Week five exercise assignment financial ratios:acc 205

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

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Edison Stagg Thornton

Cash $4,000 $2,500 $1,000

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?

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 440,000 350,000

Cash, Dec. 31 125,000 110,000

Average Accounts receivable 180,000 140,000

Average Inventory 70,000 50,000

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

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

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com¬pany reported the following information for 20X7:

Net sales $1,500,000

Interest expense $120,000

Income tax expense $80,000

Preferred dividends $25,000

Net income $130,000

Average assets $1,100,000

Average common stockholders’ equity $400,000

a. Compute the profit margin 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 ex¬plain.

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 $76,000 $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 143,000 160,000 

Stockholders’ Equity 16,200 12,000 

Net Sales 500,000 500,000 

Cost of Goods Sold 332,500 350,000 

Operating Expenses 93,500 85,000 

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

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 $ 76,000 $ 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 143,000 160,000 

Stockholders’ Equity 16,200 12,000 

Net Sales 500,000 500,000 

Cost of Goods Sold 332,500 350,000 

Operating Expenses 93,500 85,000 

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

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 2,000 2,200 

Total Current Assets $5,400 $5,200 

Property, Plant, and Equipment 

Land $1,700 $ 600 

Buildings and Equipment (net) 1,500 1,000 

Total Property, Plant, and Equipment $3,200 $1,600 

Total Assets $8,600 $6,800 

Liabilities and Stockholders’ Equity 

Current Liabilities 

Accounts Payable $1,800 $1,700 

Notes Payable 1,100 1,900 

Total Current Liabilities $2,900 $3,600 

Long-Term Liabilities 

Bonds Payable 4,100 2,100 

Total Liabilities $7,000 $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 $8,600 $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

$ 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 calcu¬lations to two decimal places when necessary: 

a. Quick ratio 

b. Current ratio 

c. Inventory-turnover ratio 

d. Accounts-receivable-turnover ratio 

e. Return-on-assets ratio 

f. Net-profit-margin ratio 

g. Return-on-common-stockholders’ equity 

h. Debt-to-total assets 

i. Number of times that interest is earned