Chapter 13: 4DQ (page 614)
What three factors would influence your evaluation as to whether a company’s current ratio is good or bad?
Three factors which affect the evaluation of the current ratio are type of business, composition of current assets and turnover rate of assets.
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Selected comparative financial statements of Bluegrass Corporation follows:
BLUEGRASS CORPORATION
Comparative Balance Sheets
December 31, 2017, 2016, and 2015
2017 2016 2015
Assets
Current assets . . . . . . . . . . . . . . . . \( 54,860 \) 32,660 \( 36,300
Long-term investments . . . . . . . . 0 1,700 10,600
Plant assets, net . . . . . . . . . . . . . . 112,810 113,660 79,000
Total assets . . . . . . . . . . . . . . . . . . \)167,670 \(148,020 \)125,900
Liabilities and Equity
Current liabilities . . . . . . . . . . . . . . \( 22,370 \) 19,180 \( 16,500
Common stock . . . . . . . . . . . . . . . 46,500 46,500 37,000
Other paid-in capital . . . . . . . . . . . 13,850 13,850 11,300
Retained earnings . . . . . . . . . . . . 84,950 68,490 61,100
Total liabilities and equity . . . . . . . \)167,670 \(148,020 \)125,900
BLUEGRASS CORPORATION
Comparative Income Statements
For Years Ended December 31, 2017, 2016, and 2015
2017 2016 2015
Sales . . . . . . . . . . . . . . . . . . . . . . \(198,800 \)166,000 \(143,800
Cost of goods sold . . . . . . . . . . . 108,890 86,175 66,200
Gross profit . . . . . . . . . . . . . . . . . 89,910 79,825 77,600
Selling expenses . . . . . . . . . . . . . 22,680 19,790 18,000
Administrative expenses . . . . . . 16,760 14,610 15,700
Total expenses . . . . . . . . . . . . . . 39,440 34,400 33,700
Income before taxes . . . . . . . . . . 50,470 45,425 43,900
Income taxes . . . . . . . . . . . . . . . . 6,050 5,910 5,300
Net income . . . . . . . . . . . . . . . . . \) 44,420 \( 39,515 \) 38,600
Required
Express the following comparative income statements in common-size percents and assess whether or not this company’s situation has improved in the most recent year (round the percents to one decimal)
GOMEZ CORPORATION Comparative Income Statements For Years Ended December 31, 2017 and 2016 | ||
2017 | 2016 | |
Sales | \(740,000 | \)625,000 |
Cost of goods sold | 560,300 | 290,800 |
Gross profit | 179,700 | 334,200 |
Operating expenses | 128,200 | 218,500 |
Net income | \( 51,500 | \)115,700 |
Use the following selected data from Business Solutions’s income statement for the three months ended March 31, 2018, and from its March 31, 2018, balance sheet to complete the requirements below: computer services revenue, \(25,307; net sales (of goods), \)18,693; total sales and revenue, \(44,000; cost of goods sold, \)14,052; net income, \(18,833; quick assets, \)90,924; current assets, \(95,568; total assets, \)120,268; current liabilities, \(875; total liabilities, \)875; and total equity, $119,393.
Required
1. Compute the gross margin ratio (both with and without services revenue) and net profit margin ratio (round the percent to one decimal).
2. Compute the current ratio and acid-test ratio (round to one decimal).
3. Compute the debt ratio and equity ratio (round the percent to one decimal).
4. What percent of its assets are current? What percent are long-term? (Round the percent to one decimal.)
Compute trend percents for the following accounts, using 2013 as the base year (round the percents to whole numbers). State whether the situation as revealed by the trends appears to be favorable or unfavorable for each account.
2017 | 2016 | 2015 | 2014 | 2013 | |
Sales | \(282,880 | \)270,800 | \(252,600 | \)234,560 | $150,000 |
Cost of goods sold | 128,200 | 122,080 | 115,280 | 106,440 | 67,000 |
Accounts receivable | 18,100 | 17,300 | 16,400 | 15,200 | 9,000 |
Refer to Simon Company’s financial information in Exercises 13-6 and 13-8. Evaluate the company’s efficiency and profitability by computing the following for 2017 and 2016:
(1) profit margin ratio—percent rounded to one decimal,
(2) total asset turnover—rounded to one decimal, and
(3) return on total assets— percent rounded to one decimal. Comment on these ratio results.
Answer
S.no | Ratios | 2017 | 2016 |
1 | Profit margin ratio | 4.6% | 5.5% |
2 | Total asset turnover ratio | 1.4 times | 1.3 times |
3 | Return on total assets | 6.4% | 7.5% |
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