Question

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Unity designs and manufactures uniforms for corporation throughout the United States. Selected finacial information follows. Compute...

Unity designs and manufactures uniforms for corporation throughout the United States. Selected finacial information follows. Compute the following ratios for Year 2: receivable turnover ratio (assume that 80% of sales were credit sales), inventory turnover ratio, cash ratio, times interest earned ratio, and cash coverage ratio.

	Year 2	Year 1
Net income	$60,000
Net sales revenue	$1,200,000
Cost of goods sold	$650,000
Interest expense	$25,000
Income tax expense	$65,000
Cash and cash equivalents	$12,000	$15,000
Accounts receivable	$120,000	$160,000
Inventories	$65,000	$60,000
Accounts payable	$20,000	$21,000
Current accrued expenses	$22,000	$20,000
Current portion of long-term debt	$40,000	$35,000
Cash flows from operating activities	$170,000
Cash paid for interest	$20,000

Solutions

Expert Solution

1. Receivable turnover ratio = Net credit sales / Average accounts receivables

where, Average accounts receivables = Beginning accounts receivables + Ending receivables / 2

For Year 2:

Beginning accounts receivables = $160000, Ending accounts receivables = $120000

Average accounts receivables = ($160000 + $120000) / 2 = $280000 / 2 = $140000

Net Credit sales = 80% * $1200000 = $960000

Putting these values in the receivable turnover ratio formula, we get,

Receivables turnover ratio = $960000 / $140000 = 6.86

2. Inventory turnover ratio = Cost of the goods sold / Average inventory

where, Average inventory = Beginning inventory + Ending inventory / 2

For year 2:

Ending inventory = $65000, Beginning inventory = Ending inventory of previous year = $60000

Average inventory = ($60000 + $65000) / 2 = $125000 / 2 = $62500

Cost of the goods sold = $650000

Putting these values in the inventory turnover ratio formula, we get,

Inventory turnover ratio = $650000 / $62500 = 10.4

3. Cash ratio = Cash & cash equivalents / Current liabilities

Current liabilities = Accounts payable + Current accrued expenses + Current portion of long term debt

Current liabilities = $20000 + $22000 + $40000 = $82000

Now, putting these values in the cash ratio formula, we get,

For Year 2:

Cash & cash equivalents = $12000, Current liabilities = $82000

Cash ratio = $12000 / $82000 = 0.15

4. Formula for times interest earned ratio is:

Times interest earned ratio = Income before interest and taxes / Interest expense

This can be further analysed as per below:

Times interest earned ratio = Net income + income taxes + interest expense / Interest expense

For Year 2:

Income before interest & taxes = $60000 + $25000 + $65000 = $150000, Interest expense = $25000

Times interest earned ratio = $150000 / $25000

Times interest earned ratio = 6

7. Cash flow coverage ratio = Cash flows from operating activities / Total debt

Cash flows from operating activities = $170000

Total debt = Accounts payable + Current accrued expenses + Current portion of long term debt

Total debt = $20000 + $22000 + $40000 = $82000

Cash flow coverage ratio = $170000 / $82000 = 2.07

jeff jeffy answered 1 year ago

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