Question

Changes in Various Ratios Presented below is selected information for Turner Company:

2019 2018

Sales revenue $950,000 $850,000

Cost of goods sold 575,000 545,000

Interest expense 20,000 20,000

Income tax expense 27,000 30,000

Net income 65,000 55,000

Cash flow from operating activities 70,000 60,000

Capital expenditures 45,000 45,000

Accounts receivable (net), December 31 126,000 120,000

Inventory, December 31 196,000 160,000

Stockholders’ equity, December 31 450,000 400,000

Total assets, December 31 750,000 675,000

Required Calculate the following ratios for 2019. The 2018 results are given for comparative purposes. Round answers to one decimal place. Use 365 days in a year.

2018 2019  

1. Gross profit percentage 35.9% % blank

2. Return on assets 8.3% % blank

3. Return on sales 6.5% % blank

4. Return on common stockholders’ equity (no preferred stock was outstanding) 13.9% % blank

5. Accounts receivable turnover 8.0 blank

6. Average collection period 45.6 days blank days

7. Inventory turnover 3.6 blank

8. Times-interest-earned ratio 5.3 blank

9. Operating-cash-flow-to-capital-expenditures ratio 1.3 blank

Answer 1

1. Gross profit percentage = (Sales - Cost of goods sold ) / Sales = ( 950000 - 575000 ) / 950000 = 39.47%

2. Return on assets = Net Income / Avg. Total Assets = 65000 / ( 750000 + 675000 ) / 2 = 65000 / 712500 = 9.12%

3. Return on sales = Net Income / Sales = 65000 / 950000 = 6.84%

4. Return on common stockholders’ equity = Net Income / Avg. Stockholders’ equity

                                                                    = 65000 / ( 450000 + 400000 ) / 2

                                                                    = 65000 / 425000               

                                                                     = 15.29%

5. Accounts receivable turnover = Sales / Avg.Accounts receivable = 950000 / (126000 + 120000) / 2 = 950000 / 123000 = 7.72

6. Average collection period = 365 / Accounts receivable turnover = 365 / 7.72 = 47.28 Days

7. Inventory turnover = Cost of goods sold / Avg.Inventory = 575000 / ( 196000 + 160000 ) / 2 = 575000 / 178000 = 3.23

8. Times-interest-earned ratio = EBIT / Interest Expense = (Net Income + Income Tax + Interest Expense) / Interest Expense = ( 65000 + 27000 + 20000 ) / 20000 = 5.6 Times

9. Operating-cash-flow-to-capital-expenditures ratio = Cash flow from operating activities / Capital expenditures = 70000 / 45000 = 1.56