Question

The following information is available about the company:

a.	All sales during the year were on account.
b.	There was no change in the number of shares of common stock outstanding during the year.
c.	The interest expense on the income statement relates to the bonds payable; the amount of bonds outstanding did not change during the year.
d.	Selected balances at the beginning of the current year were:

Accounts receivable	$	160,000
Inventory	$	280,000
Total assets	$	1,200,000

e.	Selected financial ratios computed from the statements below for the current year are:

Earnings per share	$	4.05
Debt-to-equity ratio		0.875
Accounts receivable turnover		15.0
Current ratio		2.40
Return on total assets		14	%
Times interest earned ratio		7.0
Acid-test ratio		1.12
Inventory turnover		6.0

Required:

Compute the missing amounts on the company's financial statements. (Hint: What’s the difference between the acid-test ratio and the current ratio?) (Do not round intermediate calculations.)

Answer 1

Given, Current ratio = 2.4

Current assets/current liabilities = 2.4 = Current Assets = 2.4* Current Liabilities

Given, Acid Test Ratio = 1.12  

(Current assets - Inventory)/Current Liabilities = 1.12

Current Assets - 280000 = 1.12 * Current Liabilities

we know that current assets = 2.4*current liabilities from the above

That means, 2.4Current Liabilities - 1.12 Current Liabilities = 280000

Current Liabilities = 218,750

Current Assets = 2.4*218750 = 525000

Cash = 525000 - 280000 - 160000 = $ 85,000

Given, Return on total assets = 14%

Net Profit/Total Assets = 14%

Net Profit = Total Assets*14% = 1,200,000 * 14% = $ 168,000

Given, Accounts Receivable Turnover = 15

Credit sales/Accounts Receivable = 15

Credit sales = 15*160,000 = $ 2,400,000

Given, Inventory Turnover = 6

COGS/Inventory = 6

COGS = 6*280,000 = $ 1,680,000

Sales - COGS - Interest = net profit

2400,000 - 1680,000 - Interest = 168,000

Interest = 552,000

Total Assets = Total Liabilities + Equity = 1,200,000

Given Debt - Equity ratio = 0.875

Total Debt/Total Equity = 0.875

Total Debt = 0.875 * equity

Total Liabilities + Equity = 1,200,000

0.875 Equity + Equity = 1,200,000

Equity = 640,000

Total Liabilities = 1200,000-640,000 = $ 560,000

Total Liabilities - current liabilities = Long term debt

Long term debt = 560,000 - 218,750 = $ 341,250

Income Statement
Particulars	Amount($)
Sales	2400000
Less:COGS	1680000
Gross profit	720000
Interest expense	552000
Net profit	168000
EPS	4.05

Assets	Amount ($)	Liabilities & Equity	Amount ($)
PPE	675000	Long Term Debt	341250
Current Assets:
Cash	85000	Current Liabilities	218750
Accounts Receivable	160000	Total Liabilities	560000
Inventories	280000	Equity	640000
Total Assets	1200000	Total Liabilities & Equity	1200000