Question

Part 1. Financial Ratios

Please compute the 6 ratios requested below for the Smith Company as of and for the year ended December 31, 2020. Please refer to Illustration 5A.1 on pages 5-31 and 5-32 of our textbook for a summary of financial ratios and formulas. Compute each ratio to 2 decimal places using excel rounding.

The 6 ratios you should compute are:

• Current ratio
• Accounts receivable turnover
• Inventory turnover
• Profit margin on sales
• Earnings per share
• Debt to assets ratio

Compute the 6 ratios using the following data:

Current assets                                                               $18,000,000

Current liabilities                                                          $10,450,000

Net sales                                                                         $77,000,000

Accounts receivable beginning of year                  $ 4,850,000

Accounts receivable end of year                              $ 6,125,000

Cost of goods sold                                                        $50,750,000

Inventory beginning of year                                      $ 5,800,000

Inventory end of year                                                 $ 6,500,000

Net income                                                                    $ 3,900,000

Preferred dividends                                                     $     225,000

Weighted-average common shares outstding          500,000

Total liabilities                                                              $15,100,000

Total assets                                                                    $46,400,000

Answer 1

1. current ratio = current assets/current liabilities

=$18,000,000/$10,450,000

=1.72 : 1

2.

receivable turnover= net credit sales/average receivables

average receivables= [beginning receivables+ending receivables]/2

Average receivables =[$4,850,000+$6,125,000]/2

=$5,487,500

receivable turnover= net credit sales/average receivables

=$77,000,000/$5,487,500

=14.03 times

3

Inventory turnover = cost of goods sold/ average inventory

=$50,750,000/ [$5,800,000+$6,500,000]/2

=$50,750,000/6,150,000

=8.25 times

4

profit margin on sales = profit margin/ sales *100

[$3,900,000/$77,000,000]*100

=5.06 %

5

earnings per share

=[ profit -preferred dividends]/ weighted average outstanding number of shares

=[$3,900,000-$225,000]/500,000

=$7.35 per shares

6

Debt to asset ratio = total liabilities/ Total assets

=$15,100,000/$46,400,000

=0.33

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