Question

Exercise 13-8 Selected Financial Ratios [LO13-2, LO13-3, LO13-4]

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	22,000
Accounts receivable, net					250,000
Merchandise inventory					400,000
Prepaid expenses					9,000
Total current assets					681,000
Property and equipment, net					860,000
Total assets				$	1,541,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	230,000
Bonds payable, 11%					310,000
Total liabilities					540,000
Stockholders’ equity:
Common stock, $5 par value				$	150,000
Retained earnings					851,000
Total stockholders’ equity					1,001,000
Total liabilities and equity				$	1,541,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,940,000
Cost of goods sold		1,384,500
Gross margin		1,555,500
Selling and administrative expenses		600,000
Net operating income		955,500
Interest expense		34,100
Net income before taxes		921,400
Income taxes (30%)		276,420
Net income	$	644,980

Account balances at the beginning of the year were: accounts receivable, $170,000; and inventory, $310,000. All sales were on account.

Required:

Compute the following financial data and ratios:

1.	Working capital.

       

2.	Current ratio. (Round your answer to 2 decimal places.)

        

3.	Acid-test ratio. (Round your answer to 2 decimal places.)

        

4.	Debt-to-equity ratio. (Round your answer to 2 decimal places.)

      

5.	Times interest earned ratio. (Round your answer to 2 decimal places.)

       

6.	Average collection period. (Use 365 days in a year. Round your answer to 1 decimal place.)

       

7.	Average sale period. (Use 365 days in a year. Round your intermediate and final answer to 1 decimal place.)

       

8.	Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

       

Answer 1

Computation of following financial data and ratio:

1. Working capital = current asset - current liability	= $681,000 - 230,000 = $451,000
2. Current ratio = current asset / current liabilities	= $681,000 / 230,000 = 2.96
3. Acid test ratio = current asset - inventory - prepaid expense / current liabilities	= $681,000 - 400,000 - 9,000 / 230,000 = 1.18
4. Debt to equity ratio = total liabilities / total shareholder's equity	= $540,000 / 1,001,000 = 0.54 or 53.95%
5. Times interest earned ratio = income before interest and tax / interest expense	= $955,500 / 34,100 = 28.02 times
6. Average collection period = 365 days / accounts receivable turnover ratio   accounts receivable turnover ratio = net sales / average accounts receivable	= 365 / 14 = 26.1 days = $2,940,000 / (170,000+250,000) / 2 = $2,940,000 / 210,000 = 14 times
7. Average sales period = 365 days / inventory turnover ratio Inventory turnover ratio = cost of goods sold / average inventory	= 365 / 3.9 = 93.6 days = $1,384,500 / (310,000+400,000) / 2 = $1,384,500 / 355,000 = 3.9 times
8. Operating cycle = average sales period + average collection period	= 93.6 + 26.1 = 119.7 days