Question

Problem 18-2A

The comparative statements of Painter Tool Company are presented below.

PAINTER TOOL COMPANY Income Statement For the Years Ended December 31
		2017			2016
Net sales		$1,817,800			$1,753,700
Cost of goods sold		1,006,800			972,000
Gross profit		811,000			781,700
Selling and administrative expenses		511,800			476,400
Income from operations		299,200			305,300
Other expenses and losses
Interest expense		17,400			13,900
Income before income taxes		281,800			291,400
Income tax expense		81,800			77,900
Net income		$ 200,000			$ 213,500

PAINTER TOOL COMPANY Balance Sheets December 31
Assets		2017			2016
Current assets
Cash		$60,700			$63,400
Short-term investments		68,000			50,900
Accounts receivable (net)		117,800			101,200
Inventory		122,000			114,400
Total current assets		368,500			329,900
Plant assets (net)		595,000			521,600
Total assets		$963,500			$851,500
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$160,100			$144,700
Income taxes payable		43,300			41,400
Total current liabilities		203,400			186,100
Bonds payable		204,300			204,300
Total liabilities		407,700			390,400
Stockholders’ equity
Common stock ($5 par)		278,000			300,700
Retained earnings		277,800			160,400
Total stockholders’ equity		555,800			461,100
Total liabilities and stockholders’ equity		$963,500			$851,500

All sales were on account.

Compute the following ratios for 2017. (Weighted-average common shares in 2017 were 59,300.) (Round Earnings per share, Current ratio and Acid-test ratio to 2 decimal places, e.g. 1.65 or 1.65:1, and all other answers to 1 decimal place, e.g. 6.8 or 6.8%.)

(a)		Earnings per share		$
(b)		Return on common stockholders’ equity			%
(c)		Return on assets			%
(d)		Current ratio			:1
(e)		Acid-test ratio			:1
(f)		Accounts receivable turnover			times
(g)		Inventory turnover			times
(h)		Times interest earned			times
(i)		Asset turnover			times
(j)		Debt to assets ratio			%

Answer 1

(a) Earning per share= Net Income/ Weighted Average shares outstanding

=$200,000/59,300

=$3.37

(b) Return on common stockholders’ equity= Net Income/ Average common stockholders’ equity

Net Income=$200,000

Average common stockholders’ equity= (Common stockholders’ equity of 2017+Common stockholders’ equity of 2016)/2

Common stockholders’ equity of 2017= Common Stock+Retained Earnings

=$278,000+$277,800

=$555,800

Common stockholders’ equity of 2020= Common Stock+Retained Earnings

=$300,700+$160,400

=$461,100

Average common stockholders’ equity= (Common stockholders’ equity of 2017+Common stockholders’ equity of 2016)/2

=($555,800+$461,100)/2

=$508,450

Return on common stockholders’ equity= Net Income/ Average common stockholders’ equity

=$200,000/$508,450

=39.3%

(c) Return on assets= (Net Income/ Average Total Assets)*100

Net Income= $200,000

Average Total Assets= (Total Assets of 2017+ Total Assets of 2016)/2

= ($963,500+$851,500)/2

=$907,500

Return on assets= (Net Income/ Average Total Assets)*100

=$200,000/$907,500

=22.04% or 22%

(d) Current Ratio= Total Current Assets/ Total Current Liabilities

=$368,500/$203,400

=1.81:1

(e) Acid- test ratio= (Total Current Assets- Inventory)/ Total Current Liabilities

=($368,500-$122,000)/$203,400

=$246,500/$203,400

=1.21:1

(f) Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Net Credit Sales=$1,817,800

Average Accounts Receivable= (Accounts receivable of 2017+ Accounts Receivable of 2016)/2

=($117,800+ $101,200)/2

=$109,500

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

=$1,817,800/$109,500

=16.6 times

(g) Inventory turnover=Cost of goods sold/ Average Inventory

Cost of goods sold=$1,006,800

Average Inventory= (Inventory of 2017+ Inventory of 2016)/2

=($122,000+$114,400)/2

=$118,200

Inventory turnover=Cost of goods sold/ Average Inventory

=$1,006,800/$118,200

=8.5 times

(h) Times interest earned=Earnings before interest and taxes / Total interest payable on bonds and other debt

Earnings before interest and taxes= Income before income taxes- Interest Expense

=$281,800-$17,400

=$264,400

Total interest payable on bonds and other debt= Interest Expense=$17,400

Times interest earned=Earnings before interest and taxes / Total interest payable on bonds and other debt

=$264,400/$17,400

=15.2 times

(i) Asset Turnover Ratio= Net Sales/ Average Total Assets

Net Sales= $1,817,800

Average Total Assets= (Total Assets of 2017+ Total Assets of 2016)/2

= ($963,500+$851,500)/2

=$1,815,500/2

=$907,500

Asset Turnover Ratio= Net Sales/ Average Total Assets

=$1,817,800/$907,500

=2 times

(j) Debt to assets ratio= Total Liability/ Total Assets

=$407,700/$963,500

=42.3%