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Nineteen Measures of Solvency and Profitability The comparative financial statem

ID: 2467862 • Letter: N

Question

Nineteen Measures of Solvency and Profitability The comparative financial statements of Blige Inc. are as follows. The market price of Blige Inc. common stock was $61 on December 31, 2016. Blige Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Retained earnings, January 1 $2,730,700 $2,314,500 Add net income for year 596,400 474,000 Total $3,327,100 $2,788,500 Deduct dividends On preferred stock $9,800 $9,800 On common stock 48,000 48,000 Total $57,800 $57,800 Retained earnings, December 31 $3,269,300 $2,730,700 Blige Inc. Comparative Income Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Sales $3,829,650 $3,523,300 Sales returns and allowances 19,050 12,380 Sales $3,810,600 $3,510,920 Cost of goods sold 1,267,280 1,165,900 Gross profit $2,543,320 $2,345,020 Selling expenses $898,510 $1,077,160 Administrative expenses 765,400 632,610 Total operating expenses 1,663,910 1,709,770 Income from operations $879,410 $635,250 Other income 46,290 40,550 $925,700 $675,800 Other expense (interest) 248,000 136,800 Income before income tax $677,700 $539,000 Income tax expense 81,300 65,000 Net income $596,400 $474,000 Blige Inc. Comparative Balance Sheet December 31, 2016 and 2015 Dec. 31, 2016 Dec. 31, 2015 Assets Current assets Cash $651,820 $547,000 Temporary investments 986,540 906,470 Accounts receivable (net) 678,900 635,100 Inventories 511,000 394,200 Prepaid expenses 123,324 109,400 Total current assets $2,951,584 $2,592,170 Long-term investments 1,820,086 382,195 Property, plant, and equipment (net) 3,720,000 3,348,000 Total assets $8,491,670 $6,322,365 Liabilities Current liabilities $922,370 $681,665 Long-term liabilities Mortgage note payable, 8%, due 2021 $1,390,000 $0 Bonds payable, 8%, due 2017 1,710,000 1,710,000 Total long-term liabilities $3,100,000 $1,710,000 Total liabilities $4,022,370 $2,391,665 Stockholders' Equity Preferred $0.7 stock, $40 par $560,000 $560,000 Common stock, $10 par 640,000 640,000 Retained earnings 3,269,300 2,730,700 Total stockholders' equity $4,469,300 $3,930,700 Total liabilities and stockholders' equity $8,491,670 $6,322,365 Required: Determine the following measures for 2016, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

Explanation / Answer

measures for 2016

Calculation

Figures

1. Working capital

Subtract current liabilities from current assets.

=2,951,854 - 922,370

current liabilities = current liabilities are liabilities that a firm expects to pay within a year, or one business cycle, whichever is less.
=$922,370 (given)

current assets = Current assets represent assets that a firm expects to turn into cash within one year, or one business cycle, whichever is less.
=$2,951,584 (given)

$2.029,484

2. Current ratio

Divide current assets by current liabilities.

=2,951,584 / 922,370

3.20

3. Quick ratio

Divide quick assets by current liabilities. Quick assets are cash, temporary investments, and receivables.

Quick ratio = 2,317,260 / 922,370 = 2.51

Quick assets = 651,820 + 986,540 + 678,900 = 2,317,260

2.51

4. Accounts receivable turnover

Divide sales by average accounts receivable.

Average Accounts receivable = (Beginning Net Accounts Receivable + Ending Net Accounts Receivable) ÷ 2.

= 678,900 + 635,100 / 2 = 657,000

Accounts receivable turnover = Sales /  Average Accounts receivable

=$3,810,600 / 657,000 = 5.8

5.8

5. Number of days' sales in receivables

Divide average accounts receivable by average daily sales.

=657,000 / 10,440 = 62.93

Average Accounts receivable = (Beginning Net Accounts Receivable + Ending Net Accounts Receivable) ÷ 2.

Average daily sales are sales divided by 365 days.

=3,810,600 / 365 days = 10,440

62.93days

=63 days rounded off

6. Inventory turnover

Divide cost of goods sold by average inventory.

