Question

Calculate the ratios for year 2 that are listed below:

COMPANY XYZ

Income Sheet

Year 1		Year 2
Sales (all on credit)	$1,400,000		$1,375,000
Cost of Goods sold	850,000		900,000
Gross profit	$550,000		$475,000
Selling and administrative expense*	240,000		230,000
Operating profit (EBIT)	$310,000		245,000
Interest expense	40,000		37,000
Net income before taxes	$270,000		208,000
Taxes	81,000		62,400
Net income	$189,000		145,600
Shares	30,000		30,001
Earnings per share	$6.30		$4.85
*Includes $15,000 in lease payments for each year.

COMPANY XYZ

Balance Sheet Assets	Year 1	Year 2
Cash	$50,000	$55,000
Marketable securities	20,000	20,000
Accounts receivable	150,000	150,000
Inventory	200,000	210,000
Total current assets	$420,000	435,000
Net plant and equipment	650,000	650,000
Total assets	$1,070,000	$1,085,000
Liabilities and Stockholders’ Equity
Accounts payable	$175,000	190,000
Accrued expenses	25,000	25,000
Total current liabilities	$200,000	215,000
Long-term liabilities	310,000	310,000
Total liabilities	$510,000	525,000
Common stock ($2 par)	60,000	60,000
Capital paid in excess of par	190,000	190,000
Retained earnings	310,000	310,000
Total stockholders’ equity	$560,000	560,000
Total liabilities and stockholders’ equity	$1,070,000	$1,085,000

Create your response to this:

Ratio Description	Ratio	Formula - showing numbers (labels) 435,000 (Current Assets)/215,000 (Current Liabilities)
Current Ratio
Quick Ratio (Acid Test Ratio)
Days Sales Outstanding (Average Collection Period)
Inventory Turnover
Fixed Asset Turnover
Total Asset Turnover
Debt Ratio
Times Interest Earned
Gross Profit Margin
Net Profit Margin
Return on Assets
Return on Equity

Answer 1

Ans. 1	Current ratio   =   Total current assets / Total current liabilities
		$435,000 / $215,000
		2.02 : 1
Ans. 2	Acid test ratio   =   (Total current assets - Inventory) / Total current liabilities
		($435,000 - $210,000) / $215,000
		$225,000 / $215,000
		1.05 : 1
Ans. 3	Average collection period = Average receivables / Net credit sales * No. of days in year
		$150,000 / $1,375,000 * 365
		39.82 days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
		($150,000 + $150,000) / 2
		$150,000
Ans. 4	Inventory turnover = Cost of goods sold / Average Inventory
		$900,000 / $205,000
		4.39 times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
		($200,000 + $210,000) / 2
		$205,000