Question

Selected financial statement data for Homer Company are presented below.
Net sales $1,500,000
Cost of goods sold 700,000
Interest expense 10,000
Net income 205,000
Current Assets (ending) $300,000
Fixed Assets (net) $400,000
Total assets (ending) $900,000
Current Liabilities $150,000
Long-term Liabilities $150,000
Total liabilities (ending) $300,000
Total stockholders' equity (ending) $600,000

Total assets at the beginning of the year were $800,000; total common stockholders' equity was $500,000 at the beginning of the period.

Instructions
Compute each of the following:
(a) Asset turnover
(b) Working Capital
(c) Return on assets
(d) Return on common stockholders' equity
(e) Current Ratio
(f) Ratio of Fixed Assets to Long-term Liabilities

Answer 1

(a) Asset Turnover = Total Sales / Average Total Assets

= Total Sales / [ (Assets at the beginning + Assets at the end) / 2]

= $ 1,500,000 / [($ 800,000 + $ 900,000) / 2]

= $ 1,500,000 / $ 850,000 = 1.76

(b) Working Capital = Current Assets - Current Liabilities

= $ 300,000 - $ 150,000

= $ 150,000

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

= Net Income / [ (Assets at the beginning + Assets at the end) / 2]

= $ 205,000 / [($ 800,000 + $ 900,000) / 2]

= $ 205,000 / $ 850,000 = 0.24

(d) Return on Common Stockholders' Equity = Net Income / Average Common Stockholders' Equity

= Net Income / [ (Common Stockholders' Equity at the beginning + Common Stockholders' Equity at the end) / 2]

= $ 205,000 / [ ($ 500,000 + $ 600,000) / 2]

= $ 205,000 / 550,000 = 0.37

(e) Current Ratio = Current Assets / Current Liabilities

= $ 300,000 / $ 150,000 = 2

(f) Ratio of Fixed Assets to Long-term Liabilities = Net Fixed Assets / Long Term Liabilities

= $ 400,000 / $ 150,000 = 2.67