P14-36A Effect of transactions on ratios (Learning Objective 4) Financial statem

Question

P14-36A Effect of transactions on ratios (Learning Objective 4) Financial statement data of Pacific Traveler magazine include the following items (dollars in thousands) Cash 24,500 $83,000 $180,500 $660,000 $49,500 $106,000 44,500 $182,800 $63,180 54,000 Inventories. Common shares outstanding Requirements 1. Compute Pacific Traveler's current ratio, debt ratio, and earnings per share. Round all 2. Compute the three ratios after evaluating the effect of each transaction that follows ratios to two decimal places Consider each transaction separately a. Purchased inventory on account, $75,000 b. Borrowed $264,000 on a long-term note payable c. ssued 6,750 shares of common stock, receiving cash of $210,000 d. Received cash on account, $20,500

Explanation / Answer

Answer 1 Current Ratio = Current assets / Current liabilities Current Ratio = (24,500 + 83,000 + 180,500) / (49,500 + 106,000 + 44,500) Current Ratio = 1.44 Debt Ratio = Total Debt / Total Assets Debt Ratio = (49,500 + 106,000 + 44,500 + 182,800) / 660,000 Debt Ratio           0.58 Earning per share = Net Income / Common shares outstanding Earning per share = 63,180 / 54,000 Earning per share 1.17 Answer 2 Part a. Purchasing inventory on account increases current asset and current liabilities by 75,000. Current Ratio = (24,500 + 83,000 + 180,500 + 75,000) / (49,500 + 106,000 + 44,500 + 75,000) Current Ratio = 1.32 Debt Ratio = (49,500 + 106,000 + 44,500 + 182,800 + 75,000) / (660,000 + 75,000) Debt Ratio           0.62 Earning per share = 63,180 / 54,000 Earning per share 1.17 Part b. Borrowing on long term note payable increases long term liability Current Ratio = (24,500 + 83,000 + 180,500) / (49,500 + 106,000 + 44,500) Current Ratio = 1.44 Debt Ratio = (49,500 + 106,000 + 44,500 + 182,800 + 264000) / 660,000 Debt Ratio           0.98 Earning per share = 63,180 / 54,000 Earning per share 1.17 Part c. Issuing stock and receiving cash will impact earning per share, Debt ratio and current ratio Current Ratio = (24,500 + 83,000 + 180,500 + 210,000) / (49,500 + 106,000 + 44,500) Current Ratio = 2.49 Debt Ratio = (49,500 + 106,000 + 44,500 + 182,800 + 264000) / (660,000 + 210,000) Debt Ratio           0.74 Earning per share = 63,180 / (54,000 + 6,750) Earning per share 1.04 Part d. Received cash on account does not impact any ratio as cash is increased and accounts receivable is decreased. Current Ratio = (24,500 + 83,000 + 180,500) / (49,500 + 106,000 + 44,500) Current Ratio = 1.44 Debt Ratio = (49,500 + 106,000 + 44,500 + 182,800) / 660,000 Debt Ratio           0.58 Earning per share = 63,180 / 54,000 Earning per share 1.17

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