Question

Bayside Inc. 2005 Income Statement ($ in thousands)

Net sales $5,680

Less: Cost of goods sold 4,060

Less: Depreciation 420

Earnings before interest and taxes 1,200

Less: Interest paid 30

Taxable Income $1,170

Less: Taxes 410

Net income $ 760

Bayside, Inc. 2004 and 2005 Balance Sheets ($ in thousands)

2004 2005 2004 2005

Cash $ 70 $ 180 Accounts payable $1,350 $1,170

Accounts rec. 980 840 Long-term debt 720 500

Inventory 1,560 1,990 Common stock 3,200 3,500

Total $2,610 $3,010 Retained earnings 940 1,200

Net fixed assets 3,600 3,360

Total assets $6,210 $6,370 Total liabilities & equity $6,210 $6,370

Calculate the following: for 2005 only (You will show your work ). Additional Information at the end of 2005:

Fair Market Value of the Stock $190 per share

Number of Common Shares Outstanding 100,000

Dividends paid during 2005 - $4 per share

Calculate the Current Ratio for 2005.

A current ratio of 2.2 would appear to show that the company has a healthy current ratio.Is this statement true or false.

What is the Quick Ratio for this company for 2005?

Calculate the Inventory Turnover in days for 2005.

If a seller of fresh fruit had an Inventory Turnover Ratio of 125 days, would this be a good ratio?

Calculate the Average Days Sales for Collecting Receivables.

If this companies terms are Net 15 on items it sells and its Average Days Sales for collecting those receivables is 39 days, should the company be concerned?

Calculate the Debt to Equity Ratio.

The ratio reflects that the company has used more debt than equity to finance the growth of the company.

Calculate the Profit Margin for the company.

Explain this Profit Margin Percentage. What does it mean?

Calculate the Earnings Per Share for the company.  (Net Income/Oustanding Shares)

Calculate the Price to Earnings Ratio.

If the industry Price to Earnings ratio is at 15, what could account for the difference from the industry average?

CAlculate

Beginning Retained Earnings $100,000

Dividends Paid for the Year $20,000

Net Loss for the Year $30,000

Based on the information above, the Ending Retained Earnings Balance will be?

Answer 1

Solution :

First, we shall calculate the current ratio of the company :

1 a) The current ration is defined as the ability of the company to pay off the short-term and long-term obligation of the company. It is calculated by considering total current asset divided by the total current liabilities.

Hence = Current Asset /Current Liabilities = (Cash + Acc rec +inventory )/accounts payable

= (180 +840 +1990 )/1170

= 3010 /1170

therefore the current ratio = 2.57

Since the company has a current ratio of more than 2 hence yes the statement holds true as higher the number depicts that the company has 2 times more current assets to pay off the obligation of the company.

b) Quick ratio - It is defined as how can a company meets its short-term financial liabilities and it is also known as acid test ratio. In the Quick ratio, we will not consider Inventory.

Quick ratio = (Cash +marketable securities + Acc Rec) /Acc Payable

= (180+840)/1170

= 1020/1170 = 0.87 is the quick ratio which implies that since it is less than 1 that shows that the company has an inventory high and doesn't have enough liquid asset to meet their short-term financial obligations.

c) Inventory turnover - It is defined as how many times the inventory is sold and replaced over a period by the company. Generally, we consider the cost of goods sold and not sales while calculating the inventory turnover divided by average inventory i.e (2014+2015 )/ 2

= Cost of goods sold / Avg Inventory

= 4060 / (1560+1990)/2

= 4060 / 1775 = 2.29 hence the inventory turnover in days will be = 365 / 2.29 = 159 days

d) If the company has 125 days of inventory turnover that is good because it shows that the company takes 125 days to sell the average inventory and 3 times in a year the inventory is replaced.

Thank you so much.