Question

Refer to the information below to compute and explain the ratios below.

Balance Sheet

2017                      2018

Cash                                                                      10,000 600

A/R                                                                         12,900                  18,000

Inventories                                                         31,000                  50,700

Total Current Assets                                       53,900                 69,300

Land                                                                      22,000                  29,000

Plant & Equipment                                          80,000                  130,000

Less Accumulated Depreciation (28,000)               (48,000)

Total Fixed Assets                                       74,000 11,000

Total Assets                                               127,900                180,300

Accounts Payable                                       7,900                    17,400

Accrued Expenses                                      5,000                     9,000

Short Term Bank Notes 19,000                  57,000

Total Current Liabilities 31,900                  83,400

Long-term Debt    34,750                  29,950

Common Stock                                    36,500                  38,500

Retained Earnings                                            24,750                  28,450

Total Debt & Equity                                        127,900                180,300

Income Statement 2018

Sales     220,000

COGS                                                         106,000

Gross Profit    114,000

Operating Expenses

Fixed Cash Operating Expenses 22,000

Variable Operating Expenses 16,000

Depreciation                                                      10,000

Total Operation Expenses 48,000

Earnings before Interest & Taxes (NOI) 66,000

Interest Expense 7,200

Earnings Before Taxes 58,800

Income Tax                                                         15,288

Net Income                                                        43,512

Compute and explain the meaning of the following ratios for the year 2018:

1. Current Ratio

2. Quick Ratio

3. Inventory Turnover

4. Total Asset Turnover

5. Debt Ratio

6. DSO

7. ROE

8. Operating Margin

9. Profit Margin

10. TIE

Answer 1

Answer to Part 1:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $69,300 / $83,400
Current Ratio = 0.83: 1

Answer to Part 2:
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
Quick Ratio = ($69,300 - $50,700) / $83,400
Quick Ratio = $18,600 / $83,400
Quick Ratio = 0.22: 1

Answer to Part 3:
Inventory Turnover = Cost of Goods sold / Average Inventories
Average Inventories = ($31,000 + $50,700) / 2
Average Inventories = $40,850

Inventory Turnover = $106,000 / $40,850
Inventory Turnover = 2.59 times

Answer to Part 4:
Total Asset Turnover = Net Sales / Average Total Assets
Average Total Assets = ($127,900 + $180,300) / 2
Average Total Assets = $154,100

Total Asset Turnover = $220,000 / $154,100
Total Asset Turnover = 1.43 times

Answer to Part 5:
Debt Ratio = Total Debt / Total Assets
Total Debt = $83,400 + $29,950
Total Debt = $113,350

Debt Ratio = $113,350 / $180,300
Debt Ratio = 0.63 times

Answer to Part 6:
Days’ Sales Outstanding = Average Accounts Receivable * 365 / Net Sales
Average Accounts Receivable = ($12,900 + $18,000) / 2
Average Accounts Receivable = $15,450

Days’ Sales Outstanding = $15,450 * 365 / $220,000
Days’ Sales Outstanding = 25.63 or 26 days