In: Accounting
Exercise 13-13
The condensed financial statements of Crane Company for the years 2016 and 2017 are presented below.
CRANE COMPANY |
||||
2017 |
2016 |
|||
Current assets | ||||
Cash and cash equivalents |
$330 |
$360 |
||
Accounts receivable (net) |
530 |
460 |
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Inventory |
640 |
570 |
||
Prepaid expenses |
130 |
160 |
||
Total current assets |
1,630 |
1,550 |
||
Property, plant, and equipment (net) |
410 |
380 |
||
Investments |
70 |
70 |
||
Intangibles and other assets |
530 |
510 |
||
Total assets |
$2,640 |
$2,510 |
||
Current liabilities |
$880 |
$850 |
||
Long-term liabilities |
660 |
560 |
||
Stockholders’ equity—common |
1,100 |
1,100 |
||
Total liabilities and stockholders’ equity |
$2,640 |
$2,510 |
CRANE COMPANY |
||||
2017 |
2016 |
|||
Sales revenue |
$3,980 |
$3,640 |
||
Costs and expenses | ||||
Cost of goods sold |
1,030 |
950 |
||
Selling & administrative expenses |
2,400 |
2,330 |
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Interest expense |
10 |
20 |
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Total costs and expenses |
3,440 |
3,300 |
||
Income before income taxes |
540 |
340 |
||
Income tax expense |
216 |
136 |
||
Net income |
$ 324 |
$ 204 |
Compute the following ratios for 2017 and 2016. (Round
current ratio and inventory turnover to 2 decimal places, e.g 1.83
and all other answers to 1 decimal place, e.g. 1.8 or
12.6%.)
(a) | Current ratio. | |
(b) | Inventory turnover. (Inventory on December 31, 2015, was $390.) | |
(c) | Profit margin. | |
(d) | Return on assets. (Assets on December 31, 2015, were $2,720.) | |
(e) | Return on common stockholders’ equity. (Equity on December 31, 2015, was $950.) | |
(f) | Debt to assets ratio. | |
(g) | Times interest earned. |
Answer a.
2017:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $1,630 / $880
Current Ratio = 1.85
2016:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $1,550 / $850
Current Ratio = 1.83
Answer b.
2017:
Average Inventory = ($640 + $570) / 2
Average Inventory = $605
Inventory Turnover = Cost of Goods Sold / Average
Inventory
Inventory Turnover = $1,030 / $605
Inventory Turnover = 1.70
2016:
Average Inventory = ($570 + $390) / 2
Average Inventory = $480
Inventory Turnover = Cost of Goods Sold / Average
Inventory
Inventory Turnover = $950 / $480
Inventory Turnover = 1.98
Answer c.
2017:
Profit Margin = Net Income / Sales Revenue
Profit Margin = $324 / $3,980
Profit Margin = 8.14%
2016:
Profit Margin = Net Income / Sales Revenue
Profit Margin = $204 / $3,640
Profit Margin = 5.60%
Answer d.
2017:
Average Assets = ($2,640 + $2,510) / 2
Average Assets = $2,575
Return on Assets = Net Income / Average Assets
Return on Assets = $324 / $2,575
Return on Assets = 12.58%
2016:
Average Assets = ($2,510 + $2,720) / 2
Average Assets = $2,615
Return on Assets = Net Income / Average Assets
Return on Assets = $204 / $2,615
Return on Assets = 7.80%
Answer e.
2017:
Average Stockholders’ Equity = ($1,100 + $1,100) / 2
Average Stockholders’ Equity = $1,100
Return on Common Stockholders’ Equity = Net Income / Average
Stockholders’ Equity
Return on Common Stockholders’ Equity = $324 / $1,100
Return on Common Stockholders’ Equity = 29.45%
2016:
Average Stockholders’ Equity = ($1,100 + $950) / 2
Average Stockholders’ Equity = $1,025
Return on Common Stockholders’ Equity = Net Income / Average
Stockholders’ Equity
Return on Common Stockholders’ Equity = $204 / $1,025
Return on Common Stockholders’ Equity = 19.90%
Answer f.
2017:
Debt to Assets Ratio = (Current Liabilities + Long-term
Liabilities) / Total Assets
Debt to Assets Ratio = ($880 + $660) / $2,640
Debt to Assets Ratio = 0.58
2016:
Debt to Assets Ratio = (Current Liabilities + Long-term
Liabilities) / Total Assets
Debt to Assets Ratio = ($850 + $560) / $2,510
Debt to Assets Ratio = 0.56
Answer g.
2017:
Times Interest Earned = (Income before income taxes + Interest
Expense) / Interest Expense
Times Interest Earned = ($540 + $10) / $10
Times Interest Earned = 55
2016:
Times Interest Earned = (Income before income taxes + Interest
Expense) / Interest Expense
Times Interest Earned = ($340 + $20) / $20
Times Interest Earned = 18