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Exercise 13-13 The condensed financial statements of Crane Company for the years 2016 and 2017 are...

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.

Solutions

Expert Solution

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


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