3. [Financial Statements and Ratios] Bike-With-Us Corporation, a specialty bicyc
ID: 2342976 • Letter: 3
Question
3. [Financial Statements and Ratios] Bike-With-Us Corporation, a specialty bicycle parts replacement venture, was started last year by two former professional bicycle riders who had substantial competitive racing experience including competing in the Tour de France. The two entrepreneurs borrowed $50,000 from members of their families and each put up $30,000 in equity capital. Retail space was rented and $60,000 was spent for fixtures and store equipment. Following are the abbreviated income statement and balance sheet information for the Bike-With-Us Corporation after one complete year of operation.
BIKE-WITH-US CORPORATION
Sales $325,000
Operating Costs 285,000
Depreciation 10,000
Interest 5,000
Taxes 6,000
Cash $1,000
Receivables 30,000
Inventories 50,000
Fixed Assets, Net 50,000
Payables 11,000
Accruals 10,000
Long-Term Loan 50,000
Common Equity 60,000
A. Prepare an income statement and a balance sheet for the Bike-With-Us Corporation using only the information provided above.
B. Calculate the current ratio, quick ratio, and NWC-to-total-assets ratio.
C. Calculate the total-debt-to-total-assets ratio, debt-to-equity ratio, and interest coverage.
D.Calculate the net profit margin, sales-to-total-assets ratio, and the return on total assets.
A. Calculate the equity multiplier. Combine this calculation with the calculations in Part D to show the ROE model with its three components.
Explanation / Answer
A.Ans:
Income Statement of Bike-With-Us Corporation for the period ended 31st December
Particulars
Amount
Sales
3,25,000
Less: operating cost
2,85,000
Gross Profit
40,000
Less: Depreciation
10,000
Operating Profit
30,000
Less: interest
5000
Net Profit Before taxes
25,000
Less: taxes
6,000
Net Income
19,000
Statement of Balance Sheet of Bike-With-Us Corporation, for the period ended 31-december
Amount ($)
Amount($)
Assets
Non-Current Assets
Property, Plant & Equipment
50,000
50000
Current Assets
Inventories
50000
Trade Receivables
30000
Cash and cash equivalents
1000
81000
Total Assets
131000
Equity and Liabilities
Equity
Share Capital
60000
Retained Earnings
Revaluation Reserve
Total Equity
60000
Non-current liabilities
Long-term borrowings
50,000
Current Liabilities
Trade and other payables
11,000
Short-term borrowings
Current portion of long-term borrowings
10000
Total current liabilities
21000
Total liabilities
71000
Total equity and liabilities
131000
B.Ans:
CURRENT RATIO:
Current Assets = Cash + Receivable + Inventories
Current Assets = $1,000 + $30,000 + $50,000
Current Assets = $81,000
Current Liabilities = Payable + Accruals
Current Liabilities = $11,000 + $10,000
Current Liabilities = $21,000
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $81,000 / $21,000
Current Ratio = 3.86
QUICK RATIO:
Quick Assets = Cash + Receivable
Quick Assets = $1,000 + $30,000
Quick Assets = $31,000
Current Liabilities = Payable + Accruals
Current Liabilities = $11,000 + $10,000
Current Liabilities = $21,000
Quick Ratio = Quick Assets / Current Liabilities
Quick Ratio = $31,000 / $21,000
Quick Ratio = 1.48
NWC-TO-TOTAL ASSETS RATIO:
Net Working Capital = Current Assets - Current Liabilities
Net Working Capital = $81,000 - $21,000
Net Working Capital = $60,000
NWC-to-Total Assets Ratio = Net Working Capital / Total Assets
NWC-to-Total Assets Ratio = $60,000 / 131,000
NWC-to-Total Assets Ratio = 0.46
C.Ans:
Total Debt-to-Total Assets Ratio:
Total Debt = Current Liabilities + Long-term Debt
Total Debt = $21,000 + $50,000
Total Debt = $71,000
Total Assets = $131,000
Total Debt-to-Total Assets Ratio = Total Debt / Total Assets
Total Debt-to-Total Assets Ratio = $71,000 / $131,000
Total Debt-to-Total Assets Ratio = 0.54
Debt-to-Equity Ratio:
Total Debt = $71,000
Total Equity = $60,000
Debt-to-Equity Ratio = Debt / Equity
Debt-to-Equity Ratio = $71,000 / $60,000
Debt-to-Equity Ratio = 1.18
Interest Coverage:
Interest Coverage = Operating Income / Interest
Interest Coverage = $30,000 / $5,000
Interest Coverage = 6
D.Ans:
Net Profit Margin = Net Income / Sales
Net Profit Margin = $19,000 / $325,000
Net Profit Margin = 0.0585 = 5.85%
Sales-to-total Assets Ratio = Sales / Total Assets
Sales-to-total Assets Ratio = $325,000 / $131,000
Sales-to-total Assets Ratio = 2.48
Return on Assets = Net Income / Total Assets
Return on Assets = $19,000 / $131,000
Return on Assets = 0.1450 = 14.50%
E.Ans,
Equity Multiplier = Total Assets / Total Equity
Equity Multiplier = $131,000 / $60,000
Equity Multiplier = 2.18
ROE = Net Profit Margin * Sales-to-total Assets Ratio * Equity Multiplier
ROE = 5.85% * 2.48 * 2.18
ROE = 31.63%
Income Statement of Bike-With-Us Corporation for the period ended 31st December
Particulars
Amount
Sales
3,25,000
Less: operating cost
2,85,000
Gross Profit
40,000
Less: Depreciation
10,000
Operating Profit
30,000
Less: interest
5000
Net Profit Before taxes
25,000
Less: taxes
6,000
Net Income
19,000
Statement of Balance Sheet of Bike-With-Us Corporation, for the period ended 31-december
Amount ($)
Amount($)
Assets
Non-Current Assets
Property, Plant & Equipment
50,000
50000
Current Assets
Inventories
50000
Trade Receivables
30000
Cash and cash equivalents
1000
81000
Total Assets
131000
Equity and Liabilities
Equity
Share Capital
60000
Retained Earnings
Revaluation Reserve
Total Equity
60000
Non-current liabilities
Long-term borrowings
50,000
Current Liabilities
Trade and other payables
11,000
Short-term borrowings
Current portion of long-term borrowings
10000
Total current liabilities
21000
Total liabilities
71000
Total equity and liabilities
131000
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