Question

Elements of the Income Statement for Hofstadter Experiments Ltd. follow:

	2020	2019
Net Sales (all credit)	$1,498,000	$1,200,000
Cost of goods sold	1,043,000	820,000
Net Income	91,000	76,500

Highlights of the Balance Sheet:

	2020	2019
Cash	$90,500	$64,700
Temporary Investments	75,000	60,000
Accounts receivable (net)	115,000	120,000
Inventories	264,000	283,000
Prepaid expenses	5,500	5,300
Total current liabilities	210,000	243,000
Total liabilities	310,000	443,000
Total common shareholders’ equity	829,500	787,500

Required: (Round all answers to 2 decimal places).

1. Calculate the gross profit rate for both 2019 and 2020.
2. Did the gross profit rate improve or worsen from 2019 to 2020?
3. What was the Accounts Receivable Turnover ratio for 2020?
4. Explain what Accounts Receivable Turnover is in your own words.
5. What was the Return on Common Shareholders’ Equity for 2020?
6. What was the Current Ratio for 2020?
7. Is the current ratio calculated in f) adequate?

Answer 1

A.

Gross profit rate =

(sales - cost of goods sold)*100/sales

2019=( 1,200,000 - 820,000)*100/1,200,000

= 31.67%

2020=(1,498,000-1,043,000)*100/1,498,000

= 30.37%

B

Gross profit rate is worsen from 2019 to 2020.

C.

Account Recievable turnover=

Credit sales/ Average account Recievable

2020= 1,498,000/(115,000+120,000)/2

= 1,498,000/117,500

= 12.75 times

D.

Account Recievable turnover is an ability that how a firm collects fund from there debtors or recovered credit from their account recievable.

E.

Return on common stockholders equity=

net income/ average common stockholders equity

2020= 91,000*100/(829,500+787,500)/2

=91,000*100/808,500

=11.26%

f.current ratio = current assets/current liabilities

2020 =550,000/210,000

= 2.62:1

g.

current ratio is not adequate because is more than 2.

current assets = Cash+Temporary Investments+Accounts receivable (net)+Inventories+Prepaid expenses

=90,500+75,000+115,000+264,000+5500

= 550,000