Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	21,000
Accounts receivable, net		210,000
Merchandise inventory		350,000
Prepaid expenses		9,000
Total current assets		590,000
Property and equipment, net		860,000
Total assets	$	1,450,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	200,000
Bonds payable, 10%		310,000
Total liabilities		510,000
Stockholders’ equity:
Common stock, $10 per value	$	120,000
Retained earnings		820,000
Total stockholders’ equity		940,000
Total liabilities and stockholders’ equity	$	1,450,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,775,000
Cost of goods sold		1,414,500
Gross margin		1,360,500
Selling and administrative expenses		560,000
Net operating income		800,500
Interest expense		31,000
Net income before taxes		769,500
Income taxes (30%)		230,850
Net income	$	538,650

Account balances at the beginning of the year were: accounts receivable, $160,000; 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.)

Answer 1

Answer-1)- Working capital =Current assets- Current liabilities

= $590000-$200000

= $390000

2)- Current Ratio=Current Assets/ Current Liabilities

= $590000/$200000

= 3.0 times

3)- Acid-test (Quick ratio)= Current assets-Inventory-Prepaid expenses/Current Liabilities

= ($590000-350000-$9000)/$200000

= $231000/$200000

= 1.16 times

4)- Debt to equity ratio= (Total liabilities/Total stockholder’s equity)*100

= ($510000/$940000)*100

= 54.26%

5)- Times interest earned ratio= Income before Interest & Taxes(EBIT)/Interest expenses

= ($538650+$31000+$230850)/$31000

= $800500/$31000

= 25.82 times

6)- Average collection period =24.3 days.

Explanation- Average collection period = 365 days/Accounts receivable turnover

= 365 days/15 times

= 24.3 days

Where- Accounts receivable turnover = Sales on account /Average accounts receivable

=$2775000/ ($160000+$210000)/2

=$2775000/$185000

= 15 times

7)- Average sale period =89.0 days.

Explanation- Average sale period = 365 days/Inventory turnover

= 365 days/ 4.1 times

= 89.0 days

Where- Inventory turnover = Cost of goods sold/Average inventory

= $1414500/( $340000+$350000)/2

= $1414500/$345000

= 4.1 times

8)- Operating cycle =113.3 days.

Explanation- Operating cycle = Average sale period + Average collection period

= 24.3 days+ 89.0 days

=113.3 days