The following income statement and balance sheets for Laser World are provided:

Question

The following income statement and balance sheets for Laser World are provided: Income Statement 31, 2012 Cost of goods sold $2,250,000 1,590,000 2 Gross profit Expenses 660,000 Operating expenses Depreciation expense Loss on sale of land Interest expense Income tax expense 346,000 69,000 4,200 23,000 55,000 Total expenses 497,200 Net income 162,800 LASER WORLD Balance Sheet December 31 2012 2011 Assets Current assets: $ 130,000 $ 105,000 93,00079,000 170,000 150,000 15,000 15,000 Cash Inventory Long-term assets: 320,000 260,000 440,000 300,000 Land

Explanation / Answer

Part 1)

The receivables turnover ratio can be calculated with the use of following formula:

Receivables Turnover Ratio = Sales/(Average Accounts Receivables)

where Average Accounts Receivables = (Opening Accounts Receivables + Closing Accounts Receivables)/2

____________

Using the values provided in the question, we get,

Receivables Turnover Ratio = 2,250,000/(79,000 + 93,000)/2 = 26.2 times

____________

Part 2)

The average collection period can be calculated as follows:

Average Collection Period = 365 Days/Receivables Turnover Ratio

____________

Using the value of Receivables Turnover Ratio calculated in Part 1, we get,

Average Collection Period = 365/26.2 = 14 days

____________

Part 3)

The inventory turnover ratio can be calculated with the use of following formula:

Inventory Turnover Ratio = Cost of Go1ods Sold/(Average Inventory)

where Average Inventory = (Opening Inventory + Closing Inventory)/2

____________

Using the values provided in the question, we get,

Inventory Turnover Ratio = 1,590,000/(150,000 + 170,000)/2 = 9.9 or 10 times

____________

Part 4)

The average days in inventory can be calculated as follows:

Average Days in Inventory = 365 Days/Inventory Turnover Ratio

____________

Using the value of Inventory Turnover Ratio calculated in Part 3, we get,

Average Days in Inventory = 365/9.9 = 36.7 or 37 Days

____________

Part 5)

The formula for calculating current ratio is given below:

Current Ratio = Total Current Assets/Total Current Liabilities

where Total Current Assets = Cash + Accounts Receivables + Inventory + Prepaid Rent

and Total Current Liabilities = Accounts Payable + Interest Payable + Income Tax Payable

____________

Using the values provided in the question, we get,

Current Ratio = (130,000 + 93,000 + 170,000 + 15,000)/(58,000 + 8,100 + 15,200) = 5:1

____________

Part 6)

The formula for calculating acid test ratio is given below:

Acid Test Ratio = Quick Assets/Current Liabilities

where Quick Assets = Cash + Accounts Receivables

and Total Current Liabilities = Accounts Payable + Interest Payable + Income Tax Payable

____________

Using the values provided in the question, we get,

Acid Test Ratio = (130,000 + 93,000)/(58,000 + 8,100 + 15,200) = 2.7:1

____________

Part 7)

The debt equity ratio can be calculated as follows:

Debt Equity Ratio = Total Debt/Total Equity

where Total Debt = Current Liabilities + Long Term Debt

____________

Using the values provided in the question, we get,

Debt Equity Ratio = (58,000 + 8,100 + 15,200 + 410,000)/(240,000 + 364,700) = 81.3%

____________

Part 8)

The times interest earned ratio can be calculated as follows:

Times Interest Earned Ratio = EBIT/Interest Expense

where EBIT = Gross Profit - Operating Expenses - Depreciation Expense

____________

Using the values provided in the question, we get,

Times Interest Earned Ratio = (660,000 - 346,000 - 69,000)/23,000 = 10.7 times

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.