Question

Exercise 15-8 Selected Financial Ratios [LO15-2, LO15-3, LO15-4] The financial statements for Castile Products, Inc., are given below: Castile Products, Inc. Balance Sheet December 31 Assets Current assets: Cash $ 23,000 Accounts receivable, net 200,000 Merchandise inventory 330,000 Prepaid expenses 8,000 Total current assets 561,000 Property and equipment, net 870,000 Total assets $ 1,431,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 300,000 Bonds payable, 11% 350,000 Total liabilities 650,000 Stockholders’ equity: Common stock, $10 par value $ 120,000 Retained earnings 661,000 Total stockholders’ equity 781,000 Total liabilities and stockholders’ equity $ 1,431,000 Castile Products, Inc. Income Statement For the Year Ended December 31 Sales $ 3,510,000 Cost of goods sold 1,395,000 Gross margin 2,115,000 Selling and administrative expenses 580,000 Net operating income 1,535,000 Interest expense 38,500 Net income before taxes 1,496,500 Income taxes (30%) 448,950 Net income $ 1,047,550 Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $290,000. All sales were on account. Required: Compute the following financial data and ratios: 1. Working capital. 2. Current ratio. (Round your answer to 1 decimal place.) 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 intermediate calculations and final answer to 1 decimal place.) 7. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.) 8. Operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

Answer 1

1.WORKING CAPITAL:

Working Capital=Current asset-Current liabilities=561000-300000= $ 261,000

Working Capital

$261,000

2.Current Ratio=(Current assets)/(Current Liabilities)=561000/300000= 1.87

Current Ratio

1.87

3.Acid-test ratio=(Quick Assets)/(Current Liabilities)

Quick assets=Cash+ Marketable securities+ Accounts receivable=(23000+0+200000)=223000

Acid-test Ratio=223000/300000= 0.74333333

Acid -test Ratio

0.74

4.Debt to Equity Ratio=Total Liabilities/Total Stockholders’ Equity=650000/781000=0.83226633

Debt to Equity Ratio

0.83

5.Times interest earned(TIE)=Earning before interest and taxes/Interest expenses=1535000/38500=39.8701299

Times Interest Earned

39.87

6. Average Collection Period=365/Accounts Receivable turnover

Accounts Receivable Turnover=( sales)/(Average accounts receivable)

Sales=$3,510,000

Average accounts receivable=(Beginning Receivable+ Ending Receivable)/2=(190000+200000)/2=195000

Accounts receivable turnover=3510000/195000=18.00

Average Collection Period=365/Accounts Receivable turnover=365/18.00= 20.2777778 Days

Average Collection Period

20.3

Days

7.Average Sales Period=365/inventory turnover

Inventory turnover=Cost of goods sold/Average inventory

Cost of goods sold=$1,395,000

Average inventory=(Beginning Inventory+ Ending Inventory)/2=(290000+330000)/2=310000

Inventory turnover=1395000/310000=4.50

Average Sales Period=365/4.50= 81.1111111days

Average sales Period

81.1

Days

8. Operating Cycle =Average Collection Period +Average Sales Period=20.3+81.1= 101.4

Operating Cycle

101.4

Days