Nineteen Measures of The ability of a firm to pay its debts as they come due.Sol
ID: 2471801 • Letter: N
Question
Nineteen Measures of The ability of a firm to pay its debts as they come due.Solvency and The ability of a firm to earn income.Profitability
The comparative financial statements of Blige Inc. are as follows. The market price of Blige Inc. common stock was $58 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
$4,517,950
$3,801,250
Add net income for year
966,000
778,600
Total
$5,483,950
$4,579,850
Deduct dividends
On preferred stock
$13,300
$13,300
On common stock
48,600
48,600
Total
$61,900
$61,900
Retained earnings, December 31
$5,422,050
$4,517,950
Blige Inc.
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
2016
2015
Sales
$6,404,030
$5,891,700
Sales returns and allowances
31,860
20,710
Sales
$6,372,170
$5,870,990
Cost of goods sold
2,105,320
1,936,890
Gross profit
$4,266,850
$3,934,100
Selling expenses
$1,531,680
$1,821,260
Administrative expenses
1,304,760
1,069,630
Total operating expenses
2,836,440
2,890,890
Income from operations
$1,430,410
$1,043,210
Other income
75,290
66,590
$1,505,700
$1,109,800
Other expense (interest)
408,000
224,800
Income before income tax
$1,097,700
$885,000
Income tax expense
131,700
106,400
Net income
$966,000
$778,600
Blige Inc.
Comparative Balance Sheet
December 31, 2016 and 2015
Dec. 31, 2016
Dec. 31, 2015
Assets
Current assets
Cash
$1,229,990
$854,930
Temporary investments
1,861,600
1,416,750
Accounts receivable (net)
1,131,500
1,065,800
Inventories
846,800
657,000
Prepaid expenses
232,699
170,990
Total current assets
$5,302,589
$4,165,470
Long-term investments
3,246,306
945,219
Property, plant, and equipment (net)
5,610,000
5,049,000
Total assets
$14,158,895
$10,159,689
Liabilities
Current liabilities
$1,606,845
$801,739
Long-term liabilities
Mortgage note payable, 8%, due 2021
$2,290,000
$0
Bonds payable, 8%, due 2017
2,810,000
2,810,000
Total long-term liabilities
$5,100,000
$2,810,000
Total liabilities
$6,706,845
$3,611,739
Stockholders' Equity
Preferred $0.7 stock, $50 par
$950,000
$950,000
Common stock, $10 par
1,080,000
1,080,000
Retained earnings
5,422,050
4,517,950
Total stockholders' equity
$7,452,050
$6,547,950
Total liabilities and stockholders' equity
$14,158,895
$10,159,689
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.
1. The excess of the current assets of a business over its current liabilities.Working capital
$
2. A financial ratio that is computed by dividing current assets by current liabilities.Current ratio
3. A financial ratio that measures the ability to pay current liabilities with quick assets (cash, marketable securities, accounts receivable).Quick ratio
4. The relationship between sales and accounts receivable, computed by dividing the sales by the average net accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash.Accounts receivable turnover
5. The relationship between sales and accounts receivable, computed by dividing the average accounts receivable by the average daily sales.Number of days' sales in receivables
days
6. The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory.Inventory turnover
7. The relationship between the volume of sales and inventory, computed by dividing average inventory by the average daily cost of goods sold.Number of days' sales in inventory
days
8. The ratio of fixed assets to long-term liabilities provides a measure of whether note-holders or bondholders will be paid.Ratio of fixed assets to long-term liabilities
9. The ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity.Ratio of liabilities to stockholders' equity
10. A ratio that measures creditor margin of safety for interest payments, calculated as income before income tax + interest expense divided by interest expense.Number of times interest charges are earned
11. A ratio that measures the risk that preferred dividends will not be paid if earnings decrease, calculated by dividing net income by the amount of preferred dividends.Number of times preferred dividends are earned
12. Ratio that measures how effectively a company uses its assets, computed as sales divided by average total assets.Ratio of sales to assets
13. A measure of profitability of assets, without regard to the portion of assets financed by creditors or stockholders.Rate earned on total assets
%
14. A measure of profitability computed by dividing net income by average stockholders' equity.Rate earned on stockholders' equity
%
15. A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.Rate earned on common stockholders' equity
%
16. The profitability ratio of net income available to common shareholders to the number of common shares outstanding.Earnings per share on common stock
$
17. The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.Price-earnings ratio
18. Measures the extent to which earnings are being distributed to common shareholders.Dividends per share of common stock
$
19. A ratio, computed by dividing the annual dividends paid per share of common stock by the market price per share at a specific date, that indicates the rate of return to stockholders in terms of cash dividend distributions.Dividend yield
%
Feedback
1. Subtract current liabilities from current assets.
2. Divide current assets by current liabilities.
3. Divide quick assets by current liabilities. Quick assets are cash, temporary investments, and receivables.
4. Divide sales by average accounts receivable. Average Accounts receivable = (Beginning Net Accounts Receivable + Ending Net Accounts Receivable) ÷ 2.
