Question

The following financial information is for Wildhorse Company.

WILDHORSE COMPANY Balance Sheets December 31
Assets		2017		2016
Cash		$ 70,000		$ 68,000
Debt investments (short-term)		51,000		40,000
Accounts receivable		109,000		91,000
Inventory		231,000		167,000
Prepaid expenses		27,000		26,000
Land		134,000		134,000
Building and equipment (net)		264,000		186,000
Total assets		$886,000		$712,000
Liabilities and Stockholders’ Equity
Notes payable		$171,000		$109,000
Accounts payable		67,000		53,000
Accrued liabilities		41,000		41,000
Bonds payable, due 2017		250,000		170,000
Common stock, $10 par		206,000		206,000
Retained earnings		151,000		133,000
Total liabilities and stockholders’ equity		$886,000		$712,000

WILDHORSE COMPANY Income Statements For the Years Ended December 31
		2017		2016
Sales revenue		$ 899,000		$ 798,000
Cost of goods sold		650,000		575,000
Gross profit		249,000		223,000
Operating expenses		192,000		168,000
Net income		$  57,000		$  55,000

Additional information:

1.		Inventory at the beginning of 2016 was $ 117,000.
2.		Accounts receivable (net) at the beginning of 2016 were $ 90,000.
3.		Total assets at the beginning of 2016 were $ 634,000.
4.		No common stock transactions occurred during 2016 or 2017.
5.		All sales were on account.

A) Compute the liquidity and profitability ratios of Wildhorse Company for 2016 and 2017. (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%. If % change is a decrease show the numbers as negative, e.g. -1.83% or (1.83%).)

B) Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2017, and (2) as of December 31, 2018, after giving effect to the situation. (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%. If % change is a decrease show the numbers as negative, e.g. -1.83% or (1.83%).)

Situation				Ratio
1.		18,000 shares of common stock were sold at par on July 1, 2018. Net income for 2018 was $ 54,000.		Return on common stockholders’ equity
2.		All of the notes payable were paid in 2018. All other liabilities remained at their December 31, 2017 levels. Total assets on December 31, 2018, were $ 908,000.		Debt to assets ratio
3.		The market price of common stock was $ 9 and $ 12 on December 31, 2017 and 2018, respectively.		Price-earnings ratio

Answer 1

a1)		2016		2017		% Change
	LIQUIDITY
	Current ratio	1.11	:1	1.75	:1	57.66	%
	Accounts receivables turnover	8.82	times	8.99	times	1.95	%
	Inventory turnover	4.05	times	3.27	times	-19.34	%
	Workings
	Current Ratio = Current Assets/Current Liabilities
	Current Assets	Cash+Debt Investments (short term) + Accounts Receivable+ Inventory + Prepaid Expenses
	2016	$68000+$40000+$91000+$167000+$26000	225000
	2017	$70000+$51000+$109000+$231000+$27000	488000
	Current Liabilities	Notes Payable + Accounts Payable + Accrued Liabilities
	2016	$109000+$53000+$41000	203000
	2017	$171000+$67000+$41000	279000
	Since the due date of notes payable is not mentioned it is assumed to be short term payable
	Current Ratio		Rounded to two decimals
	2016	225000/203000	1.11
	2017	488000/279000	1.75
	% Change	(1.75-1.11)/1.11*100	57.66
	Accounts Receivable Turnover	Sales/Average Accounts Receivable
	Sales
	2016	$798,000
	2017	$899,000
	Average Accounts Receivable
	2016	(90000+91000)/2	90500
	2017	(91000+109000)/2	100000
	Accounts Receivable Turnover
	2016	$798000/$90500	8.82
	2017	$899000/$100000	8.99
	% Change	(8.99-8.82)/8.82*100	1.95%
	Inventory Turnover	Cost of Goods Sold/Average Inventory
	Cost of Goods Sold
	2016	$575,000
	2017	$650,000
	Average Inventory
	2016	(117000+167000)/2	142000
	2017	(167000+231000)/2	199000
	Inventory Turnover
	2016	575000/142000	4.05
	2017	650000/199000	3.27
	% Change	(3.27-4.05)/4.05*100	-19.34%
		2016		2017		% Change
	PROFITABILITY
	Profit margin	6.89	%	6.40	%	-7.08	%
	Asset turnover	1.19	times	1.13	times	-5.11	%
	Return on assets	8.17	%	7.13	%	-12.71	%
	Earnings per share	$2.67		$2.77		3.64	%
	Profit Margin	Net Income/Sales Revenue
	2016	55000/798000	6.89%
	2017	57000/890000	6.40%
	% Change	(6.40-6.89)/6.89	-7.08%
	Asset Turnover	Sales/Average Total Assets
	Average Total Assets
	2016	(634000+712000)/2	673000
	2017	(886000+712000)/2	799000
	Asset Turnover
	2016	798000/673000	1.19
	2017	899000/799000	1.13
	% Change	(1.13-1.19)/1.19	-5.11%
	Return on Assets	Net Income/Average Total Assets
	2016	55000/673000	8.17%
	2017	57000/799000	7.13%
	% Change		-12.71%
	Earnings per Share	Net Income/Number of shares
	2016	55000/20600	2.67
	2017	57000/20600	2.77
	% Change		3.64%
b)	Return on Common Stockholders Equity	Net Income/Shareholders Equity
	2017	57000/(206000+151000)	15.97%
	2018	54000/(206000-180000+151000+54000)	23.38%
	% Change	(23.38-15.97)/15.97*100	46.41%
	Debt to assets ratio	Debt/Total Assets
	2017	(171000+67000+41000+250000)/886000	59.71%
	2018	(67000+41000+250000)/908000	39.43%
	% Change	(39.43-59.71)/59.71*100	-33.96%
	Price Earnings Ratio	Market Price/Earnings per share
	2017	9/2.77	3.25
	2018	12/20.77	0.58
	Earnings per share	EPS = 54000/(20600-18000)	20.77
	% Change		-82.24%
		2017		2018		% Change
	Return on common stockholders’ equity	15.97	%	23.38	%	46.41	%
	Debt to assets ratio	59.71	%	39.43	%	-33.96	%
	Price earnings ratio	3.25	times	0.58	times	-82.24	%