Question

Exercise 18-13

The condensed financial statements of Ness Company for the years 2019 and 2020 are presented below.

Ness Company Balance Sheets December 31 (in thousands)
		2020		2019
Current assets
Cash and cash equivalents		$360		$320
Accounts receivable (net)		510		380
Inventory		430		420
Prepaid expenses		120		140
Total current assets		1,420		1,260
Property, plant, and equipment (net)		430		360
Investments		1		10
Intangibles and other assets		480		550
Total assets		$2,331		$2,180
Current liabilities		$870		$860
Long-term liabilities		411		270
Stockholders’ equity—common		1,050		1,050
Total liabilities and stockholders’ equity		$2,331		$2,180

Ness Company Income Statements For the Years Ended December 31 (in thousands)
		2020		2019
Sales revenue		$3,840		$3,480
Costs and expenses
Cost of goods sold		950		850
Selling & administrative expenses		2,360		2,280
Interest expense		10		20
Total costs and expenses		3,320		3,150
Income before income taxes		520		330
Income tax expense		208		132
Net income		$312		$198

Compute the following ratios for 2020 and 2019. Inventory on December 31, 2018, was $310. Assets on December 31, 2018, were $1,900. Equity on December 31, 2018, was $870.

				2020			2019
(a)		Current ratio			:1			:1
(b)		Inventory turnover			times			times
(c)		Profit margin			%			%
(d)		Return on assets			%			%
(e)		Return on common stockholders’ equity			%			%
(f)		Debt to assets ratio			%			%
(g)		Times interest earned			times			times

Answer 1

Current Ratio	=	Current Assets/Current Liabilities
For 2019	=	$1,260,000/$860,000
	=	1.465116279
	=	1.46511627906977:1
	~	1.4651:1
For 2020	=	$1,420,000/$870,000
	=	1.632183908
	=	1.63218390804598:1
	~	1.6322:1
Inventory Turnover	=	Cost of Goods Sold/Average Inventory
For 2019	=	$850,000/(($420,000+$310,000)/2)
	=	2.328767123
	~	2.3288 times
For 2020	=	$950,000/(($430,000+$420,000)/2)
	=	2.235294118
	~	2.2353 times
Profit Margin (Gross)	=	(Net Sales-COGS)/Net Sales
For 2019	=	($3,480,000-$850,000)/$3,480,000
	=	75.5747%
For 2020	=	($3,840,000-$950,000)/$3,840,000
	=	75.2604%
Return on Assets	=	Net Income/Average Total Assets
For 2019	=	$198,000/(($2,180,000+$1,900,000)/2)
	=	9.7059%
For 2020	=	$312,000/(($2,331,000+$2,180,000)/2)
	=	13.8329%
Return on Equity	=	Net Income/Average Stockholder's Equity
For 2019	=	$198,000/(($1,050,000+$870,000)/2)
	=	20.6250%
For 2020	=	$312,000/(($1,050,000+$1,050,000)/2)
	=	29.7143%
Debt to Assets Ratio	=	(Debt i.e.Short term and Long Term)/Total Assets
For 2019	=	$270,000/$2,180,000
	=	12.3853%
For 2020	=	$411,000/$2,331,000
	=	17.6319%
Times Interest Earned	=	EBIT/Interest Payable
	=	(EBT+Interest)/ Interest Payable
For 2019	=	($330,000+$20,000)/$20,000
	=	17.5
	~	17.5 times
For 2020	=	($520,000+$10,000)/$10,000
	=	53
	~	53 times

Summary
Particulars	2020	2019
Current Ratio	1.6322:1	1.4651:1
Inventory Turnover	2.2353 times	2.3288 times
Profit Margin (Gross)	75.2604%	75.5747%
Return on Assets	13.8329%	9.7059%
Return on Equity	29.7143%	20.6250%
Debt to Assets Ratio	17.6319%	12.3853%
Times Interest Earned	53 times	17.5 times