Question

89) Following are selected data from the comparative income statement and balance sheet for Owens Corporation for the years ended December 31, 2014, and 2013:

Selected Data                                    2014                      2013

Net sales (all on credit)                $96,000                $93,000

Cost of goods sold                           51,300                  52,500

Gross margin                                    44,700                  40,500

Income from operations                 16,300                  15,000

Interest expense                                 3,000                    3,500

Net income                                          9,800                    9,000

Cash                                                      2,700                    3,500

Accounts receivable, net                10,700                  12,500

Inventory                                           25,000                  30,000

Prepaid expenses                               1,000                       900

Total current assets                         39,400                  46,900

Total long-term assets                    50,000                  67,000

Total current liabilities                   39,000                  49,500

Total long-term liabilities              15,000                  25,000

Common shares                               10,000 *               10,000

Retained earnings                            25,400                  29,400

* Note: 1,000 common shares have been issued and outstanding since the company started operations. During all of the fiscal year ended December 31, 2014, the shares were selling for $45 per share.

Calculate the following ratios at December 31, 2014:

a)            acid-test ratio

b)           inventory turnover

c)            days' sales in receivables

d)           book value per common share

e)            price/earnings ratio

f)            rate of return on total assets

g)           times-interest-earned ratio

h)           current ratio

Answer 1

Part a –

Acid test ratio	2014
Total Current Assets	$39,400
Less: Inventory	-$25,000
Less: Prepaid Expense	-$1,000
Quick Assets (A)	$13,400
Total Current Liabilities (B)	$39,000
Acid test ratio (A/B)	0.34
	times

Note – In calculating Acid Test ratio most liquid current assets are considered. Inventory and Prepaid Expenses are not most liquid assets hence not included in Quick Assets.

Part b –

Inventory Turnover	2014
Cost of Goods Sold (A)	$51,300
Average Inventories ((25,000+30,000)/2) (B)	$27,500
Inventory Turnover (A/B)	1.87
	Times

Part c –

Receivable Turnover	2014
Net Credit Sales (A)	$96,000
Avg Accounts Receivable (10,700+12,500)/2 (B)	$11,600
Accounts Receivable Turnover (A/B)	8.28
Days Sales in Receivable
Number of Days in a year	365 Days
Divide by Accounts Receivable Turnover	8.28
Days Sales in Receivable (365 / 8.28)	44.08	Days

Part d –

Book Value Per Share	2014
Total Assets (Current 39,400 + Long Term 50,000)	$89,400
Less: Total Liabilities (Current 39,000 + Long term 15,000)	$54,000
Net Assets Value (Net Assets Book Value)	$35,400
Number of Common Shares Outstanding (B)	1000
Book Value Per Share (Net Assets Value / Number of Common Shares outstanding)	$35.40

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