Question

1. Financial Ratios

   Financial statements for Paulson's Pet Store are shown.

   Paulson's Pet Store Income Statement For Year Ended December 31, 20--
   Revenue from sales:
   Sales			$326,040
   Less: Sales returns and allowances			5,360
   Net sales				$320,680
   Cost of goods sold:
   Merchandise inventory, January 1, 20--		$29,300
   Estimated returns inventory, January 1, 20--		900	$30,200
   Purchases		$162,630
   Less: Purchases returns and allowances	$4,080
   Less: Purchases discounts	3,200	7,280
   Net purchases		$155,350
   Add freight-in		1,600
   Cost of goods purchased			156,950
   Goods available for sale			$187,150
   Less: Merchandise inventory, December 31, 20--		$24,800
   Less: Estimated returns inventory, December 31, 20--		1,300	26,100
   Cost of goods sold				161,050
   Gross profit				$159,630
   Operating expenses:
   Wages expense			$69,300
   Advertising expense			1,100
   Supplies expense			900
   Phone expense			2,736
   Utilities expense			2,864
   Insurance expense			1,600
   Depreciation expense-building			10,000
   Depreciation expense-store equipment			1,800
   Miscellaneous expense			600
   Total operating expenses				90,900
   Income from operations				$68,730
   Other expenses:
   Interest expense				650
   Net income				$68,080

   Paulson's Pet Store Statement of Owner’s Equity For Year Ended December 31, 20--
   B. Paulson, capital, January 1, 20--		$473,510
   Add additional investments		30,000
   Total investment		$503,510
   Net income for the year	$68,080
   Less: Withdrawals for the year	4,700
   Increase in capital		63,380
   B. Paulson, capital, December 31, 20--		$566,890

   Paulson's Pet Store Balance Sheet December 31, 20--
   Assets
   Current assets:
   Cash		$23,450
   Accounts receivable		59,350
   Merchandise inventory		24,800
   Estimated returns inventory		1,300
   Supplies		2,300
   Prepaid insurance		1,800
   Total current assets			$113,000
   Property, plant, and equipment:
   Land		$90,000
   Building	$350,000
   Less: Accumulated depreciation	20,000	330,000
   Store Equipment	$120,000
   Less: Accumulated depreciation	3,600	116,400	536,400
   Total assets			$649,400
   Liabilities
   Current liabilities:
   Note payable	$2,100
   Accounts payable	59,570
   Customer refunds payable	1,600
   Wages payable	1,100
   Sales tax payable	3,440
   Total current liabilities		$67,810
   Long-term liabilities:
   Note payable	$16,800
   Less: Current portion	2,100	14,700
   Total liabilities			$82,510
   Owner's Equity
   B. Paulson, capital			566,890
   Total liabilities and owner's equity			$649,400

   All sales are credit sales. The Accounts Receivable balance on January 1, 20--, was $10,100.

   Required:

   Compute the financial ratios. Round answers to one decimal place.

   Financial Ratios
   Current ratio	fill in the blank 1 to 1
   Quick ratio	fill in the blank 2 to 1
   Working capital	$fill in the blank 3
   Return on owner's equity	fill in the blank 4%
   Accounts receivable turnover	fill in the blank 5
   Average number of days to collect receivables	fill in the blank 6 days
   Inventory turnover	fill in the blank 7
   Average number of days to sell inventory	fill in the blank 8 days

Answer 1

a. Current ratio

Current ratio = Current Assets / Current Liabilities

Current ratio = $113,000 / $67,810 = 1.7 to 1

b. Quick ratio

Quick ratio = (Cash + Accounts receivable) / Current Liabilities

Quick ratio = ($23,450 + $59,350) / $67,810 = 1.2 to 1

c. Working capital

Working capital = Current Assets - Current Liabilities

Working capital = $113,000 - $67,810 = $45,190

d. Return on owners' equity

Return on owners' equity = Net Income / Average owners' equity x 100

Average owners' equity = ($473,510 + $566,890) / 2 = $520,200

Return on owners' equity = $68,080 / $520,200 x 100 = 13.1%

e. Accounts receivable turnover

Accounts receivable turnover = Net Sales / Average accounts receivable

Average accounts receivable = ($10,100 + $59,350) / 2 = $34,725

Accounts receivable turnover = $320,680 / $34,725 = 9.2 times

f. Average number of days to collect receivables

Average number of days to collect receivables = 365 days / Net Sales x Average accounts receivable

Average accounts receivable = ($10,100 + $59,350) / 2 = $34,725

Average number of days to collect receivables = 365 days / $320,680 x $34,725 = 39.5 days

g. Inventory turnover

Inventory Turnover = Cost of goods sold / Average Inventories

Average Inventories = ($30,200 + $26,100) / 2 = $28,150

Inventory turnover = $161,050 / $28,150 = 5.7 times

h. Average number of days to sell inventory

Average number of days to sell inventory = 365 days / Cost of goods sold x Average Inventory

Average Inventories = ($30,200 + $26,100) / 2 = $28,150

Average number of days to sell inventory = 365 days / $161,050 x $28,150 = 63.8 days

All the best...