Question

Cheyenne Inc. manufactures a variety of consumer products. The company’s founders have run the company for 30 years and are now interested in retiring. Consequently, they are seeking a purchaser who will continue its operations, and a group of investors, Morgan Inc., is looking into the acquisition of Cheyenne. To evaluate its financial stability and operating efficiency, Cheyenne was requested to provide the latest financial statements and selected financial ratios. Summary information provided by Cheyenne is as follows. CHEYENNE INC. INCOME STATEMENT FOR THE YEAR ENDED NOVEMBER 30, 2018 (IN THOUSANDS) Sales (net) $ 30,560 Interest income 560       Total revenue 31,120 Costs and expenses   Cost of goods sold 17,660   Selling and administrative expenses 3,610   Depreciation and amortization expense 1,950   Interest expense 960       Total costs and expenses 24,180   Income before taxes 6,940     Income taxes 2,776   Net income $ 4,164 CHEYENNE INC. BALANCE SHEET AS OF NOVEMBER 30 (IN THOUSANDS) 2018 2017 Cash $ 460 $ 560 Short-term investments (at cost) 360 260 Accounts receivable (net) 3,260 2,960 Inventory 6,060 5,460     Total current assets 10,140 9,240 Property, plant, & equipment (net) 7,160 7,060     Total assets $ 17,300 $ 16,300 Accounts payable $ 3,760 $ 3,460 Income taxes payable 960 860 Accrued expenses 1,760 1,460     Total current liabilities 6,480 5,780 Long-term debt 2,060 1,860     Total liabilities 8,540 7,640 Common stock ($1 par value) 2,760 2,760 Paid-in capital in excess of par 1,060 1,060 Retained earnings 4,940 4,840     Total stockholders’ equity 8,760 8,660     Total liabilities and stockholders’ equity $ 17,300 $ 16,300 SELECTED FINANCIAL RATIOS Cheyenne INC. Current Industry Average 2017 2016 Current ratio 1.60 1.61 1.69 Acid-test ratio 0.65 0.65 0.79 Times interest earned 8.61 8.56 8.51 Profit margin on sales 13.26% 12.16% 13.06% Asset turnover 1.9 1.89 1.9 Inventory turnover 3.23 3.27 3.24 (a) Calculate a new set of ratios for the fiscal year 2018 for Cheyenne based on the financial statements presented. (Round answers to 2 decimal places, e.g. 52.75 or 52.75%.) Current ratio Acid-test ratio Times interest earned Profit margin on sales Asset turnover Inventory turnover

Answer 1

(a) Calculation of Ratios

Current Ratio

Current Ratio = Current Assets / Current Liability

= 10,140 / 6,480

= 1.56 Times

Acid Test Ratio

Acid Test Ratio = (Current assets – Inventory) / Current Liabilities

= (10,140 – 6,060         ) / 6,480

= 0.63 Times

Times interest earned

Times interest earned = (Earnings before interest and taxes) ÷ Interest expense

Times interest earned = (Net income + Income taxes + Interest expense) ÷ Interest expense

= (4,164 + 2,776 + 960) / 960

= 8.23 Times

Profit margin on sales

Profit margin = Net Income / Sales * 100

=( 4,164 / 30,560) * 100

= 13.63 %

Asset turnover

Asset turnover = Net Sales / Average total assets

= 30,560 / [(17,300 + 16,300)/2]

= 30560 / 16800

= 1.82 Time

Inventory turnover

Inventory turnover =    Cost of goods sold / Average Inventory

= 17,660 / [(6,060 + 5460)/2]

= 17660 / 5760

= 3.06 Times

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