5. Divide average accounts receivable by average daily sales. Average Accounts receivable = (Beginning Net Accounts Receivable + Ending Net Accounts Receivable) ÷ 2. Average daily sales are sales divided by 365 days.
6. Divide cost of goods sold by average inventory. Average Inventory = (Beginning Inventories + Ending Inventories) ÷ 2.
7. Divide average inventory by average daily cost of goods sold. Average Inventory = (Beginning Inventories + Ending Inventories) ÷ 2. Average daily cost of goods sold are cost of goods sold divided by 365 days.
8. Divide property, plant and equipment (net) by long-term liabilities.
9. Divide total liabilities by total stockholders' equity.
10. Divide the sum of income before income tax plus interest expense by interest expense.
11. Divide net income by preferred dividends from the retained earnings statement.
12. Divide sales by average total assets, excluding long-term investments. Average total assets = (Beginning total assets + Ending total assets) ÷ 2.
13. Divide the sum of net income plus interest expense by average total assets. Average total assets = (Beginning total assets + Ending total assets) ÷ 2.
14. Divide net income by average total stockholders' equity. Average total stockholders' equity = (Beginning total stockholders' equity + Ending total stockholders' equity) ÷ 2.
15. Divide net income minus preferred dividends from the retained earnings statement by average common stockholders' equity. Common stockholders' equity = Common stock + Retained earnings. Average common stockholders' equity = (Beginning common stockholders' equity + Ending common stockholders' equity) ÷ 2.
16. Divide net income minus preferred dividends from the retained earnings statement by common shares outstanding (common stock ÷ par value).
17. Divide common market share price by common earnings per share (use answer from requirement 16).
18. Divide common dividends (from Retained Earnings Statement) by common shares outstanding (common stock ÷ par value).
19. Divide common dividends per share (use answer from requirement 18) by market share price.
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Blige Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 2016 and 2015
2016
2015
Retained earnings, January 1
$4,517,950
$3,801,250
Add net income for year
966,000
778,600
Total
$5,483,950
$4,579,850
Deduct dividends
On preferred stock
$13,300
$13,300
On common stock
48,600
48,600
Total
$61,900
$61,900
Retained earnings, December 31
$5,422,050
$4,517,950
Explanation / Answer
Details Ratio 1. The excess of the current assets of a business over its current liabilities.Working capital $ 3,695,744.00 2. A financial ratio that is computed by dividing current assets by current liabilities.Current ratio 3.300 3. A financial ratio that measures the ability to pay current liabilities with quick assets (cash, marketable securities, accounts receivable).Quick ratio 2.628 4. The relationship between sales and accounts receivable, computed by dividing the sales by the average net accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash.Accounts receivable turnover 5.8 times 5. The relationship between sales and accounts receivable, computed by dividing the average accounts receivable by the average daily sales.Number of days' sales in receivables 62.93 days 6. The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory.Inventory turnover 2.8 times 7. The relationship between the volume of sales and inventory, computed by dividing average inventory by the average daily cost of goods sold.Number of days' sales in inventory 130.36 days 8. The ratio of fixed assets to long-term liabilities provides a measure of whether note-holders or bondholders will be paid.Ratio of fixed assets to long-term liabilities 1.10 9. The ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity.Ratio of liabilities to stockholders' equity 0.900 10. A ratio that measures creditor margin of safety for interest payments, calculated as income before income tax + interest expense divided by interest expense.Number of times interest charges are earned 3.690 11. A ratio that measures the risk that preferred dividends will not be paid if earnings decrease, calculated by dividing net income by the amount of preferred dividends.Number of times preferred dividends are earned 72.632 12. Ratio that measures how effectively a company uses its assets, computed as sales divided by average total assets.Ratio of sales to assets 0.524 13. A measure of profitability of assets, without regard to the portion of assets financed by creditors or stockholders.Rate earned on total assets 0.79% % 14. A measure of profitability computed by dividing net income by average stockholders' equity.Rate earned on stockholders' equity 0.138 % 15. A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.Rate earned on common stockholders' equity 0.1575 % 16. The profitability ratio of net income available to common shareholders to the number of common shares outstanding.Earnings per share on common stock $ 8.82 17. The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.Price-earnings ratio 6.576 18. Measures the extent to which earnings are being distributed to common shareholders.Dividends per share of common stock $ 0.45 19. A ratio, computed by dividing the annual dividends paid per share of common stock by the market price per share at a specific date, that indicates the rate of return to stockholders in terms of cash dividend distributions.Dividend yield 0.78% %
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