The following information pertains to Makenna Company Balance Sheet 12/13/2018 1

Question

The following information pertains to Makenna Company Balance Sheet 12/13/2018 12/31/2017 Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets $ 35,000 25,000 15,000 10,000 190,000 180,000 70,000 $230. 000 25,000 20,000 Liabilities and Stockholders' Equity: Current liabilities Long-term liabilities Common Stock, $1 Par Value Retained Earnings Total liabilities and stockholders' equity $ 50,000 S40,000 65,000 5,000 140,000 120.000 $270,000 S230.000 75,000 5,000 Income Statement for the year ended December 31, 2018 S 85,000 Sales Cost of goods sold Gross profit Operating expenses Interest expense Net income 40,000 15,000 What is the Year 2018 Asset Turnover for Makenna Company? A. .00 2.94 0.18 0.34 What is the Year 2018 Return on Total Assets for Makenna Company? A. 10.0% 8.0% O. I 0% 1.0% What is the Quick Ratio for Makenna Company at December 31, 2018? 1.60 1.44 1.20

Explanation / Answer

Solution:

Part 1 – Asset Turnover for 2018

Asset Turnover for 2018 = Sales / Average Total Assets

Average Total Assets = (Beginning + Ending) / 2

= (230,000 + 270,000) / 2

= 500,000 / 2

= 250,000

Asset Turnover for 2018 = Sales 85,000 / Average Total Assets 250,000 = 0.34

The correct option is D. 0.34

Note --- We need to understand the thumb rule that wherever one figure is from Income Statement and one figure is from balance sheet, the balance sheet figure should be average if the information available to average the balance sheet figure i.e. beginning and ending balance is given.

Part 2 – Return on Total Assets

Return on Total Assets = Net Income / Average Total Assets x 100

= 20,000 / 250,000 x 100

= 8%

Part 3 –

Quick Ratio = Quick Assets / Total Current Liabilities

Quick Assets are the assets which can be quickly convertible into cash. Quick Assets does not include prepaid expenses and inventories.

Quick Assets = Cash 35000 + Accounts Receivable 25,000 = $60,000

Total Current Liabilities = 50,000

Quick Ratio = Quick Assets 60,000 / Total Current Liabilities 50,000 = 1.2

Hence, the correct option is D. 1.2

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