Question

Do It! Review 14-3 The condensed financial statements of Murawski Company for the years 2019 and 2020 are presented follows. (Amounts in thousands.) MURAWSKI COMPANY Balance Sheets December 31 2020 2019 Current assets Cash and cash equivalents $ 370 $ 368 Accounts receivable (net) 414 468 Inventory 390 480 Prepaid expenses 166 140 Total current assets 1,340 1,456 Investments 14 10 Property, plant, and equipment 350 400 Intangibles and other assets 484 508 Total assets $2,188 $2,374 Current liabilities $ 766 $ 908 Long-term liabilities 350 428 Stockholders’ equity—common 1,072 1,038 Total liabilities and stockholders’ equity $2,188 $2,374 MURAWSKI COMPANY Income Statements For the Years Ended December 31 2020 2019 Sales revenue $3,810 $3,820 Costs and expenses Cost of goods sold 908 942 Selling & administrative expenses 2,300 2,378 Interest expense 21 25 Total costs and expenses 3,229 3,345 Income before income taxes 581 475 Income tax expense 142 81 Net income $ 439 $ 394 Compute the following ratios for 2020 and 2019. (Round current ratio and invertory turnover ratio to 2 decimal places, e.g. 1.62 or 1.62% and all other answers to 1 decimal place, e.g. 1.6 or 1.6%.) (a) Current ratio. (b) Inventory turnover. (Inventory on 12/31/18 was $331.) (c) Profit margin ratio. (d) Return on assets. (Assets on 12/31/18 were $1,912.) (e) Return on common stockholders’ equity. (Stockholders' equity on 12/31/18 was $888.) (f) Debt to assets ratio. (g) Times interest earned.

Answer 1

Ans.	Balance sheet
	Assets	2020	2019	Liabilities & Equity	2020	2019
	Cash & cash equivalents	$370	$368	Current liabilities	$766	$908
	Accounts receivables	$414	$468	Long term liabilities	$350	$428
	Inventory	$390	$480	Total liabilities (a)	$1,116	$1,336
	Prepaid expenses	$166	$140
	Total current assets (a)	$1,340	$1,456	Stockholder's equity:
	Fixed assets & investments:			Common stockholder's equity	$1,072	$1,038
	Investment	$14	$10	Total Equity (b)	$1,072	$1,038
	Property, plant and equipment	$350	$400
	Intangibles and other assets	$484	$508
	Total fixed assets and investments (b)	$848	$918
	Total assets (a+b)	$2,188	$2,374	Total liabilities and Equity (a + b)	$2,188	$2,374
Ans. A	Current ratio   =   Total current assets / Total current liabilities
2019	$1,456 / $908	1.60 : 1
2020	$1,340 / $766	1.75 : 1
Ans. B	Inventory turnover = Cost of goods sold / Average Inventory
2019	$942 / $405.50	2.32	times
2020	$908 / $435	2.09	times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
2019	($331 + $480) / 2	$405.50
2020	($480 + $390) / 2	$435.00
Ans. C	Profit Margin =   Net income / Sales * 100
2019	$394 / $3,820 * 100	10.3%
2020	$439 / $3,810 * 100	11.5%
Ans. D	Return on assets =   Net income / Average assets * 100
2019	$394 / $2,143 * 100	18.4%
2020	$439 / $2,281 * 100	19.2%
	*Average assets = (Beginning assets + Ending assets) / 2
2019	($1,912 + $2,374) / 2	$2,143
2020	($2,374 + $2,188) / 2	$2,281
Ans. E	Return on Common stockholder's equity =   Net income / Average Common stockholder's equity * 100
2019	$394 / $963 * 100	40.9%
2020	$439 / $1,055 * 100	41.6%
	* Average Stockholder's equity =   (Beginning equity + Ending equity) / 2
2019	($888 + $1,038) / 2	$963
2020	($1,038 + $1,072) / 2	$1,055
Ans. F	Debt to assets ratio   = Total liabilities / Total assets * 100
2019	$1,336 / $2,374 * 100	56.3%
2020	$1,116 / $2,188 * 100	51.0%
Ans. G	Time interest earned = Income before interest and taxes / Interest expenses
2019	$500 / $25	20.0	times
2020	$602 / $21	28.7	times
	*Calculation of income before interest and taxes:
		2020	2019
	Net sales	$3,810	$3,820
	Cost of goods sold	-$908	-$942
	Selling & administrative expenses	-$2,300	-$2,378
	Income before interest and taxes	$602	$500