The financial statements for Royale and Cavalier companies are summarized here R

Question

The financial statements for Royale and Cavalier companies are summarized here Royale Company Cavalier Company Balance Sheet Cash Accounts Receivable, Net Inventory Equipment, Net Other Assets $ 24,000 54,000 108,000 548,000 139,000 $ 44,000 15,000 23,000 158,000 45,000 Total Assets $873,000 $285,000 $13,000 53,000 209,000 3,000 7,000 Current Liabilities $118,000 Note Payable (long-term) Common Stock (par $20) Additional Paid-in Capital Retained Earnings 188,000 479,000 49,000 39,000 Total Liabilities and Stockholders' Equity $873,000 $285,000 Income Statement Sales Revenue Cost of Goods Sold Other Expenses $797,000 479,000 239,000 $277,000 149,000 94,000 Net Income $79,000 $ 34,000 Other Data Per share price at end of year Selected Data from Previous Year Accounts Receivable, Net Note Payable (long-term) Equipment, Net Inventory Total Stockholders' Equity $ 20.00 $12.00 $ 46,000 188,000 548,000 94,000 567,000 $13,000 53,000 158,000 37,000 219,000 These two companies are in the same business and state but different cities. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Royale Company wants to borrow $74,000 cash and Cavalier Company is asking for $29,000 The loans will be for a two-year period. Both companies estimate bad debts based on an aging analysis, but Cavalier has estimated slightly higher uncollectible rates than Royale. Neither company issued stock in the current year. Assume the end-of-year total assets and net equipment balances approximate the years average and all sales are on account.

Explanation / Answer

1 Net profit margin=Net income/Sales revenue Royale Cavalier Net income   (a) 79000 34000 Sales revenue (b) 797000 277000 Net profit margin (a)/(b) 0.10 0.12 2 Gross profit percentage=Gross profit/Sales revenue Gross profit=Sales revenue-cost of goods sold Royale Cavalier Sales revenue (a) 797000 277000 Cost of goods sold (b) 479000 149000 Gross profit ©=(a)-(b) 318000 128000 Gross profit percentage ©/(a) 0.40 0.46 3 Fixed asset turnover=Sales/Average fixed assets Average fixed asset=(Beginning fixed asset+ending fixed asset)/2 In this case ,only fixed asset is Equipment. Royale Cavalier Beginning equipment (a) 548000 158000 Ending equipment (b) 548000 158000 Average fixed asset ©=[(a)+(b)/2] 548000 158000 Sales revenue (d) 797000 277000 Fixed asset turnover (d)/© 1.45 1.75 4 Return on equity=Net income /Total equity Total equity=Common stock+Additional paid-in-capital+Retained earnings Royale Cavalier Net income (a) 79000 34000 Common stock (b) 479000 209000 Additional paid-in-capital © 49000 3000 Retained earnings (d) 39000 7000 Total equity €=(b)+©+(d) 567000 219000 Return on equity (a)/(b) 13.93% 15.53% 5 Earnings per share=Net income/ Number of common stock Number of common stock=Common stock in $/Par value of shares Royale Cavalier Net income (a) 79000 34000 Common stock in $ (b) 479000 209000 Par value © 20 20 Number of common stock (d) 23950 10450 Earnings per share (a)/(d) 3.30 3.25 6 Price earnings ratio=Current stock price/Earnings per share Royale Cavalier Current stock price (a) 20 12 Earnings per share (b) 3.30 3.25 Price earnings ratio (a)/(b) 6.06 3.69 7 receivable turnover ratio=Sales/Average accounts receivable Average accounts receivable=(Beginning accounts receivable+ending accounts receivable)/2 Royale Cavalier Sales revenue (a) 797000 277000 Beginning accounts receivable (b) 46000 13000 Ending accounts receivable (c) 54000 15000 Average accounts receivable (d)=[(b)+©]/2 50000 14000 Receivable turnover ratio (a)/(d) 15.94 19.78571 8 Inventory turnover=Sales/Average inventory Average inventory=(Beginning inventory+ending inventory)/2 Royale Cavalier Sales revenue (a) 797000 277000 Beginning inventory (b) 94000 37000 Ending inventory (c) 108000 23000 Average inventory (d)=[(b)+©]/2 101000 30000 Inventory turnover ratio (a)/(d) 7.89 9.23 9 Current ratio=Current asst/Current liabilities Current assets=Cash+Accounts receivable+Inventory Royale Cavalier Cash (a) 24000 44000 Accounts receivable (b) 54000 15000 Inventory (c) 108000 23000 Current assets (d)=(a)+(b)+© 186000 82000 Current liabilities € 118000 13000 Current ratio (d)/€ 1.58 6.31 10 Debt to assets=Debt/Total assets Here, Debt=Notes payable Royale Cavalier Notes payable (a) 188000 53000 Total assets (b) 873000 285000 Debt to assets (a)/(b) 0.22 0.19

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