Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	22,000
Accounts receivable, net		220,000
Merchandise inventory		300,000
Prepaid expenses		9,000
Total current assets		551,000
Property and equipment, net		870,000
Total assets	$	1,421,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	290,000
Bonds payable, 8%		380,000
Total liabilities		670,000
Stockholders’ equity:
Common stock, $5 par value	$	140,000
Retained earnings		611,000
Total stockholders’ equity		751,000
Total liabilities and stockholders’ equity	$	1,421,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,660,000
Cost of goods sold		1,044,000
Gross margin		1,616,000
Selling and administrative expenses		600,000
Net operating income		1,016,000
Interest expense		30,400
Net income before taxes		985,600
Income taxes (30%)		295,680
Net income	$	689,920

Account balances at the beginning of the year were: accounts receivable, $160,000; and inventory, $280,000. 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

Ans. 1	Working capital =     Total current assets - Total current liabilities
	$551,000 - $290,000
	$261,000
Ans. 2	Current ratio   =   Total current assets / Total current liabilities
	$551,000 / $290,000
	1.90 : 1
Ans. 3	Acid test ratio   =   (Cash + Accounts receivable) / Total current liabilities
	($22,000 + $220,000) / $290,000
	$242,000 / $290,000
	0.83 : 1
Ans. 4	Debt to equity ratio   =   Total liabilities / Total stockholder's equity
	$670,000 / $751,000
	0.89
Ans. 5	Time interest earned = Net operating income / Interest expenses
	$1,016,000 / $30,400
	33.42	times
Ans. 6	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	365 / $2,660,000 * $190,000
	26.1	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	($160,000 + $220,000) / 2
	$190,000
Ans. 7	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
	365 / $1,044,000 * $290,000
	101.4	days
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	($280,000 + $300,000) / 2
	$290,000
Ans. 8	Operating cycle = Average collection period + Average sales period
	26.1 + 101.4
	127.5   days