Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	19,000
Accounts receivable, net		190,000
Merchandise inventory		400,000
Prepaid expenses		10,000
Total current assets		619,000
Property and equipment, net		840,000
Total assets	$	1,459,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	260,000
Bonds payable, 12%		360,000
Total liabilities		620,000
Stockholders’ equity:
Common stock, $5 per value	$	200,000
Retained earnings		639,000
Total stockholders’ equity		839,000
Total liabilities and stockholders’ equity	$	1,459,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	3,330,000
Cost of goods sold		1,373,500
Gross margin		1,956,500
Selling and administrative expenses		620,000
Net operating income		1,336,500
Interest expense		43,200
Net income before taxes		1,293,300
Income taxes (30%)		387,990
Net income	$	905,310

Account balances at the beginning of the year were: accounts receivable, $180,000; and inventory, $270,000. 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

Current Assets - Current laibilities
619,000-260,000
359,000

2. Current Ratio

Current Assets\Current Laibilitie
619,000/260,000
2.4

3. Acid Test Ratio

Quick Assets/Current laibilities
(Current assets-inventory)/current liabilities
(619,000-400,000)/260,000
219,000/260,000
0.84

4.Debt Equity Ratio

Total debt/ Share Holders equity
360,000/839,000
0.43

5.Times intersted earned ratio

Earnings before interest and taxes/interest
1,336,500/43,200
30.94

6. Average collection Peroid
Average sales per day = 3,33,000/365
= 9,123.28
Average receivables = (Opeing receivables + Closing Receivables)/2

= (190,000+180,000)/2
185,000
Average Collection Peroid = Average Receivables/ Average sales per day

= 185,000/9,123.28
20.3 days

7. Average sale peroid

Average Inventory = ( Opening inventory + Closing inventory)/2
(270,000+400,000)/2
355,000

Avearge Sales peroid = (Average inventory *365)/Cost of sales
335,000 * 365 /1,373,500
89.0 dyas

8. Operating Cycle

Operating cycle is the time requied for company' s cash to be put into its operation and then return to campany's cash account

Operating Cycle = Average Sales peroid + Average Collection peroid
= 20.3+89.0
109.3 Days

Summary

1. Working Capital $359,000

2. Current Ratio 2.4 times

3. Acid Test Ratio 0.84 times

4. Debt Equity Ratio 0.43 times

5. Times interest Earned Ratio 30.94 times

6. Average collection Period 20.3 Days

7. Average Sales Period 89.0 Days

8. Operation Cycle 109.3 Days