Question

Prepare balance sheet and an income statement for corp xyz given the following information:

Inventory $ 6,500

Common Stock 45,000

Cash 15,550

Operating expenses 1,350

Short-term notes payable 600

Interest expense 900

depreciation expense 500

sales 12,800

accounts receivable 9,600

Accounts payable 4,800

long-term debt 55,000

Cost of goods sold 5,750

Buildings and equipment 122,000

Accumulated depreciation 34,000

Taxes 1,440

General and Administrative expenses 850

retained earnings?

Using previously worked financial statements, determine the following financial ratios. Please interpret each of them. Show the calculations.

a. Current ratio

b.debt ratio

c. times interest earned

d. average collection period

e. inventory turnover

f. fixed assets turnover

g. total asset turnover

h. gross profit margin

i. operating profit margin

j.operating return on assets

k. return on equity

Answer 1

Note :

1) As we know, Operating expenses includes depreciation and general & admin. expenses but here, depreciation and general and admin. expenses is given saperately. So, i am assuming that operating expenses of 1350 doesn't include depreciation expenses as well as General and admin. expenses.

2) I am Assuming that Taxes having amount 1440 shown above is expenses and has been paid.

a) Current ratiio = Current Assets/Current Liabilities = 31650/5400 = 5.86

As per Industries standard, Ideal Current ratio is 2 : 1 . It means company has so much non-require working capital, Company should decrease their fund in current asset or invest them in some other asset that can generates income.

b) Debt ratio = Total Liabilities/Total Asset = (55000+5400)/164650 = 0.366 or 0.37

It means from the total asset of company 36.6% or 37% assets are from debt fund.

c) Times Interest Earn = EBIT/I   = (2010+1440+900)/900 = 4350/900 = 4.83 times

Company can pay 4.83 times of actual interest. It means company can pay its interest 3.83 times extra after paying interest.

d) Average collection period = Account receivable * 365/ Net sales

                                             = 273.75 days or 274 days

It means normally company collects payment in 274 days after making sales. It is not a good indicator.

e) Inventory turnover = Cost of goods sold / closing stock   = 5750/6500 = 0.88 times

It means, in one year, company is selling only 0.88 times of its closing stock. which is not a good indicator.

f) Fixed asset turnover = Sales/fixed asset = 12800/88000 = 0.145 or 0.15

It means, company is using its fixed asset in such a way that it is generating only 0.15 times of its value.

g) total asset turnover = Sales/ total asset = 12800/164650 = 0.077 or 0.08 times

It means, company is using its all assets in such a way that it is generating only 0.08 times of its value.

h) Gross profit margin = Gross profit/ sales = 7050/12800 = 55.08%

It means companies earns 55.08% of sales after deducting cost of goods sold.

I) Operating profit margin = Operating profit/ sales = (2010+1440+900) / 12800 = 4350/12800 = 33.98 %

It means companies earns 33.98% of sales after deducting operating expenses.

j) operating return on sales = Operating income / Operating asset = 4350/(164650-45000) = 3.64%

it is company is earning only 3.64% by using its operating assets.

k) Return on equity = Net profit/Equity = 2010/104250 = 1.93%

Company is getting only 1.93% return on is owner's fund.