Balance Sheet December 31 Assets Current assets: $ 23,000 240,000 310,000 8,000

Question

Balance Sheet December 31 Assets Current assets: $ 23,000 240,000 310,000 8,000 581,000 860,000 $1,441,000 Cash Accounts receivable, net Merchandise inventory Prepaid expenses Total current assets Property and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 290,000 310,000 600,000 Bonds payable, 10% Total liabilities Stockholders' equity: Common stock, $5 par value Retained earnings $ 140,000 701,000 841,000 Total stockholders' equity Total liabilities and stockholders' equity 1,441,000 Castile Products, Inc. Income Statement For the Year Ended December 31 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income Interest expense Net income before taxes Income taxes (30%) Net income $3,780,000 1,050,000 2,730,000 580,000 2,150,000 31,000 2,119,000 635,700 $1,483,300 Account balances at the beginning of the year were: accounts receivable, $180,000; and inventory, $290,000. All sales were on account.

Explanation / Answer

Answer 1. Working Capital = Current Assets - Current Liabilities Working Capital = $581,000 - $290,000 Working Capital = $291,000 Answer 2. Current Ratio = Current Assets / Current Liabilities Current Ratio = $581,000 / 290,000 Current Ratio = 2.003448 or say 2.00 (approx.) Answer 3. Acid-Test Ratio = Quick Assets / Current Liabilities Quick Assets = Total Current Assets - (Inventory + Prepaid Expenses) Quick Assets = $581,000 - ($310,000 + $8,000) Quick Assets = $263,000 Acid-Test Ratio = $263,000 / $290,000 Acid-Test Ratio = 0.91 (Approx.) Answer 4. Debt-to-equity Ratio = Total Liabilities / Total Equity Debt-to-equity Ratio = $600,000 / $841,000 Debt-to-equity Ratio = 0.71 (Approx.) Answer 5. Times Interest Earned Ratio = EBIT / Interest Expense Times Interest Earned Ratio = $2,150,000 / $31,000 Times Interest Earned Ratio = 69.35 times Answer 6. Average Collection Period = 365 Days / Receivables Turnover Receivables Turnover = Sales Revenue / Avg. Accounts Receivables Receivables Turnover = $3,780,000 / $240,000 Receivables Turnover = 15.75 Average Collection Period = 365 Days / 15.75 Average Collection Period = 23.17 days Answer 7. Average Sales Period = 365 Days / Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Inventory Turnover Ratio = $1,050,000 / $310,000 Inventory Turnover Ratio = 3.39 (Approx.) Average Sales Period = 365 Days / 3.39 Average Sales Period = 107.76 days (Approx.) Answer 8. Operating Cycle = Average Sales Period + Average Collection Period Operating Cycle = 107.76 days + 23.17 days Operating Cycle = 130.94 days

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