Financial Statement Analysis able problems are available with McGraw-Hill\'s Con

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Financial Statement Analysis able problems are available with McGraw-Hill's Connect Proble All applicable 17-11 Cemmon-Size Statements and Financial Ratios for Creditors Lo1 uilding Supply sells various building materials to retail outlets s Connect™ Accounting. Meched Linden State Bank requesting a $300,000 loan to ffros certain pressing short-term obligation recent two years follow . The company's financial statements for the most Modern Building Supply Comparative Batance Sheelt This Year Last Year Assets Non-current assets Plant and equipment, net Current assets $1,940000 $1,830000 650,000 400,000 ,000 800,000 Inven Prepaid expenses Marketable securities Cash and cash equivalents. tory 20,000 20 Total current assets Total assets Equity and liabilities Equity 50,000 90000 200,000 2,060,0001.470.000 $4,000,000 $3.300,000 .. Common stock, $10 par Preferred stock, S50 par, 8%. Retained earnings. … $ 500,000 $ 500,000 200,000200,000 1450,000 1250,000 2,150,000 1,950,000 Total equity Liabilities Bonds payable, 12% … … * Total liabilities Total equity and liablties .750,000750,000 1,850,000 350,000 $4,000,000 $3.300,000 Modern Building Supply Comparative Income Statement and Reconcilation This Year Last Year $7,000,000 $6.000,000 5,400,000 4,800,000 Reveneue.... 1,600,000 1,200,000 Gross margin Selling and administrative expenses 970,000 710,000 Net operating income Interest expense Net income before taxes.. Income taxes (40%) Net income.. Dividends paid 30,000 490,000 90,000 ...90,000 216.000 324,000 160.000 240,000 16,000 60,000 108 000

Explanation / Answer

Since, Question 1 has multiple sub-parts, I have answered all the parts of question 1.

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Question 1:

Part a)

The working capital ratio can be calculated with the use of following formula:

Working Capital Ratio = Total Current Assets - Total Current Liabilities

Using the information provided in the question in the above formula, we get,

Working Capital Ratio (This Year) = 2,060,000 - 1,100,000 = $960,000

Working Capital Ratio (Last Year) = 1,470,000 - 600,000 = $870,000

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Part b)

The current ratio for each year is calculated as follows:

Current Ratio = Total Current Assets/Total Current Liabilities

Using the information provided in the question in the above formula, we get,

Current Ratio (This Year) = 2,060,000/1,100,000 = 1.87 or 1.9

Current Ratio (Last Year) = 1,470,000/600,000 = 2.45 or 2.5

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Part c)

The acid-test ratio for each is determined as follows:

Acid-Test Ratio = (Total Current Assets - Inventory - Prepaid Expenses)/Total Current Liabilities

Using the information provided in the question in the above formula, we get,

Acid-Test Ratio (This Year) = (2,060,000 - 1,300,000 - 20,000)/1,100,000 = .67 or .7

Acid-Test Ratio (Last Year) = (1,470,000 - 800,000 - 20,000)/600,000 = 1.08 or 1.1

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Part d)

The average collection period can be calculated with use of formula given below:

Average Collection Period = 365/Accounts Receivable Turnover Ratio

where Accounts Receivable Turnover Ratio = Net Sales/Average Accounts Receivable

where Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable)/2

Using the information provided in the question in the above formula, we get,

Average Collection Period (This Year) = 365/(7,000,000/((400,000 + 650,000)/2)) = 27.38 days or 27.4 days

Average Collection Period (Last Year) = 365/(6,000,000/((350,000 + 400,000)/2)) = 22.81 or 22.8 days

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Part e)

The average sale period for each year is arrived as below:

Average Sale Period = 365/Inventory Turnover Ratio

where Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

where Average Inventory = (Opening Inventory + Closing Inventory)/2

Using the information provided in the question in the above formula, we get,

Average Sale Period (This Year) = 365/(5,400,000/((800,000 + 1,300,000)/2)) = 70.97 days or 71 days

Average Sale Period (Last Year) = 365/(4,800,000/((720,000 + 800,000)/2)) = 57.79 days or 57.8 days

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Part f)

The value of debt-to-equity ratio for each year is determined as below:

Debt-to-Equity Ratio = Total Debt/Total Equity

Using the information provided in the question in the above formula, we get,

Debt-to-Equity (This Year) = 1,850,000/2,150,000 = .86

Debt-to-Equity (Last Year) = 1,350,000/1,950,000 = .69

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Part g)

The times interest earned ratio for each years is calculated as follows:

Times Interest Earned Ratio = EBIT/Interest Expense

Using the information provided in the question in the above formula, we get,

Times Interest Earned (This Year) = 630,000/90,000 = 7

Times Interest Earned (Last Year) = 490,000/90,000 = 5.44 or 5.4

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