Question

Clouston Container Corporation reports the following data in its December 31, 2019 Financial Statements:

Sales = $225,000 Current Assets = $50,000

Long-Term Assets = $130,000 Current Liabilities = $33,000

Long-Term Liabilities = $52,000 Net Income = $11,250

1. Compute Owner’s Equity_____________________________
2. Compute the Current Ratio___________________________
3. Complete Debt-to-Equity Ratio________________________
4. Complete Return on Sales____________________________
5. Complete Return on Owner’s Equity____________________
6. Pick two of these ratios and discuss how this company is doing relative to the ratio.

Answer 1

1) Calculation of owners Equity:

Owners Equity= Total assets-total liabilities

Owners Equity=(50000+130000)-(33000+52000)= 95000

Owners Equity= $95000

2) calculation of current ratio:

Current ratio= current assets/current liabilities

Current ratio= 50000/33000= 1.52

Current ratio= 1.52

3) Calculation of debt equity ratio:

Debt equity ratio= total debt/owners Equity

Debt equity ratio= (33000+52000)/95000= 0.89

Debt equity ratio= 0.89

4) Calculation of return on sales:

Return on sales= Net income/sales*100

Return on sales= 11250/225000*100= 5%

Return on sales= 5%

5) calculation of return on owners Equity:

Return on owners Equity= Net income/Equity*100

Return on owners Equity= 11250/95000*100= 11.84

Return on owners Equity= 11.84%

Return on sales indicate the firm's profitability after taking into account the expenses. So it shows that the firm is earning 5% profit after taking into account the expenses.

Current ratio is the ratio of current assets and current liabilities. It shows whether the firm's assets is capable of satisfying it's current liabilities. Here since the ratio is 1.52 that is more than 1 which means the firm has enough current assets to satisfy it's current liabilities.