Question

In: Accounting

Ludwig Inc.'s adjusted trial balance is shown below. In addition, the following information is known: No...

Ludwig Inc.'s adjusted trial balance is shown below. In addition, the following information is known:

No shares were issued in the years ended December 31, 2016 and 2017.

No dividends were declared or paid in the years ended December 31, 2016 and 2017.

The market value for the common shares at December 31, 2016 and 2017 were $15 and $16 respectively.

                                                                                                                  Ludwig Inc.

                                                                                                        Adjusted Trial Balance

                                                                                                              December 31,                                                

                                                                                                     2017           2016          2015

Cash                                                                                          595,050    412,850    146,500

Account receivable                                                                       40,600      32,950      31,675

Allowance for doubtful accounts                                                  10,000         3,750       5,575

Merchandise inventory                                                                 42,500       41,900     39,900

Prepaid expenses                                                                          3,000         2,600       2,900

Notes receivable, due in 2019                                                      13,000       15,500    13,500

Property, plant and equipment assets                                        371,250    405,725   516,650

Accumulated depreciation                                                           91,250       90,725   126,650

Accounts payable                                                                        36,700       36,700     35,300

Unearned sales                                                                             5,200        4,500       4,500

Notes payable, due in 2020                                                        60,000       68,000     70,000

Preferred shares; $1.00 non-cumulative; 100,000 shares         290,000    290,000   290,000

Common shares; 50,000 shares issued and outstanding         170,000    170,000   170,000

Retained earnings                                                                     247,850      49,100       7,400

Sales                                                                                       1,226,400 1,038,600 1,286,500

Cost of goods sold                                                                     849,400    604,100 1,099,600

Other operating expenses                                                         167,700     201,800   124,800

Interest expense                                                                            8,900         8,750       7,600      

Income tax expense                                                                     46,000       25,200    12,800

Ratio                                               2017     2016      Change      Ind. Average    Comparison

Current ratio                                                                                         13.26

Acid-test ratio                                                                                       16.15

Accounts receivable turnover                                                               36.75

Merchandise turnover                                                                           21.34

Days' sales uncollected                                                                          7.78

Days' sales in inventory                                                                        19.41

Total asset turnover                                                                                1.44

Debt ratio                                                                                              12.68

Equity ratio                                                                                            87.32

Times interest earned                                                                           21.29

Profit margin                                                                                         13.26

Gross margin                                                                                        26.93

Return on total assets                                                                          14.44

Return on common shareholders' equity                                              26.07

Book value per common share                                                             12.91

Book value per preferred share                                                              2.42

Basic earnings per share                                                                        3.25

Price-earnings ratio                                                                                 5.93

Accounts Payable Turnover                                                                  18.60

Required:

Industry averages for each ratio are shown in the table above. Use this information to complete the chart above by calculating the required ratios, determining if the change from the previous year is favourable or unfavourable, and then determining whether the each ratio (for 2017) is favourable or unfavourable compared to the industry average. If there is no change to 2 decimal places, select 'No change' if comparing from year to year, or 'The same as' if comparing to the industry average. All values should be accurate to at least two decimal places.

Solutions

Expert Solution

Ratio                                               2017     2016      Change      Ind. Average    Comparison

Current ratio                                   16.02   11.81  Favourable            13.26       Favourable           

Acid-test ratio                                 14.93   10.73 Favourable           16.15        Unfavourable           

Accounts receivable turnover        33.35   32.14  Favourable            36.75       Unfavourable           

Merchandise turnover                   20.13    14.77 Favourable             21.34       Unfavourable           

Days' sales uncollected                12.08    11.6    Unfavourable           7.78         Unfavourable           

Days' sales in inventory                18.13    24.71 favourable              19.41         favourable           

Total asset turnover                      1.38       1.45 Unfavourable            1.44       Unfavourable             

Debt ratio                                       0.36     0.44 favourable                   12.68      favourable           

Equity ratio                                                                                            87.32

Times interest earned                                                                           21.29

Profit margin                                                                                         13.26

Gross margin                                                                                        26.93

Return on total assets                                                                          14.44

Return on common shareholders' equity                                              26.07

Book value per common share                                                             12.91

Book value per preferred share                                                              2.42

Basic earnings per share                                                                        3.25

Price-earnings ratio                                                                                 5.93

Accounts Payable Turnover                                                                  18.60

Notes:

  • Current ratio: current assets/ current liabilties

Current assets: cash + (accounts receivable - allowance for doubtful debts) + merchandise inventory+ prepaid expenses

Notes receivable are due in 2019 (more than a year) hence not considered as current asset

Current liabilties: accounts payable + unearned sales

Notes payable are due in 2020 (more than a year) hence not considered as current liabilty

  • Acid test ratio = (current assets - inventory - prepaid expenses) / current liabilties
  • accounts receivable turnover= sales / average accounts receivable

Average accounts receivable = (beginning + ending )/2

for 2017: 1226400 / (40600+32950)/2 = 33.35

  • Merchandise turnover = cost of sales / average merchandise held

For 2017, merchandise turnover = 849400 / (42500+41900)/2 = 20.13

  • days sales uncollcted = accounts receivable / sales x 365

for 2017, 40600 / 1226400 x 365 = 12.08 days

  • days sales in inventory = 365 / invnetory turnover ratio
  • total asset turnover = sales / average assets

for 2017 , total asset turnover = 1226400 / ( 964150+ 817050)/2

total asset for 2017= current assets + notes receivable + fixed assets - accumulated depreciation

= 671150 + 13000 + 371250 - 91250 = 964150

total asset for 2016 = 486550 + 15500 + 405725 - 90725 = 817050

  • debt ratio = total debt / total assets

for 2017, debt ratio = (60000+290000)/ 964150 = 0.36

ekkarill92 answered 1 year ago
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