Question

Financial statements for Zachary Company follow.

ZACHARY COMPANY
Balance Sheets As of December 31
	Year 4				Year 3
Assets
Current assets
Cash	$	25,500			$	21,500
Marketable securities		21,900				7,900
Accounts receivable (net)		60,000				52,000
Inventories		145,000				153,000
Prepaid items		29,000				14,000
Total current assets		281,400				248,400
Investments		22,000				15,000
Plant (net)		260,000				245,000
Land		29,000				24,000
Total assets	$	592,400			$	532,400
Liabilities and Stockholders’ Equity
Liabilities
Current liabilities
Notes payable	$	39,200			$	10,800
Accounts payable		73,800				60,000
Salaries payable		22,000				16,000
Total current liabilities		135,000				86,800
Noncurrent liabilities
Bonds payable		110,000				110,000
Other		25,000				20,000
Total noncurrent liabilities		135,000				130,000
Total liabilities		270,000				216,800
Stockholders’ equity
Preferred stock, (par value $10, 5% cumulative, non-participating; 9,000 shares authorized and issued)		90,000				90,000
Common stock (no par; 50,000 shares authorized; 10,000 shares issued)		90,000				90,000
Retained earnings		142,400				135,600
Total stockholders’ equity		322,400				315,600
Total liabilities and stockholders’ equity	$	592,400			$	532,400

ZACHARY COMPANY
Statements of Income and Retained Earnings For the Years Ended December 31
	Year 4				Year 3
Revenues
Sales (net)	$	420,000			$	400,000
Other revenues		11,800				8,800
Total revenues		431,800				408,800
Expenses
Cost of goods sold		210,000				160,000
Selling, general, and administrative		74,000				69,000
Interest expense		13,700				12,900
Income tax expense		118,000				117,000
Total expenses		415,700				358,900
Net earnings (net income)		16,100				49,900
Retained earnings, January 1		135,600				95,000
Less: Preferred stock dividends		4,500				4,500
Common stock dividends		4,800				4,800
Retained earnings, December 31	$	142,400			$	135,600

Required
Calculate the following ratios for Year 4 and Year 3.

a. Working capital.
b. Current ratio. (Round your answers to 2 decimal places.)
c. Quick ratio. (Round your answers to 2 decimal places.)
d. Receivables turnover (beginning receivables at January 1, Year 3, were $53,000). (Round your answers to 2 decimal places.)
e. Average days to collect accounts receivable. (Use 365 days in a year. Round your intermediate calculations to 2 decimal places and your final answers to the nearest whole number.)
f. Inventory turnover (beginning inventory at January 1, Year 3, was $159,000). (Round your answers to 2 decimal places.)
g. Number of days to sell inventory. (Use 365 days in a year. Round your intermediate calculations to 2 decimal places and your final answers to the nearest whole number.)
h. Debt-to-assets ratio. (Round your answers to the nearest whole percent.)
i. Debt-to-equity ratio. (Round your answers to 2 decimal places.)
j. Number of times interest was earned. (Round your answers to 2 decimal places.)
k. Plant assets to long-term debt. (Round your answers to 2 decimal places.)
l. Net margin. (Round your answers to 2 decimal places.)
m. Turnover of assets (average total assets in Year 3 is $532,400). (Round your answers to 2 decimal places.)
n. Return on investment (average total assets in Year 3 is $532,400). (Round your answers to 2 decimal places.)
o. Return on equity (average stockholders' equity in Year 3 is $135,600). (Round your answers to 2 decimal places.)
p. Earnings per share (total shares outstanding is unchanged). (Round your answers to 2 decimal places.)
q. Book value per share of common stock. (Round your answers to 2 decimal places.)
r. Price-earnings ratio (market price per share: Year 3, $12.70; Year 4, $14.40). (Round your intermediate calculations and final answer to 2 decimal places.)
s. Dividend yield on common stock. (Round your answers to 2 decimal places.)

Answer 1

Answer to Part a.
Working Capital = Current Assets – Current Liabilities

Year 3:
Working Capital = $248,400 - $86,800
Working Capital = $161,600

Year 4:
Working Capital = $281,400 - $135,000
Working Capital = $146,400

Answer to Part b.
Current Ratio = Current Assets/ Current Liabilities

Year 3:
Current Ratio = $248,400 / $86,800
Current Ratio = 2.86: 1

Year 4:
Current Ratio = $281,400/ $135,000
Current Ratio = 2.08: 1

Answer to Part c.
Quick Ratio = (Current Assets – Inventories – Prepaid Items) / Current Liabilities

Year 3:
Quick Ratio = ($248,400 - $153,000 - $14,000) / $86,800
Quick Ratio = $81,400 / $86,800
Quick Ratio = 0.94: 1

Year 4:
Quick Ratio = ($281,400 - $145,000 - $29,000) / $135,000
Quick Ratio = $81,400 / $86,800
Quick Ratio = 0.80: 1

Answer to Part d.
Receivable Turnover = Sales / Average Accounts Receivable

Year 3:
Average Accounts Receivable = ($53,000 + $52,000) / 2
Average Accounts Receivable = $52,500

Receivable Turnover = $400,000 / $52,500
Receivable Turnover = 7.62 times

Year 4:
Average Accounts Receivable = ($52,000 + $60,000) / 2
Average Accounts Receivable = $56,000

Receivable Turnover = $420,000 / $56,000
Receivable Turnover = 7.50 times