ctw years Ratios from Comparative and Common-Size Data Consider the following fi
ID: 2521790 • Letter: C
Question
ctw years Ratios from Comparative and Common-Size Data Consider the following financial statements for Waverly Company P13-6A. LO2, 3,4 During 2016, management obtained additional bond financing to enlarge its production facilities. The company faced higher production costs during the year for such things as fuel, materials, and freight, Because of temporary government price controls, a planned price increase on products was As a holder of both common and preferred stock, you decide to analyze the financial statements: delayed several months.Explanation / Answer
Part a:
Year
31-Dec-16
31-Dec-15
Current ratio:
Current assets:
Cash and cash equivalents
19000
12000
Accounts receivable
55000
43000
Inventory
120000
105000
Prepaid expenses
20000
14000
(A): Total current assets
214000
174000
Current liabilities
91000
82000
(B): Total current liabilities
91000
82000
Current ratio (Current assets / Current liabilities)
(214000 / 91000)
2.3516484
(174000 / 82000)
2.1219512
Quick ratio:
Total current assets
214000
174000
Less: Inventories
120000
105000
(A): Current assets less inventories
94000
69000
Current liabilities
91000
82000
(B): Total current liabilities
91000
82000
Quick ratio (A/B)
(94000 / 91000)
1.032967
(69000/82000)
0.8414634
Operating cash flows to current liabilities ratio:
Cash provided by operating activities
65200
60500
Current liabilities
91000
82000
Operating cash flows to current liabilities ratio:
(Cash from operating activities / Current liabilities)
0.7164835
0.7378049
Inventory turnover ratio:
Sales revenue
820000
678000
Average inventory
Opening inventory
105000
87000
Add: Closing inventory
120000
105000
Aggregate inventory
225000
192000
Average inventory
(225000 / 2)
112500
96000
Inventory turnover ratio (Sales revenue / Average inventory)
(820000 / 112500)
7.2888889
(678000/96000)
7.0625
Debt to equity ratio:
Debt fund:
10% bond payable
225000
160000
Equity shareholders' fund
Common stock
200000
200000
Add: Retained earnings
94000
68000
294000
268000
Debt to equity ratio (Debt fund / Equity shareholders' fund)
0.7653061
0.5970149
Times interest earned ratio:
Net income
54600
57580
Add: interest expense
22500
16000
(A): Net income plus interest
77100
73580
(B): Interest expense
22500
16000
Times interest earned ratio:
(77100 / 22500)
3.4266667
(73580 / 16000)
4.59875
Return on assets
Net income
54600
57580
Average total assets:
Opening total assets
585000
490000
Add: Closing total assets
685000
585000
Aggregate of total assets
1270000
1075000
Average total assets
(1270000/2)
635000
(1075000 / 2)
537500
Return on assets
(54600 x 100/635000)
8.5984252
(57580 x 100/537500)
10.712558
Return on common stockholders' equity
Net income
54600
57580
Less: Preference dividend
(75000 x 9%)
6750
6750
Earnings available to common shareholders
47850
50830
Average equity shareholders’ funds:
Opening common stockholders' equity
268000
235000
Add: Closing stockholders equity
(200000 + 94000)
294000
(200000 +68000)
268000
562000
503000
Average equity shareholders’ funds:
(562000 / 2)
281000
(503000 / 2)
251500
Return on common stockholders' equity
(47850 x 100/281000)
17.02847
(50830 x 100/251500)
20.210736
Part b:
Calculation of common size percentages
2,016.00
Percentage
2,015.00
Percentage
Sale revenue
820,000.00
100.00
678,000.00
100.00
Cost of goods sold
545,000.00
66.46
433,920.00
64.00
Gross profit
275,000.00
33.54
244,080.00
36.00
Selling and administrative expenses
175,000.00
21.34
149,200.00
22.01
Income before interest expenses and taxes
100,000.00
12.20
94,880.00
13.99
Interest expense
22,500.00
2.74
16,000.00
2.36
Income before taxes
77,500.00
9.45
78,880.00
11.63
Income tax expense
22,900.00
2.79
21,300.00
3.14
54,600.00
6.66
57,580.00
8.49
Part c:
From the above it is clear that liquidity and solvency position of the company has been improved in the current year compare to the previous year. Similarly the efficiency ratios have also improved as the inventory turnover ratio has improved in the current year.
Year
31-Dec-16
31-Dec-15
Current ratio:
Current assets:
Cash and cash equivalents
19000
12000
Accounts receivable
55000
43000
Inventory
120000
105000
Prepaid expenses
20000
14000
(A): Total current assets
214000
174000
Current liabilities
91000
82000
(B): Total current liabilities
91000
82000
Current ratio (Current assets / Current liabilities)
(214000 / 91000)
2.3516484
(174000 / 82000)
2.1219512
Quick ratio:
Total current assets
214000
174000
Less: Inventories
120000
105000
(A): Current assets less inventories
94000
69000
Current liabilities
91000
82000
(B): Total current liabilities
91000
82000
Quick ratio (A/B)
(94000 / 91000)
1.032967
(69000/82000)
0.8414634
Operating cash flows to current liabilities ratio:
Cash provided by operating activities
65200
60500
Current liabilities
91000
82000
Operating cash flows to current liabilities ratio:
(Cash from operating activities / Current liabilities)
0.7164835
0.7378049
Inventory turnover ratio:
Sales revenue
820000
678000
Average inventory
Opening inventory
105000
87000
Add: Closing inventory
120000
105000
Aggregate inventory
225000
192000
Average inventory
(225000 / 2)
112500
96000
Inventory turnover ratio (Sales revenue / Average inventory)
(820000 / 112500)
7.2888889
(678000/96000)
7.0625
Debt to equity ratio:
Debt fund:
10% bond payable
225000
160000
Equity shareholders' fund
Common stock
200000
200000
Add: Retained earnings
94000
68000
294000
268000
Debt to equity ratio (Debt fund / Equity shareholders' fund)
0.7653061
0.5970149
Times interest earned ratio:
Net income
54600
57580
Add: interest expense
22500
16000
(A): Net income plus interest
77100
73580
(B): Interest expense
22500
16000
Times interest earned ratio:
(77100 / 22500)
3.4266667
(73580 / 16000)
4.59875
Return on assets
Net income
54600
57580
Average total assets:
Opening total assets
585000
490000
Add: Closing total assets
685000
585000
Aggregate of total assets
1270000
1075000
Average total assets
(1270000/2)
635000
(1075000 / 2)
537500
Return on assets
(54600 x 100/635000)
8.5984252
(57580 x 100/537500)
10.712558
Return on common stockholders' equity
Net income
54600
57580
Less: Preference dividend
(75000 x 9%)
6750
6750
Earnings available to common shareholders
47850
50830
Average equity shareholders’ funds:
Opening common stockholders' equity
268000
235000
Add: Closing stockholders equity
(200000 + 94000)
294000
(200000 +68000)
268000
562000
503000
Average equity shareholders’ funds:
(562000 / 2)
281000
(503000 / 2)
251500
Return on common stockholders' equity
(47850 x 100/281000)
17.02847
(50830 x 100/251500)
20.210736
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