Question

Consider the data for Ryan Company in Exhibit 12-15. Assume all sales are on credit.

Compute the following ration for the year 20X2 and 20X3.

Percentage of the net income to stockholders’ equity (ROE)

Gros profit rate

Percent of net income to sales

Ratio of total debt to stockholders’ equity (define total debt as total liabilities)

Inventory turnover

Current ratio

Average collection period for account receivable.

December 31                                                                                                                            20X3        20X2          20X1 Cash                                                                                                                  $ 30         $ 25            $ 20 Accounts receivable                                                                                          90            70               50 Merchandise Inventory                                                                                    80            70               60 Prepaid expenses                                                                                              10            10               10   Land                                                                                                                     30            30               30 Building                                                                                                               70            75               80 Equipment                                                                                                          60            50               40 Total assets                                                                                                     $ 370       $ 330        $ 290 Accounts Payable                                                                                            $ 50         $ 40           $ 30 Taxes Payable                                                                                                      20            15             10 Accrued expenses payable                                                                                15            10             5 Long-term debt                                                                                                    45           45             45 Paid-in Capital                                                                                                      150         150           150 Retained Earnings                                                                                                90           70             50 Total Liabilities and stockholders’ equity                                                    $ 370      $ 330      $ 290                                                                                                                                  Year Ended December 31                                                                                                                                         20X3                 20X2                           Sales (all on credit)                                                                          $ 800                 $ 750                           Costs of goods sold                                                                              435                   410                           Operating expenses                                                                             350                   295                           Pretax Income                                                                                       60                     45                           Income taxes                                                                                         20                     15                           Net Income                                                                                         $ 45                  $ 30

For each of the following item, indicate whether the change from 20X2 too 20X3 for Ryan. Company seems to be favourable or unfavourable, and identity the ratios you computed previously that most directly support your answer. The first two items that follow are given as an example.

Return to owners, favourable, a

Gross profit rate basically unchanged, b (increased from 45.3% to 45.6%, could answer favourable)

Ability to pay current debt on time

Collectability of receivables

Risks of insolvency

Salability of merchandise

Return on sales

Overall accomplishment

Coordination of buying and selling functions

Screening of risks in granting credit to customer.

Answer 1

			31-Dec
	2003	2002	2001
Cash	30	25	20
Accounts receivable	90	70	50
Merchandise Inventory	80	70	60
Prepaid expenses	10	10	10
Land	30	30	30
Building	70	75	80
Equipment	60	50	40
Total assets	370	330	290
Accounts Payable	50	40	30
Taxes Payable	20	15	10
Accrued expenses payable	15	10	5
Long-term debt	45	45	45
Paid-in Capital	150	150	150
Retained Earnings	90	70	50
Total Liabilities and stockholders’ equity	370	330	290
Year Ended December 31
20X3                 20X2
Sales (all on credit)	800	750
Costs of goods sold	435	410
Gross Profit	365	340
Operating expenses	350	295
Pretax Income	60	45
Income taxes	20	15
Net Income	40	30

Solution:

S No	Ratio	2003	2002
	Shareholder's Equity = Paid In Capital+ Retained Earnings ($)	240	220
a	Net Income to shareholders equity= Net Income/Shareholder's Equity	17%	14%
b	Gross profit rate = Gross Profit/ sales	46%	45%
c	Percentage of Net Income to Sales = Net Income/Sales	5%	4%
d	Ratio of total debt to stockholders’ equity (define total debt as total liabilities)	54%	50%
e	Inventory turnover Ratio = Costs of goods sold/ Average Inventory (times)	5.8	6.3
	Average Inventory = (Opening Inventory+Closing Inventory)/2 ($)	75	65
f	Current Ratio= Current assets/current liabilities (times)	2	3
	Current Assets $	200	165
	Current Liabilities $	85	65
	Average Accounts Receivable = (Opening AR+Closing AR)/2 ($)	28	23
	Receivables Turnover = Credit sales/ Average Accounts Receivable (times)	29	33
g	Average collection period for accounts receivable = 365/ Receivables Turnover (days)	13	11
	Return to Owners	Favourable	a
	Gross Profit Rate	Favourable	b
	Ability to pay Current debt on time	Unfavourable	f
	Collectability of receivables	Unfavourable	g
	Risks of Insolvency	Unfavourable	d
	salability of merchandise	Unfavourable	e
	Returns on sales	Favourable	c
	Overall Accomplishment	Favourable	a
	Coordination of buying and selling function	Unfavourable	e
	Screening of risks in granting credit to customers	Unfavourable	g