=1,267,280 / 452,600 = 2.8

Average Inventory = (Beginning Inventories + Ending Inventories) ÷ 2.
= 511,000+394,200 / 2 = 452,600

2.8

7. Number of days' sales in inventory

Divide average inventory by average daily cost of goods sold.

=452,600 / 3,472 = 130.36

Average Inventory = (Beginning Inventories + Ending Inventories) ÷ 2.

Average daily cost of goods sold are cost of goods sold divided by 365 days.

= 1,267,280 / 365 days =3,472

130.36 days = 130days rounded off

8. Ratio of fixed assets to long-term liabilities

Divide Long term investments , property, plant and equipment (net) by long-term liabilities.

=1,820,086 + 3,720,000 / 3,100,000
= 5,540,086 / 3,100,000 = 1.79

1.79

9. Ratio of liabilities to stockholders' equity

Divide total liabilities by total stockholders' equity.

=3,100,000 / 4,469,300

0.69

10. Number of times interest charges are earned

Divide the sum of income before income tax plus interest expense by interest expense

=925,700 / 248,000 = 3.73

3.73

11. Number of times preferred dividends are earned

Divide net income by preferred dividends from the retained earnings statement.

= 596,400 / 9,800

60.86 = 61times rounded off

12. Ratio of sales to assets

Divide sales by average total assets, excluding long-term investments.

=3,810,600 / 7,407,017.5 = 0.51

Average total assets = (Beginning total assets + Ending total assets) ÷ 2.
=8,491,670+6,322,365 / 2 =7,407,017.5

0.51

13. Rate earned on total assets

Divide the sum of net income plus interest expense by average total assets.

=844,400 / 7,407,017.5 = 0.114

Average total assets = (Beginning total assets + Ending total assets) ÷ 2.

=8,491,670+6,322,365 / 2 =7,407,017.5

0.114

14. Rate earned on stockholders' equity

Divide net income by average total stockholders' equity.

=596,400 / 4,200,000 = 0.142

Average total stockholders' equity = (Beginning total stockholders' equity + Ending total stockholders' equity) ÷ 2.

=4,469,300+3,930,700/2 = 4,200,000

0.142

15. Rate earned on common stockholders' equity

Divide net income minus preferred dividends from the retained earnings statement by average common stockholders' equity.

=596,400 - 9,800/ 3,640,000 = 0.16

Common stockholders' equity = Common stock + Retained earnings.

=640,000 + 3,269,300 = 3,909,300
Average common stockholders' equity = (Beginning common stockholders' equity + Ending common stockholders' equity) ÷ 2. = 3,909,300 +3,70,700 /2 = 3,640,000

0.16 rounded off

16. Earnings per share on common stock

Divide net income minus preferred dividends from the retained earnings statement by common shares outstanding (common stock ÷ par value).

=596,400 - 9,800 / 64,000 = 9.166

common shares outstanding = (common stock ÷ par value). = 640,000 / 10 = 64,000

9.17

17. Price-earnings ratio

Divide common market share price by common earnings per share

=61 / 9.17= 6.65

6.65

18. Dividends per share of common stock

Divide common dividends (from Retained Earnings Statement) by common shares outstanding (common stock ÷ par value).

=48,000 / 64,000 = 0.75

0.75

19. Dividend yield

Divide common dividends per share by market share price = 0.75 / 61 = 0.012

0.012

measures for 2016

Calculation

Figures

1. Working capital

Subtract current liabilities from current assets.

=2,951,854 - 922,370

current liabilities = current liabilities are liabilities that a firm expects to pay within a year, or one business cycle, whichever is less.
=$922,370 (given)

current assets = Current assets represent assets that a firm expects to turn into cash within one year, or one business cycle, whichever is less.
=$2,951,584 (given)

$2.029,484

2. Current ratio

Divide current assets by current liabilities.

=2,951,584 / 922,370

3.20

3. Quick ratio

Divide quick assets by current liabilities. Quick assets are cash, temporary investments, and receivables.

Quick ratio = 2,317,260 / 922,370 = 2.51

Quick assets = 651,820 + 986,540 + 678,900 = 2,317,260

2.51

4. Accounts receivable turnover

Divide sales by average accounts receivable.

