Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	23,000
Accounts receivable, net		200,000
Merchandise inventory		370,000
Prepaid expenses		7,000
Total current assets		600,000
Property and equipment, net		840,000
Total assets	$	1,440,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	240,000
Bonds payable, 8%		380,000
Total liabilities		620,000
Stockholders’ equity:
Common stock, $5 par value	$	160,000
Retained earnings		660,000
Total stockholders’ equity		820,000
Total liabilities and stockholders’ equity	$	1,440,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	3,780,000
Cost of goods sold		1,597,500
Gross margin		2,182,500
Selling and administrative expenses		620,000
Net operating income		1,562,500
Interest expense		30,400
Net income before taxes		1,532,100
Income taxes (30%)		459,630
Net income	$	1,072,470

Account balances at the beginning of the year were: accounts receivable, $220,000; and inventory, $340,000. All sales were on account.

Required:

Compute the following financial data and ratios:

1. Working capital.

2. Current ratio. (Round your answer to 1 decimal place.)

3. Acid-test ratio. (Round your answer to 2 decimal places.)

4. Debt-to-equity ratio. (Round your answer to 2 decimal places.)

5. Times interest earned ratio. (Round your answer to 2 decimal places.)

6. Average collection period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

7. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

8. Operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

	1. Working capital 2. Current ratio 3. Acid-test ratio 4. Debt-to-equity ratio 5. Times interest earned ratio 6. Average collection period days 7. Average sale period days 8. Operating cycle days

Answer 1

1.Working Capital

Working Capital = Current Assets - Current Liabilities

= $600,000 - $240,000

=$360,000

2.Current Ratio

Current Ratio = Current Assets / Current Liabilities

= $600,000 / $240,000

= 2.5

3.Acid Test Ratio

Acid Test Ratio = (Current Assets - Inventory - prepaid Expense) / Current Liabilities

=($600,000 - $370,000 - $7000 ) / $240,000

=$223000 / $240,000

=0.93

4.Debt to Equity Ratio

Debt to Equity = Total Liabilities / Total Equity

= $620,000 /$820,000

= 0.76

5.Times Interest Earned Ratio

Times Interest Earned Ratio = Earnings Befor Interest and Taxes / Interest Expense

= $1562500 / $30400

= 51.40

6.Average Collection period

Average collection period = (Account receivable / Net Sales ) x 365

= ($200,000 / $3,780,000) x 365

=0.05291 x 365

= 19.31 Days

7.Average Sales period

Average Sales period = 365 days / inventory turnover

Inventory turnover = Cost of goods sold / Inentory

= $1597500 / $370000

=4.32

Average Sales period = 365 days / 4.32

= 84.5 Days

8. Operating Cycle

Operating Cycle = Average Sales period + Average collection period

=84.5 days + 19.31 days

=103.81 days