Question

The condensed financial statements of Ness Company for the years 2016 and 2017 are presented below. NESS COMPANY Balance Sheets December 31 (in thousands) 2017 2016 Current assets Cash and cash equivalents $330 $360 Accounts receivable (net) 470 400 Inventory 460 390 Prepaid expenses 130 160 Total current assets 1,390 1,310 Property, plant, and equipment (net) 410 380 Investments 10 10 Intangibles and other assets 530 510 Total assets $2,340 $2,210 Current liabilities $820 $790 Long-term liabilities 480 380 Stockholders’ equity—common 1,040 1,040 Total liabilities and stockholders’ equity $2,340 $2,210 NESS COMPANY Income Statements For the Year Ended December 31 (in thousands) 2017 2016 Sales revenue $3,800 $3,460 Costs and expenses Cost of goods sold 970 890 Selling & administrative expenses 2,400 2,330 Interest expense 10 20 Total costs and expenses 3,380 3,240 Income before income taxes 420 220 Income tax expense 168 88 Net income $ 252 $ 132 Compute the following ratios for 2017 and 2016. (Round current ratio and inventory turnover to 2 decimal places, e.g 1.83 and all other answers to 1 decimal place, e.g. 1.8 or 12.6%.) (a) Current ratio. (b) Inventory turnover. (Inventory on December 31, 2015, was $340.) (c) Profit margin. (d) Return on assets. (Assets on December 31, 2015, were $1,900.) (e) Return on common stockholders’ equity. (Equity on December 31, 2015, was $900.) (f) Debt to assets ratio. (g) Times interest earned.

Answer 1

Answer to Part a.

Current Ratio = Current Assets/ Current Liabilities

Year 2016:

Current Ratio = 1,310/ 790

Current Ratio = 1.66 : 1

Year 2017:

Current Ratio = 1,390/ 820

Current Ratio = 1.70 : 1

Answer to Part b.

Inventory Turnover Ratio = Cost of Goods sold/ Average Inventory

Year 2016:

Average Inventory = (390+ 340)/ 2 = $365

Inventory Turnover Ratio = 890/ 365

Inventory Turnover Ratio = 2.44 times

Year 2017:

Average Inventory = (460+ 390)/ 2 = $425

Inventory Turnover Ratio = 970/ 425

Inventory Turnover Ratio = 2.28 times

Answer to Part c.

Profit Margin = Net Income / Sales * 100

Year 2016:

Profit Margin = 132/ 3,460 * 100

Profit Margin = 3.8%

Year 2017:

Profit Margin = 252/ 3,800 * 100

Profit Margin = 6.6%

Answer to Part d.

Return on Assets = Net Income / Average Total Assets * 100

Year 2016:

Average Total Assets = (2,210 + 1,900)/2 = $2,055

Return on Assets = 132/ 2,055* 100

Return on Assets = 6.4%

Year 2017:

Average Total Assets = (2,340 + 2,210)/2 = $2,275

Return on Assets = 252/ 2,275 *100

Return on Assets = 11.1%