Question

Bavarian Sausage, Inc. posted the following balance sheet and income statement:

Balance Sheet
Cash	$  50,000		Accounts Payable	$185,000
Accounts Receivable	125,000		Notes Payable	125,000
Inventories	225,000		Long-term debt	115,000
Net Plant and Equipment	525,000		Common Stock	350,000
			Retained earnings	150,000
Total Assets	$925,000		Total liabilities and Stockholders’ Equity	$925,000

Income Statement
Sales		$525,000
Cost of goods sold		215,000
Depreciation		65,000
Earnings before interest and taxes		245,000
Interest expense	35,000
Net profit before taxes		210,000
Taxes (@ 40%)		84,000
Net income		$126,000

What is Bavarian Sausage, Inc.’s quick ratio?  (Show your work. Four decimal places required. Highlight or bold your answer.)
What is Bavarian Sausage, Inc.’s net profit margin?  (Show your work. Label %. No decimal places required. Highlight or bold your answer.)
What is Bavarian Sausage, Inc.’s debt-equity ratio?  (Show your work. Two decimal places required. Highlight or bold your answer.)
Calculate Bavarian Sausage, Inc.’s return on assets.  (Show your work. Label %. Two decimal places required. Highlight or bold your answer.)
Calculate Bavarian Sausage, Inc.’s inventory turnover.  (Show your work. Two decimal places required. Highlight or bold your answer.)
Calculate Bavarian Sausage, Inc.’s return on equity.  (Show your work. Label %. Two decimal places required. Highlight or bold your answer.)

Answer 1

(a) Quick ratio = Current assets – Inventories – Prepaid expenses / Current liabilities

Current assets = Cash + Accounts receivable + Inventories

Current assets = $50000 + $125000 + $225000 = $400000

Current liabilities = Accounts payable = $185000

Inventories = $225000

Putting the values in the quick ratio formula, we get,

Quick ratio = ($400000 - $225000) / $185000

Quick ratio = $175000 / $185000 = 0.9459

Quick ratio = 0.9459

(b) Net Profit margin = Net income / Sales * 100

Net income = $126000, Sales = $525000

Net Profit margin = $126000 / $525000 * 100 = 24%

Net Profit margin = 24%

(c) Debt equity ratio = Total liabilities / Shareholder's equity

Total liabilities = Accounts payable + Notes payable + Long term debt

Total liabilities = $185000 + $125000 + $115000 = $425000

Shareholder's equity = Common stock + Retained earnings

Shareholder's equity = $350000 + $150000 = $500000

Putting these values in the debt equity ratio formula above, we get

Debt equity ratio = $425000 / $500000 = 0.85

Debt equity ratio = 0.85

(d) Return on assets (ROA) = Net income / Total assets * 100

Net income = $126000, Total assets = $925000

Now, putting these values in the above ROA formula, we get,

Return on assets (ROA) = $126000 / $925000 * 100 = 13.62%

Return on assets = 13.62%

(e) Inventory turnover ratio = Cost of the goods sold / Inventory

Cost of the goods sold = $215000, Inventory = $225000

Putting these values in the inventory turnover ratio formula, we get,

Inventory turnover ratio = $215000 / $225000 = 0.96

Inventory turnover ratio = 0.96

(f) Return on equity (ROE) = Net income / Stockholder's equity * 100

Net income = $126000,

Stockholder's equity = Common stock + Retained earnings = $350000 + $150000 = $500000

Now, putting these values in the above ROE formula, we get,

Return on equity (ROE) = $126000 / $500000 * 100 = 25.2%

Return on equity = 25.2%