09
3	Receivables turnover	Net credit sales/Average accounts receivables	((900000*75%)/((112000+112000)/2))	6.03	((840000*75%)/((112000+110000)/2))	5.68
4	Collection period	365/Accounts receivable turnover ratio	365/6.03	60.53	365/5.68	64.26
5	Inventory turnover	Cost of goods sold/Average inventory	625000/((140000+135000)/2)	4.55	575000/((135000+96000)/2)	4.98
6	Days sales in inventory	365/Inventory turnover ratio	365/4.55	80.22	365/4.98	73.29
7	Operating cycle	Days sales in inventory + Collection period	80.22+60.53	140.75	73.29+64.26	137.55
	Solvency ratios
8	Debt to total assets	(Short-term+Long-term debt)/Total assets	(110000+43000+32000+190000)/761000	0.49	(100000+40000+40000+150000)/659000	0.50
9	Interest coverage	Earnings before interest& tax / Interest expense	121000/30000	4.03	115000/20000	5.75
10	Free cash flow	Cash flow from operations - Capital expenditures	103500-115500	-12000.00	129000-32000	97000.00
	Profitability ratios
11	Gross profit margin	Gross Profit/Sales * 100	275000/900000 * 100	30.56%	265000/840000 * 100	31.55%
12	Profit margin	Net profit/Sales * 100	64000/900000 * 100	7.11%	75000/840000 * 100	8.93%
13	Asset turnover	Net sales / Average total assets	900000/((761000+659000)/2)	1.27	840000/((659000+630000)/2)	1.30
14	Return on assets	Net income / Average total assets * 100	64000/((761000+659000)/2)	9.01%	75000/((659000+630000)/2)	11.64%
15	Return on equity	Net income/Shareholders' equity * 100	64000/386000 * 100	16.58%	75000/329000 * 100	22.80%
16	Earnings per share	Net income/No. of outstanding common shares	64000/20000	3.20	75000/20000	3.75
17	Payout ratio	Dividend per share/ Earnings per share	(3000/20000)/3.2	0.05	(9000/20000)/3.75	0.12