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ACC 205-Week-5 Financial Ratios




Question;1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10;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?;b. Suppose Thornton is using FIFO for inventory valuation and Edison is;using LIFO. Comment on the comparability of information between these;two companies.;c. If all short-term notes payable are due on July 11 at 8 a.m., comment;on each company's ability to settle its obligation in a timely manner.;2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc;19X5 19X4;Net credit sales $832,000 $760,000;Cost of goods sold 440,000 350,000;Cash, Dec. 31 125,000 110,000;Accounts receivable, Dec. 31 180,000 140,000;Inventory, Dec. 31 70,000 50,000;Accounts payable, Dec. 31 115,000 108,000;The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs.;a. Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.;b. Study the ratios from part (a) and comment on the company's ability to repay a bank loan in 90 days.;c. Suppose that Alaska's major line of business involves the processing;and distribution of fresh and frozen fish throughout the United States.;Do you have any concerns about the company's inventory turnover ratio?;Briefly discuss.;3. Profitability ratios, trading on the equity. Digital Relay has both;preferred and common stock outstanding. The com?pany reported the;following information for 19X7;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 on sales and the rates of return on assets;and common stockholders' equity, rounding calculations to two decimal;places.;b. Does the firm have positive or negative financial leverage? Briefly ex?plain.;4. Financial statement construction via ratios. Incomplete financial statements of Lock Box, Inc., are presented below.;LOCK BOX, INC.;Income Statement;For the Year Ended December 31, 19X3;Sales $?;Cost of goods sold?;Gross profit $15,000,000;Operating expenses & interest?;Income before tax $?;Income taxes, 40%?;Net income $?;LOCK BOX, INC.;Balance Sheet;December 31, 19X3;Assets;Cash;Accounts receivable;Inventory;Property, plant, &. equipment;Total assets $?;?;?;8,000,000;$24,000,000;Liabilities & Stockholders' Equity;Accounts payable;Notes payable (short-term);Bonds payable;Common stock;Retained earnings;Total liabilities & stockholders' equity $?;600,000 4,600,000;2,000,000;?;$24,000,000;Further information;1. Cost of goods sold is 60% of sales. All sales are on account.;2. The company's beginning inventory is $5 million, inventory turnover is 4.;3. The debt to total assets ratio is 70%.;4. The profit margin on sales is 6%.;5. The firm's accounts receivable turnover is 5. Receivables increased by $400,000 during the year.;Instructions;Using the preceding data, complete the income statement and the balance sheet.


Paper#40064 | Written in 18-Jul-2015

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