Average Accounts receivable = (Beginning Net Accounts Receivable + Ending Net Accounts Receivable) ÷ 2.

= 678,900 + 635,100 / 2 = 657,000

Accounts receivable turnover = Sales /  Average Accounts receivable

=$3,810,600 / 657,000 = 5.8

5.8

5. Number of days' sales in receivables

Divide average accounts receivable by average daily sales.

=657,000 / 10,440 = 62.93

Average Accounts receivable = (Beginning Net Accounts Receivable + Ending Net Accounts Receivable) ÷ 2.

Average daily sales are sales divided by 365 days.

=3,810,600 / 365 days = 10,440

62.93days

=63 days rounded off

6. Inventory turnover

Divide cost of goods sold by average inventory.

=1,267,280 / 452,600 = 2.8

Average Inventory = (Beginning Inventories + Ending Inventories) ÷ 2.
= 511,000+394,200 / 2 = 452,600

2.8

7. Number of days' sales in inventory

Divide average inventory by average daily cost of goods sold.

=452,600 / 3,472 = 130.36

Average Inventory = (Beginning Inventories + Ending Inventories) ÷ 2.

Average daily cost of goods sold are cost of goods sold divided by 365 days.

= 1,267,280 / 365 days =3,472

130.36 days = 130days rounded off

8. Ratio of fixed assets to long-term liabilities

Divide Long term investments , property, plant and equipment (net) by long-term liabilities.

=1,820,086 + 3,720,000 / 3,100,000
= 5,540,086 / 3,100,000 = 1.79

1.79

9. Ratio of liabilities to stockholders' equity

Divide total liabilities by total stockholders' equity.

=3,100,000 / 4,469,300

0.69

10. Number of times interest charges are earned

Divide the sum of income before income tax plus interest expense by interest expense

=925,700 / 248,000 = 3.73

3.73

11. Number of times preferred dividends are earned

Divide net income by preferred dividends from the retained earnings statement.

= 596,400 / 9,800

60.86 = 61times rounded off

12. Ratio of sales to assets

Divide sales by average total assets, excluding long-term investments.

=3,810,600 / 7,407,017.5 = 0.51

Average total assets = (Beginning total assets + Ending total assets) ÷ 2.
=8,491,670+6,322,365 / 2 =7,407,017.5

0.51

13. Rate earned on total assets

Divide the sum of net income plus interest expense by average total assets.

=844,400 / 7,407,017.5 = 0.114

Average total assets = (Beginning total assets + Ending total assets) ÷ 2.

=8,491,670+6,322,365 / 2 =7,407,017.5

0.114

14. Rate earned on stockholders' equity

Divide net income by average total stockholders' equity.

=596,400 / 4,200,000 = 0.142

Average total stockholders' equity = (Beginning total stockholders' equity + Ending total stockholders' equity) ÷ 2.

=4,469,300+3,930,700/2 = 4,200,000

0.142

15. Rate earned on common stockholders' equity

Divide net income minus preferred dividends from the retained earnings statement by average common stockholders' equity.

=596,400 - 9,800/ 3,640,000 = 0.16

Common stockholders' equity = Common stock + Retained earnings.

=640,000 + 3,269,300 = 3,909,300
Average common stockholders' equity = (Beginning common stockholders' equity + Ending common stockholders' equity) ÷ 2. = 3,909,300 +3,70,700 /2 = 3,640,000

0.16 rounded off

16. Earnings per share on common stock

Divide net income minus preferred dividends from the retained earnings statement by common shares outstanding (common stock ÷ par value).

=596,400 - 9,800 / 64,000 = 9.166

common shares outstanding = (common stock ÷ par value). = 640,000 / 10 = 64,000

9.17

17. Price-earnings ratio

Divide common market share price by common earnings per share

=61 / 9.17= 6.65

6.65

18. Dividends per share of common stock

Divide common dividends (from Retained Earnings Statement) by common shares outstanding (common stock ÷ par value).

=48,000 / 64,000 = 0.75

0.75

19. Dividend yield

Divide common dividends per share by market share price = 0.75 / 61 = 0.012

0.012

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