Question

1. Financial information for Sigma Company is presented below. Calculate the following ratios for 2018:

(a) Inventory turnover.

(b) Accounts receivable turnover.

(c) Return on total assets.

(d) Times interest earned.

(e) Total asset turnover.

	2018	2017
Assets:
Cash	$   18,000	$ 22,000
Marketable securities	25,000	0
Accounts receivable	38,000	42,000
Inventory	61,000	52,000
Prepaid insurance	6,000	9,000
Long-term investments	49,000	20,000
Plant assets, net	218,000	225,000
Total assets	$415,000	$370,000
Net income after interest expense and taxes	$ 62,250
Sales (all on credit)	305,000
Cost of goods sold	123,000
Interest expense	15,600
Income tax expense	27,000

Answer 1

Answer of Part a:

Average Inventory = (Beginning Inventory + Ending Inventory) /2
Average Inventory = ($52,000 + $61,000) / 2
Average Inventory = $56,500

Inventory Turnover = COGS / Average Inventory
Inventory Turnover = $123,000 / $56,500
Inventory Turnover = 2.18 times

Answer of Part b:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($42,000 + $38,000) /2
Average Accounts Receivable = $40,000

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $305,000 / $40,000
Accounts Receivable Turnover = 7.63 times

Answer of Part c:

Average Total Assets = (Beginning Total Assets + Ending Total Assets) /2
Average Total Assets = ($370,000 + $415,000) /2
Average Total Assets = $392,500

EBIT = Net Income after Interest Expense and Taxes + Interest Expense + Income Tax Expense
EBIT = $62,250 + $15,600 + $27,000
EBIT = $104,850

Return on Total Assets = EBIT / Average Total Assets
Return on Total Assets = $104,850 / $392,500
Return on Total Assets = 0.2671 or 26.71%

Answer of Part d:

Times Interest Earned = EBIT / Interest
Times Interest Earned = $104,850 / $15,600
Times Interest Earned = 6.72

Answer of Part e:

Average Total Assets = (Beginning Total Assets + Ending Total Assets) /2
Average Total Assets = ($370,000 + $415,000) /2
Average Total Assets = $392,500

Total Assets Turnover = Sales / Average Total Assets
Total Assets Turnover = $305,000 / $392,500
Total Assets Turnover = 0.78 times