AutoSound, Inc. manufactures radios, tape players, and compact disk players for

Question

AutoSound, Inc. manufactures radios, tape players, and compact disk players for automobiles.
Comparative balance sheets and income statements for 20x0 and 20x1 are presented here.
AutoSound, Inc.
Comparative Balance Sheets
December 31, 20x1 and 20x0
(in thousands)
Assets 20x1 20x0
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200 $ 170
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 90
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 2,500
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 4,200
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 60
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,395 7,020
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 500
Property, furnishings, and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Buildings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 12,000
Equipment and furnishings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 6,000
Total property, furnishings, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 20,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,845 $27,520
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500 $ 1,400
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 500
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780 900
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,880 2,800
Long-term liabilities:
Bonds payable ($1,000 face value; 10%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 8,500
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,880 11,300
Problem 21–37
Comprehensive Problem on
Ratio Analysis
(LO 2, LO 5)
76 Chapter 21 Analyzing Financial Statements
20x1 20x0
Stockholders’ equity:
Preferred stock ($100 par value; 8%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500 $ 1,500
Common stock ($10 par value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,500
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 900
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,465 8,320
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,965 16,220
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,845 $27,520
AutoSound, Inc.
Comparative Income and Retained Earnings Statements
For the Years Ended December 31, 20x1 and 20x0
(in thousands)
20x1 20x0
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,700 $25,550
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 17,500
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,700 8,050
Operating expenses:
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 1,350
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 350
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 1,700
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900 6,350
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 850
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,500
Income-tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 1,650
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 3,850
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 120
Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,080 3,730
Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935 730
Net income added to retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,145 3,000
Retained earnings, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,320 5,320
Retained earnings, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,465 $ 8,320
Additional Information
All sales were made on account.
Each share of preferred stock is convertible into five shares of common stock.
The market price per share of common stock is $50 per share.
50,000 shares of common stock were issued on January 1, 20x1. Therefore, the weighted-average
number of shares during 20x1 was 600,000 shares.
Required:
Compute each of the following amounts or ratios for 20x1.
1. Working capital, 12/31/x1.
2. Current ratio, 12/31/x1.
3. Quick assets, 12/31/x1.
4. Acid-test ratio, 12/31/x1.
5. Accounts receivable turnover.
6. Average collection period.
7. Inventory turnover.
8. Average number of days per inventory turnover.
9. Number of bonds and number of shares of stock outstanding, 12/31/x1.
10. Book value of securities: (a) per bond, (b) per share of preferred stock, and (c) per share of
common stock, 12/31/x1.
11. Capitalization ratios, 12/31/x1.
12. Debt-equity ratio, 12/31/x1.
13. Interest coverage.
14. Coverage of dividends on preferred stock.
15. Earnings per share.
16. Diluted earnings per share.
17. Return on assets.
18. Return on equity.
19. Return on sales.
20. Dividend payout ratio.
21. Dividend yield ratio.

Refer to the data given in the preceding problem for AutoSound, Inc.
Required:
Prepare a common-size balance sheet as of December 31, 20x1, and a common-size income and retained
earnings statement for 20x1.

Explanation / Answer

Computing ratios for 20X1:

1. Working Capital = Current Assets - Current Liabiities = 8395 - 2880 = $ 5,515

2. Current ratio = Current Assets/ Current liabilities = 8395/2880 = 2.91

3.   Quick Assets = (Current Assets - Inventory - Prepaid expenses)/ Current liabilities = (8395-5000-75)/ 2880

                                                                                                                               = 1.15

4. Acid test ratio = (Current Assets - Inventory)/ Current liabilities = (8395-5000)/2880 = 1.17

5. Accounts receivable turnover = Net Credit Annual Sales/ Average accounts receivable = 26,700/2,750 = 9.70

6. Average collection period = 365/ Accounts receivable turnover = 365/9.70 = 37 days.

7. Inventory tunover = Cost of good sold/ Average Inventory = 18,000/4,600 = 3.91

8. Average number of days per inventory turnover = 365/Inventory turnover = 365/3.91 = 93 days.

9. Number of bonds and Number of stocks outstanding as on 20X1 = 9,000 bonds and 600,000 weighed average

                                                                                                                                    number of shares.

10. Book value of securities. a] per bond = 1000

                                          b} Common stock = $12. and preferred stock = $100.

11. Capitalization ratios = Long term debt/ Long term debt+ Shareholders equity = 9000/ (9000+19,965)

                                                                                                                      = 0.31

12. Debt equity ratio = Debt/ Equity = 9000/19965 = 0.45

13. Interest coverage = EBIT ( Earnings before interest and Taxes )/ Interest = 6900/90 = 76.67

14. Coverage of dividend on preferred stock = net profit after tax/dividend on preference shares

                                                               = 4200/120 = 35

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