Question

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall Inc. common stock was $ 53 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$ 3,511,600		$ 2,972,700
Net income			766,800		608,900
Total			$ 4,278,400		$ 3,581,600
Dividends
	On preferred stock		$ 12,600		$ 12,600
	On common stock		57,400		57,400
		Total dividends	$ 70,000		$ 70,000
Retained earnings, December 31			$ 4,208,400		$ 3,511,600

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 4,236,555		$ 3,903,330
Cost of goods sold	1,608,920		1,480,210
Gross profit	$ 2,627,635		$ 2,423,120
Selling expenses	$ 828,250		$ 1,025,330
Administrative expenses	705,555		602,170
Total operating expenses	1,533,805		1,627,500
Income from operations	$ 1,093,830		$ 795,620
Other income	57,570		50,780
	$ 1,151,400		$ 846,400
Other expense (interest)	280,000		154,400
Income before income tax	$ 871,400		$ 692,000
Income tax expense	104,600		83,100
Net income	$ 766,800		$ 608,900

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 641,430		$ 806,930
	Marketable securities		970,810		1,337,180
	Accounts receivable (net)		824,900		773,800
	Inventories		627,800		481,800
	Prepaid expenses		121,348		161,390
		Total current assets	$ 3,186,288		$ 3,561,100
Long-term investments			2,960,832		1,344,507
Property, plant, and equipment (net)			4,200,000		3,780,000
Total assets			$ 10,347,120		$ 8,685,607
Liabilities
Current liabilities			$ 1,098,720		$ 1,704,007
Long-term liabilities
	Mortgage note payable, 8 %		$ 1,570,000		$ 0
	Bonds payable, 8 %		1,930,000		1,930,000
		Total long-term liabilities	$ 3,500,000		$ 1,930,000
Total liabilities			$ 4,598,720		$ 3,634,007
Stockholders' Equity
Preferred $ 0.70 stock, $ 40 par			$ 720,000		$ 720,000
Common stock, $ 10 par			820,000		820,000
Retained earnings			4,208,400		3,511,600
	Total stockholders' equity		$ 5,748,400		$ 5,051,600
Total liabilities and stockholders' equity			$ 10,347,120		$ 8,685,607

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

1. Working capital	$
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables		days
6. Inventory turnover
7. Number of days' sales in inventory		days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield

Answer 1

Solution'

1. working capital = Current asset - Current liability

     Current asset = 3186288

     Current liability = 1098720

          WC = 3186288 - 1098720 = 2087568

2. Current ratio = Current asset / current liability

                       = 3186288 / 1098720

                        = 2.9 or 3

3. Quick ratio = Liquid asset / Current liabilities

Liquid asset or quick asset = Cash + Marketable securities + Accounts receivable

                                          =641430 + 970810 + 824900

                                          = 2437140

Quick ratio = 2437140 / 1098720 = 2.22

4. Accounts receivable turnover = Net sales credit / Average accounts receivable

    Average accounts receivable = ( Opening accounts receivable + closing accpunts receivable ) / 2

                                             = ( 773800 + 824900 ) / 2 = 799350

Net sales credit   = 4236555

   Accounts receivable turnover = 4236555 / 799350 = 5.3

5. Number of days' sales in receivable = No.of days in the year / Accounts receivable turnover ratio

                                                       = 365 / 5.3 = 68.8 or 69 days

6.Inventory turnover = Cost of goods sold / Average inventory

Cost of goods sold = 1608920

Average inventory = ( Beginning inventory + Ending inventory ) / 2

                          = ( 481800 + 627800 ) / 2 = 554800

Inventory turnover = 1608920 / 554800 = 2.9 or 3

7. Number of days sales in inventory = ( Average inventory / Cost of goods sold ) * 365

    Average inventory = 554800

Cost of goods sold = 1608920

No. of days sales in inventory = ( 554800 / 1608920 ) * 365

                                              = 126 days

8. Ratio of fixed assets to longterm liability = Value of fixed asset / Long term debt

   Value of fixed asset = 4200,000 + 2960832 = 7160832

Long term debt = 1570,000 + 1930000 = 3500,000

Ratio of fixed asset to long term liability = 7160832 / 3500,000 = 2.045

9. Ratio of liabilities to stockholders equity = Total liabilities / Shareholders equity

     Total liability = 4598720

Shareholders equity = 5748400

Ratio of liabilities to stockholders equity = 4598720 / 5748400 = 0.8

10. Times interest earned = Incomes before interest and income taxes / Interest expenses

     Income before interest and income taxes = 1093830

   Interest expenses = 280,000

Times interest earned = 1093830 / 280,000 = 4

11. Asset turnover = Net sale / Average total asset

   Net sale = 4236555

Average total asset = ( 10347120 + 8685607 ) / 2 = 9516363.5

Asset turnover = 4236555 / 9516363.5 = 0.44

12.Return on total assets = Net income / average total asset

   Net income = 766800 / 9516363.5 = 0.08

13.Return on stockholders' equity = ( Company's earnings after tax   / Total shareholders' equity ) * 100

Company's earning after tax = 766800

Total shareholders' equity = 5748400

Return on stockholders' equity = ( 766800 / 5748400 ) * 100 = 13.33

14. Return on common stockholders' equity = ( Net income - preferred divident ) / Average common stockholders'     equity

                                                                 = ( 766800 -720000 ) / 820000 = 0.057

15. Earning per share on common stock = ( net income - Preferred dividends ) / End of period of commonstock outstanding

                                                          =( 766800 - 720000 ) / 820000 = 0.57

16.Price earning ratio = Current stock price / EPS

    Current stock price = $40

   P/E = 10 / 0.57 =17.54

17. Dividents per share of common stock = Total divident paid out / No. of outstanding commonshares issued

                                                           = 720000 / 820000 =0.87

18. Divident yield =( Annual divident / stock price ) * 100

                             ( 0.70 / 10 ) * 100 = 7