Question

The condensed financial statements of Underwood Company for the years 2017 and 2018 are presented as follows. (Amounts in thousands.)

UNDERWOOD COMPANY Balance Sheets December 31
	2018	2017
Current assets
Cash and cash equivalents	$330	$360
Accounts receivable (net)	470	400
Inventory	460	390
Prepaid expenses	120	160
Total current assets	1,380	1,310
Investments	10	10
Property, plant, and equipment	420	380
Intangibles and other assets	530	510
Total assets	$2,340	$2,210
Current liabilities	$900	$790
Long-term liabilities	410	380
Stockholders’ equity—common	1,030	1,040
Total liabilities and stockholders’ equity	$2,340	$2,210

UNDERWOOD COMPANY Income Statements For the Years Ended December 31
	2018	2017
Sales revenue	$3,800	$3,460
Costs and expenses
Cost of goods sold	955	890
Selling & administrative expenses	2,400	2,330
Interest expense	25	20
Total costs and expenses	3,380	3,240
Income before income taxes	420	220
Income tax expense	126	66
Net income	$294	$154

Compute the following ratios for 2018 and 2017.

1. Current ratio.
2. Inventory turnover. (Inventory on 12/31/16 was $340.)
3. Profit margin.
4. Return on assets. (Assets on 12/31/16 were $1,900.)
5. Return on common stockholders’ equity. (Stockholders’ equity on 12/31/16 was $900.)
6. Debt to assets ratio.
7. Times interest earned.

Answer 1

Part-a:

a. Curren tRatio= Currnet Asset / Current Laibility

2018= 1380/900=1.53 times

2017= 1310/790=1.66 times

b. Inventory Turnover Ratio= Cost of Goods Sold / Avergae Inventory

2018= 955/((460+390)/2)=2.25 times

2017= 890/((390+340)/2)=2.44 times

c. Profit Margin = Net Income / Sales

2018= 294/3800=7.7%

2017= 154/3460=4.5%

d. Return On Asset= Net Income / Average Asset

2018= 294/((2340+2210)/2)=12.9%

2017= 154/((2210+1900)/2)=7.5%

e. Retunr on Common Stockholder Equity- Net Income / CommonS tockholder Equity

2018= 294/((1030+1040)/2)=28.4%

2017= 154/((1040+900)/2)=15.9%

f. Debt to Asset Ratio= Debt /A sset

2018=(900+410)/2340=0.6 times

2017= (790+380)/2210)=0.5 times

g. Times Interest Earned Ratio= Income Before Tax & Interest /interest

2018=(420+25)/25=17.80times

2017= (220+20)/20=12 times