Question

Questions 3–9 of the Self-Study Questions are based on the following data:

HYDRO COMPANY

Balance Sheet

December 31, 2018

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000 Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . $ 80,000

Accounts receivable (net). . . . . . . . . . . . 80,000 10% bonds payable . . . . . . . . . . . . . . . . . . . . . . 120,000

Inventory. . . . . . . . . . . . . . . . . . . . . . . . . 130,000 Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

Plant and equipment (net) . . . . . . . . . . . 250,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 100,000

Total assets . . . . . . . . . . . . . . . . . . . . . . $500,000 Total liabilities and stockholders’ equity . . . . . . . $500,000

Sales revenues for 2018 were $800,000, gross profit was $320,000, and net income was $36,000. The income

tax rate was 40 percent. One year ago, accounts receivable (net) were $76,000, inventory was $110,000, total

assets were $460,000, and stockholders’ equity was $260,000. The bonds payable were outstanding all year and

the 2018 interest expense was $12,000.

3. The current ratio of Hydro Company at December 31, 2018, calculated using the above data, was

3.13 and the company’s working capital was $170,000. Which of the following would happen if the

firm paid off $20,000 of its current liabilities on January 1, 2019?

a. Both the current ratio and working capital would decrease.

b. Both the current ratio and working capital would increase.

c. The current ratio would increase, but working capital would remain the same.

d. The current ratio would increase, but working capital would decrease.

4. What was the firm’s inventory turnover for 2018?

a. 6.67 c. 6

b. 4 d. 3.69

5. What was the firm’s return on common stockholders’ equity for 2018?

a. 25.7 percent c. 17.1 percent

b. 12.9 percent d. 21.4 percent

6. What was the firm’s average collection period for 2018?

a. 36.5 days c. 35.6 days

b. 37.4 days d. 18.3 days

7. What was the firm’s times-interest-earned ratio for 2018?

a. 4 c. 5

b. 3 d. 6

8. What was the firm’s return on sales for 2018?

a. 4.0 percent c. 5.0 percent

b. 4.5 percent d. 5.5 percent

9. What was the firm’s return on assets for 2018?

a. 6.0 percent c. 7.5 percent

b. 7.0 percent d. 8.0 percent

Answer 1

Net Working Capital	Account receivable+Inventory-Current liability
Ans 3 b	If Firm Pay Current liabilies for 20000 then Current iability Will Decrease Implis that Net working capital will increase
	Current ratio	Curent asset/Current liability
	If Current liability Will Paid off Then denomitaor willdecrease then Current Ratio will also increase
	Both Will Increase
Ans 4 b	Inventory Turnover ratio		COGS/Avg Inventory
		COGS	Net sale-Gross Profit
			800000-320000
			480000
		Avg Inventory	110000+130000/2
			120000
			480000	4
			120000
Ans 5 b	Return on Common holder equity	Net income/ Avg Shareholder Equity
			Avg Shareholder Equity	(200000+260000+100000)/2
						280000
						36000/280000
						12.9%
Ans 6 c	Average Collecton period		Avergare Receivable/Net credi sale
				Average Receivabe	(80000+76000)/2
						78000
						(78000/800000)*365
						35.6	Days
Ans 7 a	Time Interst Earned Ratio			EBITDA/Interst Expense
		EBITDA		Net Income+Interes Expense
				48000	36000+12000
				4	48000/12000
Ans 8 b	return on Sale		Net Income/Sale
				36000/800000
				4.5
Ans 9 c	Return on Asset		Net Income /Avg Asset
				7.50%