In: Finance
THERMO COMPANY
BALANCE SHEET
DECEMBER 31, 1993
Cash $ 40,000 Current Liabilities $ 80,000
Accounts Receivable (net) 80,000 10% Bonds Payable 120,000
Inventory 130,000 Common Stock 200,000
Plant and Equipment (Net) 250,000 Retained Earnings 100,000
Total Liabilities and
Total Assets $500,000 Stockholder’s Equity $500,000
Net sales for 1993 were $800,000, gross profit was $320,000, and net income was $36,000. The income tax rate was 40%. A year ago accounts receivable (net) were $76,000, inventory was $110,000, and common stockholders’ equity was $260,000. The bonds payable were out-standing all year and 1993 interest expense was 12,000.
The current ratio of Thermo Company at 12/31/93, calculated from the above data, was 3.13, and the working capital was $170,000. If the firm paid $20,000 of its current liabilities, immediately after this transaction,
Both the current ratio and the working capital would decrease.
Both the current ratio and the working capital would increase.
The current ratio would increase, but the working capital would remain the same.
The current ratio would increase, but the working capital would decrease.
The firm’s inventory turnover for the year was
6.67
4
6
3.69
The firm’s return on common stockholder’s equity was
25.7%
12.9%
17.1%
21.4%
The firm’s average collection period for receivables was
36.5 days
37.4 days
35.6 days
18.3 days
The firm’s times interest earned ratio for the year was
4
3
5
6
Answer 1:
If the firm paid $20,000 of its current liabilities, immediately after this transaction,
Correct choice is:
The current ratio would increase, but the working capital would remain the same.
Explanation
The transaction reduces cash/current assets and reduces current liability by the same amount of $20,000; as such working capital remains same.
Since current ratio is 3.13 which is greater than1, a decrease by equal amount of both current assets and current liability will increase current ratio.
Calculations are given below:
Current assets = ($40,000 - $20,000) + $80,000 + $130,000 = $230,000
Current Liability = $80,000 - $20,000 = $60,000
As such working capital = $230,000 - $60,000 = $170,000
Current ratio = Current asset / current liability = $230,000 / $60,000 =3.83
Answer 2:
The firm's inventory turnover for the year is:
Correct choice is: 4
Inventory turnover = Cost of goods sold / average inventory
= (sales - gross profit) / average inventory
= ($800,000 -$320,000) / [($110,000 + $130,000)/2]
=4
Answer 3:
The firm’s return on common stockholder’s equity was:
Correct choice is: 12.9%
Return on common equity = Net Income / Average Common Stockholder’s Equity
= $36,000 /[($260,000 + $300,000)/2]
=12.9%
Answer 4:
The firm’s average collection period for receivables was
Correct choice is: 35.6 Days
Average receivable turnover = Credit sales / average receivable = $800,000 / [($76,000 + $80,000)/2] = 10.26
Average collection period = 365 days / Average receivable turnover
= 365 /10.26 = 35.6
Answer 5:
The firm’s times interest earned ratio for the year was:
Correct choice is; 6
Times interest earned ratio = EBIT / Interest expense
Given:
10% Bonds payable = $120,000
Interest expense = $120,000 * 10% = $12,000
Net income = $36,000
Tax rate =40%
Earnings before tax = $36,000/ (1 - 40%) = $60,000
EBIT = Earnings before tax + Interest expense = $60,000 + $12,000 = $72,000
Times interest earned ratio = $72,000 /$12,000 = 6