Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	21,000
Accounts receivable, net					260,000
Merchandise inventory					330,000
Prepaid expenses					10,000
Total current assets					621,000
Property and equipment, net					900,000
Total assets				$	1,521,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	300,000
Bonds payable, 10%					360,000
Total liabilities					660,000
Stockholders’ equity:
Common stock, $5 par value				$	150,000
Retained earnings					711,000
Total stockholders’ equity					861,000
Total liabilities and equity				$	1,521,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	3,150,000
Cost of goods sold		1,287,000
Gross margin		1,863,000
Selling and administrative expenses		650,000
Net operating income		1,213,000
Interest expense		36,000
Net income before taxes		1,177,000
Income taxes (30%)		353,100
Net income	$	823,900

Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $330,000. All sales were on account.

Required:

Compute the following financial data and ratios:

1.	Working capital.

       

2.	Current ratio. (Round your answer to 2 decimal places.)

        

3.	Acid-test ratio. (Round your answer to 2 decimal places.)

        

4.	Debt-to-equity ratio. (Round your answer to 2 decimal places.)

      

5.	Times interest earned ratio. (Round your answer to 2 decimal places.)

       

6.	Average collection period. (Use 365 days in a year. Round your answer to 1 decimal place.)

       

7.	Average sale period. (Use 365 days in a year. Round your intermediate and final answer to 1 decimal place.)

       

8.	Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

       

Answer 1

• All working forms part of the answer
• Answers

Working Capital
A	Total Current Assets	$      621,000.00
B	Total Current Liabilities	$      300,000.00
C = A- B	Working Capital	$      321,000.00

Current Ratio
A	Total Current Assets	$      621,000.00
B	Total Current Liabilities	$      300,000.00
C = A/B	Current Ratio	2.07

Acid Test Ratio
A	Total Current Assets	$      621,000.00
B	Merchandise inventory	$      330,000.00
C	Prepaid expenses	$        10,000.00
D = A - B - C	Total Quick Assets	$      281,000.00
E	Total Current Liabilities	$      300,000.00
F = D/E	Acid Test Ratio	0.94

Debt to Equity Ratio
A	Total Liabilities	$      660,000.00
B	Total Stockholder's Equity	$      861,000.00
C = A/B	Debt - to - Equity Ratio	0.77

Times Interest Earned
A	Income before Interest & Income tax expenses [or Net Operating Income]	$ 1,213,000.00
B	Interest expenses	$        36,000.00
C = A/B	Times interest earned ratio	33.69

Average Collection Period
A	Beginning Accounts receivables	$      190,000.00
B	Ending Accounts receivables	$      260,000.00
C = A+B	Total	$      450,000.00
D = C/2	Average Accounts receivables	$      225,000.00
E	Sales	$ 3,150,000.00
F = E/D	Account receivables Turnover Ratio	14
G	No. Of days	365
H = G/F	Average Collection period	26.1

Average Sales Period
A	Sales	$ 3,150,000.00
B	No. of days	365
C=A/B	Average Sale Period	$             8,630.1

Operating Cycle
A	Beginning Inventory balance	$      330,000.00
B	Ending Inventory Balance	$      330,000.00
C =(A+B)/2	Average Inventory	$      330,000.00
D	Cost of Goods Sold	$ 1,287,000.00
E = D/C	Inventory Turnover Ratio	3.9
F = 365/E	No. of days	93.6
G (calculated as Req '6 above')	Average Collection period	26.1
H = F + G	Operating Cycle	119.7