Financial Ratios
monv32Week Five Exercise Assignment
Financial Ratios
1. 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 
 
Shortterm 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: shortterm  3,100  3,100  3,100 
 
Accrued payables  300  300  300 
 
Longterm liabilities  3,800  3,800  3,800 
 
 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  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 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 




 Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
 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  
LongTerm 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  
LongTerm 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.
 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 ShortTerm 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  
 LongTerm 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. Inventoryturnover ratio
d. Accountsreceivableturnover ratio
e. Returnonassets ratio
f. Netprofitmargin ratio
g. Returnoncommonstockholders’ equity
h. Debttototal assets
i. Number of times that interest is earned
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Acc 205 week 5 exercise assignment
Week Five Exercise Assignment
Financial Ratios
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6. Ratio computation. The financial statements of the Lone Pine Company follow.
LONE PINE COMPANY
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