Question

Assets	2018		2019
Cash	$17,000		$12,400
Short-term investments.	48,600		18,000
Accounts receivable	351,200		632,160
Inventories	710,200		1,287,360
Total current assets	$1,127,000		$1,949,920
Gross fixed assets	491,000		1,202,950
Less: accumulated depreciation	146,200		263,160
Net fixed assets	$344,800		$939,790
Total assets	$1,471,800		$2,889,710
Liabilities and equity	2018		2019
Accounts payable	$148,600		$327,118
Notes payable	200,000		720,000
Accruals	136,000		284,960
Total current liabilities	$484,600		$1,332,078
Long-term debt	323,432		1,000,000
Common stock (100,000 shares)	460,000		460,000
Retained earnings	203,768		97,632
Total equity	$663,768		$557,632
Total liabilities and equity	$1,471,800		$2,889,710

	2018		2019
Sales	$7,222,384		$7,460,011
Cost of goods sold	3,123,321		3,800,000
Other expenses	340,000		720,000
Depreciation	18,900		116,960
Total operating costs	$3,482,221		$4,636,960
EBIT	$3,740,163		$2,823,051
Interest expense	62,500		176,000
Pretax earnings	$3,677,663		$2,647,051
Taxes (40%)	1,471,065		1,058,820
Net income	$2,206,598		$1,588,231

8.         Construct a common size balance sheets for 2018 and 2019. Comment on any changes       in the percentages of assets and liabilities.

9.         Construct a common size income statement 2018 and 2019. Comment on any of the changes in the composition of the income statement.

10.       Compute the following using the data from 2019 except where noted:

            a.         Current ratio

            b.         Quick ratio

            c.         Net working capital

            d.         Inventory turnover

            e.         Receivables turnover

            f.          Total asset turnover

            g.         Debt/Equity ratio

h.         Net profit margin

            i.          Return on assets

            j.          Return on equity

11.       Use the DuPont equation to decompose return on equity for 2019.

Answer 1

Answer(10): Calculating Ratios for the year 2019-

Current Ratio = Current assets/Current liabilities

Current ratio: 1949920 / 1332078 = 1.46

Quick ratio = Liquid assets/ Current liabilities

Note: Usually Inventory is not considered as Liquid asset. So we leave inventory in liquid assets. So liquid assets are current assets-inventory

Quick ratio: (1949920-1287360) / 1332078 = .49

Net working capital = Current assets- Current liabilities

Net working capital: 1949920-1332078 = $617842

Inventory turnover = Cost of goods sold / Average inventory

Average inventory = (Closing inventory + Beginning inventory) / 2

Average inventory: (1287360+710200) / 2 = 998780

Inventory turnover: 3800000/998780 = 3.80 times

Receivable turnover = Net sales / Average account receivables

Average account receivables = (Closing receivables + Beginning receivables) / 2

Average account receivables: (632160+351200) / 2 = 491680

Receivable turnover: 7460011 / 491680 = 15.17 times

Total assets turnover ratio = Net Sales / Average Total assets

Average Total assets = (Ending assets+beginning assets)/2

Average Total assets: (2889710+1471800) / 2 = 2180755

Total assets turnover ratio: 7460011/2180755 = 3.42 times

Debt/Equity ratio = Total liabilities/Total shareholder's equity

Total liabilities = Current liabilities + Long term debt

Debt/Equity ratio: 2332078 / 557632 = 4.18

Net profit margin = Net profit / Net sales

Net profit margin: 1588231 / 7460011 * 100 = 21.28%

Return on asset = Net profit / Total assets

Return on asset: 1588231 / 2889710 * 100 = 54.96%

Return on equity = Net profit / Total equity

Return on equity: 1588231 / 557632 * 100 = 284.81%

Answer(11): Du point equation-

ROE = Net profit margin * Asset turnover ratio * Financial leverage

NPM has already been calculated,

Financial leverage = Total assets / Shareholder's equity

Financial leverage: 2889710 / 557632= 5.18

Asset turnover = Net sales/Total assets

Asset turnover: 7460011/2889710 = 2.58

ROE: 21.28% * 2.58 * 5.18 = 284.8%

Note: In calculating total assets turnover(f), I took average total assets, only total assets can also be taken. Later for Du point, I took Total assets.