Question

The financial statements of Morgan Ltd appear below:

Morgan LTD

Comparative Statement of Financial Position

31 December 2018

________________________________________________________________________________________

Assets                                                                                                         2018                    2017   

Cash ..................................................................................................     $ 25,000              $ 40,000

Marketable securities ...........................................................................         15,000                 60,000

Accounts receivable (net) .....................................................................         50,000                 30,000

Inventory ............................................................................................       150,000                170,000

Property, plant and equipment (net) ......................................................       160,000                200,000

      Total assets ..................................................................................     $400,000              $500,000

Liabilities and equity

Accounts payable ................................................................................     $ 20,000              $ 30,000

Short-term notes payable .....................................................................         40,000                 90,000

Bonds payable ....................................................................................         80,000                160,000

Ordinary shares ..................................................................................       170,000                145,000

Retained earnings ...............................................................................         90,000                  75,000

      Total liabilities and equity................................................................     $400,000              $500,000

Morgan LTD

Income Statement

For the Year Ended 31 December 2018

Net sales ............................................................................................                                 $360,000

Cost of sales .......................................................................................                                   184,000

Gross profit .........................................................................................                                   176,000

Expenses

      Interest expense ............................................................................        $24,000

      Selling expenses ...........................................................................         30,000

      Administrative expenses ................................................................          20,000

            Total expenses ........................................................................                                     74,000

Profit before income taxes ...................................................................                                   102,000

Income tax expense ............................................................................                                     30,000

Profit ..................................................................................................                                 $ 72,000

Additional information:

a.     Cash dividends of $57,000 were declared and paid in 2018.

b.     Weighted-average number of shares of ordinary shares outstanding during 2018 was 60,000 shares.

c.     Market value of ordinary shares on 31 December 2018 was $18 per share.

d.     Net cash provided by operating activities for 2018 was $63,000.

Required

Using the financial statements and additional information, compute the following ratios for Morgan Ltd for 2018. Show all computations.

1.     Current ratio

2.     Return on ordinary shareholders’ equity

3.     Price-earnings ratio

4.     Acid-test/Quick ratio

5.     Receivables turnover

Answer 1

Answer :

1. Current ratio :

= Current assets / Current liabilities

= (Cash + Marketable securities + Accounts receivable + Inventory) / (Accounts payable + Short-term notes payable)

= (25,000 + 15,000 + 50,000 + 150,000) / (20,000 + 40,000)

= $240,000 / $60,000

= 4 : 1

2. Return on ordinary stockholders' equity :

= (Net Profit - Preferred dividend) / Average common stockholders’ equity

Average common stockholders’ equity = (170,000 + 90,000 + 145,000 + 75,000) /2 = $240,000

= ($72,000 - 0) / $240,000

= 30%

3. Price-earnings ratio :

= Market price per share / Earning per share

Earning per share = Net Profit / Weighted average no. of shares outstanding

= $72,000 / 60,000 shares

= $1.2

Price-earnings ratio = $18 / $1.20

= 15 times

4. Acid-test/Quick ratio :

= Quick assets / Current liabilities

= (Cash + Marketable securities + Accounts receivable) / (Accounts payable + Short-term notes payable)

= (25,000 + 15,000 + 50,000) / (20,000 + 40,000)

= $90,000 / $60,000

= 1.5 : 1

5. Receivables turnover :

= Net Credit sales / Average accounts receiavble

Average accounts receiavble = ($50,000 + $30,000) / 2 = $40,000

Accounts receivable turnover ratio

= $360,000 / $40,000

= 9 times