Question

Gaines Company Comparative Balance Sheet December 31 20X3 20X2 Assets Cash 25,000 40,000 Short-term Investments 15,000 60,000 Accounts Receivable Net 50,000 30,000 Inventory 50,000 70,000 Property Plant and Equipemt (net) 260,000 300,000 Total Assets 400,000 500,000 Liabilities and Stockholders Equity Accounts Payable 20,000 30,000 Short-term notes Payable 30,000 90,000 Bonds Payable 90,000 160,000 Common Stock 150,000 150,000 Retained Earnings 110,000 70,000 Total Liabilities and stockholders equity 400,000 500,000 Income Statement For the Year Ended December 31, 20X3 Net Sales 400,000 Cost of Goods Sold 240,000 Gross Profit 160,000 Expenses: Operating Expense 42,000 Interest Expense 18,000 Total Expenses 60,000 Income before Income Taxes 100,000 Income Tax expense 30,000 Net Income 70,000 Additional Information: a. Cash Dividends of $30,000 were declared and Paid in 20x3 b. Weighted-average number of shares of common stock outsanding during 20X3 was 30,000 shares. c. Market Value of Common Stock on December 31 20X3 was $21 per share

Compute the following ratios for Gaines Company for 20X3
. Current ratio
. Return on common stckholders equity
. Price -earning ratio
. Acid -test ratio
. Receivabke turnover
2. Refer to Problem #1 - Compute the following ratios for Gaines Company for 20X3:
. Times interest earned
. Profit Margin
. Days in Inventory
. Payout ratio
. Return on assets

Answer 1

Current Ratio = current assets / current liabilities

Current assets = cash + Short-term Investments +Accounts Receivable + Inventory =25000+15000+50000+50000 = 140000

Current liabilities = Accounts Payable + Short-term notes Payable = 20000+30000 = 50000

Current Ratio = 140000/50000 = 2.80:1

2. Return on Common Stockholders equity = net income / Average stockholders equity = 70000 / ((260000+220000)/2) =70000/240000 = 29.17%

3. Price earning ratio = market value per share / earnings per share = 21 / (70000/30000) = 21 / 2.33 = 9.01

4. Acid test ratio = (current assets - inventory) / current liabilities = (140000-50000)/50000 = 1.80:1

5. Receivable turnover = sales / Average accounts receivable = 400000/((50000+30000)/2) = 10 times

6. Times interest earned ratio = EBIT / interest = (100000+18000)/18000 = 6.56

7. Profit margin = net income / sales = 70000/400000 = 17.5%

8. Days in inventory = 365*average inventory /cost of goods sold = 365*((50000+70000)/2)/240000 = 91.25 days

9. Payout ratio = dividend / net income = 30000/70000 = 42.86%

10. Return on assets = net income / Average total assets = 70000/((400000+500000)/2) = 15.56%