Question

Exercise 13-8 Selected Financial Ratios [LO13-2, LO13-3, LO13-4]

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	20,000
Accounts receivable, net					190,000
Merchandise inventory					390,000
Prepaid expenses					7,000
Total current assets					607,000
Property and equipment, net					810,000
Total assets				$	1,417,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	280,000
Bonds payable, 8%					380,000
Total liabilities					660,000
Stockholders’ equity:
Common stock, $5 par value				$	150,000
Retained earnings					607,000
Total stockholders’ equity					757,000
Total liabilities and equity				$	1,417,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,520,000
Cost of goods sold		1,368,000
Gross margin		1,152,000
Selling and administrative expenses		590,000
Net operating income		562,000
Interest expense		30,400
Net income before taxes		531,600
Income taxes (30%)		159,480
Net income	$	372,120

Account balances at the beginning of the year were: accounts receivable, $170,000; and inventory, $330,000. All sales were on account.    5. Times interest earned ratio. (Round your answer to 2 decimal places.)         6. Average collection period. (Use 365 days in a year. Round your answer to 1 decimal place.)         7. Average sale period. (Use 365 days in a year. Round your intermediate and final answer to 1 decimal place.)         8. Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

Answer 1

5.            Times interest earned ratio. (Round your answer to 2 decimal places.)

Ans: Formula   Earnings before interest and taxes/Interest expense

       562,000/30400=18.48

6.            Average collection period. (Use 365 days in a year. Round your answer to 1 decimal place.)

Ans: Average Accounts Receivable/sales revenue*365

   Average accounts receivable=Opening receivable +Closing receivables/2

                                                                170000+190000/2=180000

Sales Revenue=2520000

Therefore Average Collection period= 180000/2520000*365=26 days

7.            Average sale period. (Use 365 days in a year. Round your intermediate and final answer to 1 decimal place.)

Ans: Average sale period formula=

       365/Inventory Turnover

Inventory Turnover= Cost of goods sold/Average Inventory Balance

Cost of goods sold = 136,8000

Average Inventory Balance=Opening balance + Closing Balance/2

                                                =330 000 +390 000/2

                                                                =360,000

Therefore Inventory Turnover=1368000/360000=3.8

Average sale period=365/3.8=96 Days

8.           

Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

Formula          365/Inventory Turnover +365/Receivable turnover

or

Inventory period + Accounts Receivable period

Inventory turnover =3.8

Receivable Turnover=Credit sales/Average accounts receivable

Credit sales=2520000

Average accounts receivable =180000

Receivable Turnover=2520000/180000=14

Therefore operating cycle=365/3.8 +365/14=96+26=122 Days