Question

(Ratio analysis​) The balance sheet and income statement for the A. Thiel Mfg. Company are given in the popup​ window: Calculate the following​ ratios:

a. Current ratio

b. Operating return on assets

c. Times interest earned

d. Debt ratio

e. Inventory turnover

f. Average collection period

g. Total asset turnover

h. Fixed asset turnover

i. Operating profit margin

j. Return on equity

Cash   $ 500
Accounts receivable   2,000
Inventories   1,000
Current assets   $ 3,500
Net fixed assets   4,500
Total assets   $ 8,000
  
Accounts payable   $ 1,100
Accrued expenses   600
Short-term notes payable   300
Current liabilities   $ 2,000
Long-term debt   2,000
Owners' equity   4,000
Total liabilities and owners' equity 8,000

Sales (all credit)   $ 8,000
Cost of goods sold   (3,300)
Gross profit   $ 4,700
Operating expenses (includes $500 depreciation)   (3,000)
Operating profits   $ 1,700
Interest expense   (367)
Earnings before taxes   $ 1,333
Income taxes (21%)   (280)
Net income 1,053

Answer 1

a) Current ratio:

=> Current ratio = current assets/current liabilities

=> It is given that current asset = $ 3,500 and current liabilities = $ 2,000

=> Therefore current ratio = 3,500/2,000 = 1.75

b) Operating return on assets:

=> Operating return on assets = Operating income/Total assets ( Operating income is also called EBIT)

=> It is given that operating income = $ 1,700 and total assets = $ 8,000

=> Therefore operating return on assets = 1,700/8,000 = 0.2125 or 21.25%

c) Times interest earned:

=> Time interest earned = operating income / interest expense

=> operating income = $ 1,700 and interest expense = $ 367

=> Therefore time interest earned ratio = 1,700/367 = 4.632

d) Debt ratio

=> Debt ratio = total liabilities/total assets

=> It is given that total assets = $ 8,000 and total liabilities = current liabilities + long term debt= 2,000+2,000 = $ 4,000

=> Therefore debt ratio = 4,000/8,000 = 0.5 or 50%

e) Inventory turnover:

=> inventory turnover = cost of goods sold/ average inventory ( In this case we will take inventory of that particular year)

=> It is given that cost of goods sold = $ 3,300 , inventories = $ 1,000

=> Therefore inventory turnover = 3,300/1,000 = 3.3

f) Average collection period:

=> Average collection period = (average receivables / sales)*365 ( In this case we will take receivables of that particular year)

=> It is given that receivables = $ 2,000 , sales = $ 8,000

=> Therefore average collection period = (2,000/8,000)*365 = 91.25 days

g) Asset turnover ratio:

=> Asset turnover ratio = sales/ total assets

=> It is given that sales = $ 8,000, total assets = $ 8,000

=>Therefore asset turnover ratio = 8,000/8,000 = 1

h) Fixed asset turnover:

=> Fixed asset turnover = sales/ fixed assets

=> It is given that sales = $ 8,000, fixed assets = $ 4,500

=>Therefore fixed asset turnover = 8,000/4,500 = 1.778

I) Operating profit margin:

=> Operating profit margin = Operating income / sales

=> it is given that operating income = $ 1,700 and sales = $ 8,000

=> Therefore operating profit margin = 1,700 / 8,000 = 0.2125 or 21.25%

j) Return on equity:

=> Return on equity = net income / shareholder's equity

=> It is given that net income = $ 1,053 and shareholder's equity = $ 4,000

=> Therefore return on equity = 1,053/4,000 = 0.2633 or 26.33%