Ludwig Inc.\'s adjusted trial balance is shown below. In addition, the following
ID: 2432870 • Letter: L
Question
Ludwig Inc.'s adjusted trial balance is shown below. In addition, the following information is known:
No shares were issued in the years ended December 31, 2016 and 2017.
No dividends were declared or paid in the years ended December 31, 2016 and 2017.
The market value for the common shares at December 31, 2016 and 2017 were $15 and $16 respectively.
Ludwig Inc.
Adjusted Trial Balance
December 31,
2017 2016 2015
Cash 595,050 412,850 146,500
Account receivable 40,600 32,950 31,675
Allowance for doubtful accounts 10,000 3,750 5,575
Merchandise inventory 42,500 41,900 39,900
Prepaid expenses 3,000 2,600 2,900
Notes receivable, due in 2019 13,000 15,500 13,500
Property, plant and equipment assets 371,250 405,725 516,650
Accumulated depreciation 91,250 90,725 126,650
Accounts payable 36,700 36,700 35,300
Unearned sales 5,200 4,500 4,500
Notes payable, due in 2020 60,000 68,000 70,000
Preferred shares; $1.00 non-cumulative; 100,000 shares 290,000 290,000 290,000
Common shares; 50,000 shares issued and outstanding 170,000 170,000 170,000
Retained earnings 247,850 49,100 7,400
Sales 1,226,400 1,038,600 1,286,500
Cost of goods sold 849,400 604,100 1,099,600
Other operating expenses 167,700 201,800 124,800
Interest expense 8,900 8,750 7,600
Income tax expense 46,000 25,200 12,800
Ratio 2017 2016 Change Ind. Average Comparison
Current ratio 13.26
Acid-test ratio 16.15
Accounts receivable turnover 36.75
Merchandise turnover 21.34
Days' sales uncollected 7.78
Days' sales in inventory 19.41
Total asset turnover 1.44
Debt ratio 12.68
Equity ratio 87.32
Times interest earned 21.29
Profit margin 13.26
Gross margin 26.93
Return on total assets 14.44
Return on common shareholders' equity 26.07
Book value per common share 12.91
Book value per preferred share 2.42
Basic earnings per share 3.25
Price-earnings ratio 5.93
Accounts Payable Turnover 18.60
Required:
Industry averages for each ratio are shown in the table above. Use this information to complete the chart above by calculating the required ratios, determining if the change from the previous year is favourable or unfavourable, and then determining whether the each ratio (for 2017) is favourable or unfavourable compared to the industry average. If there is no change to 2 decimal places, select 'No change' if comparing from year to year, or 'The same as' if comparing to the industry average. All values should be accurate to at least two decimal places.
Explanation / Answer
Ratio 2017 2016 Change Ind. Average Comparison
Current ratio 16.02 11.81 Favourable 13.26 Favourable
Acid-test ratio 14.93 10.73 Favourable 16.15 Unfavourable
Accounts receivable turnover 33.35 32.14 Favourable 36.75 Unfavourable
Merchandise turnover 20.13 14.77 Favourable 21.34 Unfavourable
Days' sales uncollected 12.08 11.6 Unfavourable 7.78 Unfavourable
Days' sales in inventory 18.13 24.71 favourable 19.41 favourable
Total asset turnover 1.38 1.45 Unfavourable 1.44 Unfavourable
Debt ratio 0.36 0.44 favourable 12.68 favourable
Equity ratio 87.32
Times interest earned 21.29
Profit margin 13.26
Gross margin 26.93
Return on total assets 14.44
Return on common shareholders' equity 26.07
Book value per common share 12.91
Book value per preferred share 2.42
Basic earnings per share 3.25
Price-earnings ratio 5.93
Accounts Payable Turnover 18.60
Notes:
Current assets: cash + (accounts receivable - allowance for doubtful debts) + merchandise inventory+ prepaid expenses
Notes receivable are due in 2019 (more than a year) hence not considered as current asset
Current liabilties: accounts payable + unearned sales
Notes payable are due in 2020 (more than a year) hence not considered as current liabilty
Average accounts receivable = (beginning + ending )/2
for 2017: 1226400 / (40600+32950)/2 = 33.35
For 2017, merchandise turnover = 849400 / (42500+41900)/2 = 20.13
for 2017, 40600 / 1226400 x 365 = 12.08 days
for 2017 , total asset turnover = 1226400 / ( 964150+ 817050)/2
total asset for 2017= current assets + notes receivable + fixed assets - accumulated depreciation
= 671150 + 13000 + 371250 - 91250 = 964150
total asset for 2016 = 486550 + 15500 + 405725 - 90725 = 817050
for 2017, debt ratio = (60000+290000)/ 964150 = 0.36
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