Question

Exercise 13-13

The condensed financial statements of Crane Company for the years 2016 and 2017 are presented below.

CRANE COMPANY Balance Sheets December 31 (in thousands)
		2017		2016
Current assets
Cash and cash equivalents		$330		$360
Accounts receivable (net)		530		460
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 Income Statements For the Year Ended December 31 (in thousands)
		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
Interest expense		10		20
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 1

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