Question

Long-term debt ratio 0.3 Times interest earned 8.0 Current ratio 1.4 Quick ratio 1.0 Cash ratio 0.4 Inventory turnover 4.0 Average collection period 73 days Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

COMPLETE THE INCOME STATEMENT

Net Sales?

Cost of Goods sold?

selling, general and administrative expenses = 16.00

depreciation = 26.00

EBIT?

Interest Expense?

income before tax?

tax (35% of income before tax)?

Net Income?

COMPLETE THE BALANCE SHEET

Balance Sheet
Figures in Milliions    this year last year
Assets
Cash and marketable securities ? $26
accounts receivable ? 40
inventories ? 32
Total current assets ? $98
net property, plant, and equipment ? $129
Liabilities and shareholders equity
Accounts payable $20.00 $15
Notes payable 30 $35
total current liabilities ? $50
long term debt ? $26
shareholders equity ? $53
total liabilities and shareholders equity $175.00 $129

Answer 1

Current Ratio = CA/CL = 1.4
Current Assets = 1.4 * Current Liabilities = 1.4* 50 = 70
Quick ratio = Quick Assets/ Current Liabilities = 1
Quick assets = 1 * Current liablities = 1*50 = 50
Cash ratio = Cash/Current liabilities = 0.4
Cash = 0.4 * Current liabilities = 0.4* 50 = 20

Balance Sheet
Assets                                                         Liabilities
Cash                             20         26    Account Payables    20    15
Account Receivable        30         40                Notes Payable                   30         35
Inventories                     20         32                Total Current Laibilites       50        50
Total Current Assets       70         90                Long Term Debt                  52.5      26
Property plant & Equip. 105       39                 Shareholder's Equity          72.5       53
Total Assets                  175       129               Total Liabilites                   175        129

Long Term Debt Ratio = Long term debt ratio/ Total Assets = 0.3
Long term debt = 0.3*175 = 52.5

Inventory Turnover Ratio = COGS/Inventory = 4
COGS = 4*32= 128

Average collection period = NO. of days / Account receivable turnover = 73 days
Account receivable turnover = 365/73 = 5

Account receivable turnover = Turnover/ Account receivable = 5
Turnover = 5*40 = 200

INCOME STATEMENT
Net Sales                                   200
COGS                                       128
Selling, general expenses            16
Depreciation                               26
EBIT                                          30
Interest Expense                        3.75
Income Before Tax                     26.25
Tax @ 35%                              9.1875
Net Income                             17.0625

Times interest earned= EBIT/Interest Expense =8
Interest = 30/8 = 3.75

(There may be change in values depending on the formula you works on,you can check the formula and if there is a difference then you can change but the method is same.)