Question

The financial statements of the Precious Company appear below:

PRECIOUS COMPANY

Comparative Balance Sheet December 31,

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Assets	2020	2019
Cash .............................................................................................	$ 25,000	$ 40,000
Debt investments ..........................................................................	20,000	60,000
Accounts receivable (net) ..............................................................	50,000	30,000
Inventory .......................................................................................	140,000	170,000
Property, plant and equipment (net) ..............................................	170,000	200,000
Total assets .............................................................................	$405,000	$500,000

Liabilities and stockholders' equity
Accounts payable ..........................................................................	$ 25,000	$ 30,000
Short-term notes payable ..............................................................	40,000	90,000
Bonds payable ..............................................................................	75,000	160,000
Common shares ............................................................................	160,000	145,000
Retained earnings .........................................................................	105,000	75,000
Total liabilities and shareholders' equity ...................................	$405,000	$500,000

PRECIOUS COMPANY

Income Statement

For the Year Ended December 31, 2020

Net sales (all on credit) .................................................................		$360,000
Cost of goods sold ........................................................................		184,000
Gross profit ...................................................................................		176,000
Expenses
Interest expense ......................................................................	$11,000
Selling expenses .....................................................................	30,000
Administrative expenses ..........................................................	20,000
Total expenses ..................................................................		61,000
Income before income taxes .........................................................		115,000
Income tax expense ......................................................................		35,000
Net income ....................................................................................		$ 80,000

Additional information:

1. Cash dividends of $50,000 were declared and paid on common stock in 2020.
2. Weighted-average number of shares of common stock outstanding during 2020 was 50,000 shares.
3. Market price of common stock on December 31, 2020, was $16 per share.
4. Net cash provided by operating activities for 2020 was $70,000.

Required

Using the financial statements and additional information above, compute the following ratios for the Precious Company for 2020. Show all formulas and computations.

1. Current ratio .
2. Return on common stockholders' equity .
3. Price-earnings ratio .
4. Inventory turnover .
5. Accounts receivable turnover .
6. Times interest earned .
7. Profit margin .
8. Days in inventory .
9. Payout ratio .
10. Return on assets .

The end of the assignment

Answer 1

Current Ratio=Current Assets/Current Liabilities

Current Assets=Cash+Debt Investments+ Accounts Receivable(net)+Inventory

=$25,000+$20,000+$50,000+$140,000

=$235,000

Current Liabilities= Accounts payable+Short term notes payable

=$25,000+$40,000

=$65,000

Current Ratio=Current Assets/Current Liabilities

=$235,000/$65,000

=3.6154

Return on common stockholders’ equity= Net Income/ Average common stockholders’ equity

Net Income=$80,000

Average common stockholders’ equity= (Common stockholders’ equity of 2019+Common stockholders’ equity of 2020)/2

Common stockholders’ equity of 2019= Common Shares+Retained Earnings

=$145,000+$75,000

=$220,000

Common stockholders’ equity of 2020= Common Shares+Retained Earnings

=$160,000+$105,000

=$265,000

Average common stockholders’ equity= (Common stockholders’ equity of 2019+Common stockholders’ equity of 2020)/2

=($220,000+$265,000)/2

=$242,500

Return on common stockholders’ equity= Net Income/ Average common stockholders’ equity

=$80,000/$242,500

=32.99%

Price-earnings ratio= Market value per share/ Earning per share

Earning per share= Net Income/ Weighted Average shares outstanding

=$80,000/50,000

=$1.6

Price-earnings ratio= Market value per share/ Earning per share

=$16/$1.6

=10

Inventory turnover=Cost of goods sold/ Average Inventory

Cost of goods sold=$184,000

Average Inventory= (Inventory of 2019+ Inventory of 2020)/2

=($170,000+$140,000)/2

=$155,000

Inventory turnover=Cost of goods sold/ Average Inventory

=$184,000/$155,000

=1.187

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Net Credit Sales=$360,000

Average Accounts Receivable= (Accounts receivable of 2019+ Accounts Receivable of 2020)/2

=($30,000+ $50,000)/2

=$40,000

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

=$360,000/$40,000

=9

Times interest earned=Earnings before interest and taxes / Total interest payable on bonds and other debt

Earnings before interest and taxes= Income before income taxes- Interest Expense

=$115,000-$11,000]

=$104,000

Total interest payable on bonds and other debt= Interest Expense=$11,000

Times interest earned=Earnings before interest and taxes / Total interest payable on bonds and other debt

=$104,000/$11,000

=9.45

Profit margin= Net Income/ Net Sales

Net Sales=$360,000

Net Income=$80,000

Profit margin= (Net Income/ Net Sales)*100

=($80,000/$360,000)*100

=22.22%

Days in inventory= 365/ Inventory Turnover

=365/1.187

=307.5

Payout ratio =(Total Dividend Paid/ Net Income)*100

Total Dividend Paid=$50,000

Net Income= $80,000

Payout ratio =(Total Dividend Paid/ Net Income)*100

=($50,000/ $80,000)*100

=62.5%

Return on assets= (Net Income/ Average Total Assets)*100

Net Income= $80,000

Average Total Assets= (Total Assets of 2019+ Total Assets of 2020)/2

= ($500,000+$405,000)/2

=$452,500

Return on assets= (Net Income/ Average Total Assets)*100

=$80,000/$452,500

=17.68%