Week Five Exercise Assignment

Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Edison
Stagg
Thornton
Cash
$6,000
$5,000
$4,000
Short-term investments
3,000
2,500
2,000
Accounts receivable
2,000
2,500
3,000
Inventory
1,000
2,500
4,000
Prepaid expenses
800
800
800
Accounts payable
200
200
200
Notes payable: short-term
3,100
3,100
3,100
Accrued payables
300
300
300
Long-term liabilities
3,800
3,800
3,800
a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why? Account
Edison
Stagg
Thornton
Cash
6,000.00
5,000.00
4,000.00
Short term investments
3,000.00
2,500.00
2,000.00
Accounts receivable
2,000.00
2,500.00
3,000.00
Inventory
1,000.00
2,500.00
4,000.00
Prepaid Expense
800.00
800.00
800.00
Total Current Assets:
12,800.00
13,300.00
13,800.00

Account
Edison
Stagg
Thornton
Accounts payable
200.00
200.00
200.00
Notes payable
3,100.00
3,100.00
3,100.00
Accrued payables
300.00
300.00
300.00
Total Current Liabilities:
3,600.00
3,600.00
3,600.00

Edison:

Current ratio – 12,800.00 / 3,600.00 = 3.56

Quick ratio – (6,000 + 3,000 + 2,000) =3.06

Stagg:

Current ratio – 13,300.00 / 3,600.00 =3.69

Quick ratio – (5,000.00 + 2,500.00 + 2,500.00)/ 3,600.00 = 2.78

Thornton:

Current ratio – 13,800.00 / 3,600.00 = 3.83

Quick ratio – (4,000.00 + 2,000.00 + 3,000.00) / 3,600 =2.5

The most liquid company is Edison because they have the most access if necessary.

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

20X5
20X4
Net credit sales
$832,000
$760,000

Cost of goods sold
530,000
400,000

Cash, Dec. 31
125,000
110,000

Average Accounts receivable
205,000
156,000

Average Inventory
70,000
50,000

Accounts payable, Dec. 31
115,000
108,000

Instructions
a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

Accounts Receivable Ratio = Net Credit Sales / Average Accounts Receivable $832,000 / 205,000 = 4.10 Inventory Turnover Ratio = Net Credit Sales / Average Accounts Receivable $530,000 / 70,000 =7.60 (205,000 + 156,000) / 2 = 180,500

(70,000 + 50,000) / 2 =60,000
3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 20X7:

Net sales
$1,750,000
Interest expense
120,000
Income tax expense
80,000
Preferred dividends
25,000
Net income
130,000
Average assets
1,200,000
Average common stockholders’ equity
500,000

a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places. b. Does the firm have positive or negative financial leverage? Briefly ex­plain. Profit Margin = 130,000/1,7500,00 =7.43%

Return on equity = 130,000/5,000=26%

Return on assets = 130,000/1,200,000=10.83%

(120,000 + 80,000 + 130,000) / (80,000 + 130,000) =1.57

It has a positive financial leverage of around 1.57 times.
The net profit ratio states Digital Relay made a 9% profit off its sales.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2
20X1
Current Assets
$86,000
$80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
153,000
160,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
322,500
350,000
Operating Expenses
93,500
85,000

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

Horizontal Analysis
20×2
20×1
Difference
%Change
Current Assets
86,000.00
80,000.00
-4,000.00
-5.00%
Property, Plant, and Equipment (net)
99,000.00
90,000.00
9,000.00
10.00%
Intangiables
25,000.00
50,000.00
-25,000.00
-50.00%
Total Assets
200,000.00
220,000.00
20,000.00
-9.09%
Current Liabilities
40,800.00
48,000.00
-7,200.00
-15.00%
Long Term Liabilities
143,000.00
160,000.00
-17,000.00
-10.63%
Total Liabilities
183,800.00
208,000.00
-24,200.00
-11.63%
Stockholders’ Equity
16,200.00
12,000.00
4,200.00
35.00%
Total Liabilities and Stockholders’ Equity
200,000.00
220,000.00
-20,000.00
-9.09%

Net Sales
500,000.00
500,000.00
0.00
0.00%
Cost of Goods Sold
332,500.00
350,000.00
-17,500.00
-5.00%
Gross Profit
167,500.00
150,000.00
17,500.00
11.67%
Operating Expense
935,000.00
85,000.00
8,500.00
10.00%
Net Income
74,000.00
65,000.00
9,000.00
13.85%

(4,000) / 80,000 =-5%
The company decreased its liabilities which is good but also decreased its assets and costs of goods sold. The operating expenses increased and kept the same amount of net sales. Their Stockholders’ Equity increased so they
were able to purchase additional equipment, property, and plant.

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2
20X1
Current Assets
$86,000
$80,000
Property, Plant, and Equipment (net)
99,000
80,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
153,000
150,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
322,500
350,000
Operating Expenses
93,500
85,000

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

Current Assets
15.20%
16.00%
Property, Plant, and Equipment
19.80%
18.00%
Intangibles
5.00%
10.00%
Current Liabilities
8.16%
9.60%
Long term Liabilities
28.60%
32.00%
Stockholders’ Equity
3.24%
2.40%
Net Sales
100.00%
100.00%
Cost of Goods Sold
66.50%
70.00%
Operating Expenses
18.70%
17.00%

It seems as if the findings were the same as in the horizontal analysis. There is a difference, which is, seeing the sections changed based upon the previous. There is a 35% increase in the Stockholders’ Equity which is great for the company. 6. Ratio computation. The financial statements of the Lone
Pine Company follow.

LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2
20X1
Assets
Current Assets
Cash and Short-Term Investments
$400

$600
Accounts Receivable (net)
3,000

2,400
Inventories
3,000

2,300
Total Current Assets
$6,400

$5,300
Property, Plant, and Equipment
Land
$1,700

$500
Buildings and Equipment (net)
1,500

1,000
Total Property, Plant, and Equipment
$3,200

$1,500
Total Assets
$9,600

$6,800
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
$2,800

$1,700
Notes Payable
1,100

1,900
Total Current Liabilities
$3,900

$3,600
Long-Term Liabilities
Bonds Payable
4,100

2,100
Total Liabilities
$8,000

$5,700
Stockholders’ Equity
Common Stock
$200

$200
Retained Earnings
1,400

900
Total Stockholders’ Equity
$1,600

$1,100
Total Liabilities and Stockholders’ Equity
$9,600

$6,800

LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales*

$36,000

Less: Cost of Goods Sold
$20,000

Selling Expense
6,000

Administrative Expense
4,000

Interest Expense
400

Income Tax Expense
2,000
32,400

Net Income

$3,600

Retained Earnings, Jan. 1

900

Ending Retained Earnings

$4,500

Cash Dividends Declared and Paid

3,100

Retained Earnings, Dec. 31

$1,400

*All sales are on account.

Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calcu­lations to two decimal places when necessary: a. Quick ratio 1.17
b. Current ratio 1.86
c. Inventory-turnover ratio 10
d. Accounts-receivable-turnover ratio 13.33
e. Return-on-assets ratio 0.51
f. Net-profit-margin ratio 0.1
g. Return-on-common-stockholders’ equity 2.67
h. Debt-to-total assets 0.81
i. Number of times that interest is earned 15