Liquidity Ratios

  1. Liquidity ratiosEdison, 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  
  1. 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 ratiosThe 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.

     
       

 

 

 

3. Profitability ratios, trading on the equityDigital 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
   
   

 

  1. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
  2. Does the firm have positive or negative financial leverage? Briefly ex­plain.

 

 

 

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.

 

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

 

 

 

  1. 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 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

 

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

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