Question

The condensed financial statements of Sunland Company for the years 2016 and 2017 are presented as follows. (Amounts in thousands.)

SUNLAND COMPANY Balance Sheets December 31
		2017		2016
Current assets
Cash and cash equivalents		$330		$360
Accounts receivable (net)		490		420
Inventory		660		590
Prepaid expenses		120		160
Total current assets		1,600		1,530
Investments		30		30
Property, plant, and equipment (net)		420		380
Intangibles and other assets		530		510
Total assets		$2,580		$2,450
Current liabilities		$920		$810
Long-term liabilities		610		580
Stockholders’ equity—common		1,050		1,060
Total liabilities and stockholders’ equity		$2,580		$2,450

SUNLAND COMPANY Income Statements For the Year Ended December 31
		2017		2016
Sales revenue		$4,000		$3,660
Costs and expenses
Cost of goods sold		975		910
Selling & administrative expenses		2,400		2,330
Interest expense		25		20
Total costs and expenses		3,400		3,260
Income before income taxes		600		400
Income tax expense		180		120
Net income		$ 420		$ 280

Compute the following ratios for 2017 and 2016. (Round current ratio and inventory turnover to 2 decimal places, e.g. 1.83 and all other answers to 1 decimal place, e.g. 1.8 or 12.6%.)

(a)		Current ratio.
(b)		Inventory turnover. (Inventory on 12/31/15, was $420.)
(c)		Profit margin.
(d)		Return on assets. (Assets on 12/31/15, were $2,800.)
(e)		Return on common stockholders’ equity. (Stockholders’ equity on 12/31/15, was $910.)
(f)		Debt to assets ratio.
(g)		Times interest earned.

Answer 1

(a) Current ratio = Current assets / Current liabilities
2017 = $1,600 / $920 = 1.74
2016= $1,530/ 810 = 1.89

(b) Inventory turnover = Cost of goods sold / Average inventory
2017 = $975 / {(660 + 590) / 2} = 1.56
2016 = $910 / {(590 + 420) / 2} = 1.80

(c) Profit margin = Net Income / Net Sales
2017 = $420 / 4,000 = 10.5%
2016 = $280 / 3,660 = 7.7%

(d) Return on assets = Net Income / Average total assets
2017 = $420 / {(2,580 +  2,450) / 2} = 0.17 or 16.7%
2016 = $280 / {(2,450 + 2,800) / 2} = 0.11 or 10.7%

(e) Return on common stockholders’ equity = Net income - preferred dividend / common stockholders’ equity
2017 = $420 / 1,050 = 40.0%
2016 = $280 / 1,060 = 26.4%

(f) Debt to assets ratio = Debt / Assets
2017 = ($920 + 610) / 2,580 = 59.3% or 0.6 times
2016 = ($810 +580 ) / 2,450 = 56.7% or 0.6 times

(g) Times interest earned = EBIT / Interest expense
2017 = ($600 + 25)/ 25 = 25.0 times
2016 = ($400 + 20) / 20 = 21.0 times