Chapter 15: Q26PGA (page 844)

Determining the effects of business transactions on selected ratios Financial statement data of Style Traveler Magazine include the following items:
Cash
$ 23,000
Accounts Receivable, Net
81,000
Merchandise Inventory
185,000
Total Assets
635,000
Accounts Payable
99,000
Accrued Liabilities
37,000
Short-term Notes Payable
51,000
Long-term Liabilities
224,000
Net Income
68,000
Common Shares Outstanding
20,000 shares
Requirements
Compute Style Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:
Current Ratio Debt Ratio Earnings per Share
2.Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately
Purchased merchandise inventory of $49,000 on the account.
Borrowed $127,000 on a long-term note payable.
Issued 2,000 shares of common stock, receiving cash of $107,000.
Received cash on account, $5,000.

Short Answer

Expert verified

S. no.	Current Ratio	Debt ratio	Earnings per share
1	1.54	.64	$3.40
2a	1.43	.67	$3.40
2b	2.22	.70	$3.40
2c	2.12	.55	$3.09
2d	1.55	.65	$3.40

Step by step solution

Meaning of Current Ratio

The current ratio is the ratio that determines the efficiency of a business. The current ratio is one of the most helpful liquidity ratios in the financial analysis since it allows for assessing a company's liquidity situation.

(1) Computing various ratios

Preparing extract of Balance sheet

Company ST
Extract of balance sheet
Assets	Amount ($)	Liabilities	Amount ($)
Current asset:		Current liabilities:
Cash	23,000	Accounts payable	99,000
Account receivable	81,000	Accrued liabilities	37,000
Merchandise inventory	185,000	Short term payable	51,000
Total current asset	289,000	Total current liabilities	187,000
		Long term liabilities	224,000
		Total liabilities	411,000

Compute the current ratio for Company ST

$\begin{matrix} Current ratio = \frac{Current asset}{Current liabilities} \\ = \frac{$ 289, 000}{$ 187, 000} \\ = 1.54 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} Debt ratio = \frac{Total liabilities}{Total assets} \\ = \frac{$ 411, 000}{$ 635, 000} \\ = 0.64 \end{matrix}$

Compute the earnings per share for Company ST

\begin{matrix} Earning per share = \frac{Net income - Preferred share}{Weighted average number of shares outstanding} \\ = \frac{$ 68, 000 - $ 0}{20, 000} \\ = $ 3.40 per share \end{matrix}

(2) Computing three ratios considering the effect in each transaction

a. Purchased merchandise inventory of $49,000 on the account.

Compute the current ratio of the or Company ST

$\begin{matrix} Current ratio = \frac{Current asset}{Current liabilities} \\ = \frac{$ 289, 000 + $ 49, 000}{$ 187, 000 + $ 49, 000} \\ = \frac{$ 338, 000}{$ 236, 000} \\ = 1 .43 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} Debt ratio = \frac{Total liabilities}{Total assets} \\ = \frac{$ 411, 000 + $ 49, 000}{$ 635, 000 + $ 49, 000} \\ = \frac{$ 460, 000}{$ 684, 000} \\ = . 67 \end{matrix}$

Compute the earning per ratio for Company ST

$\begin{matrix} Earning per share = \frac{Net income - Preferred share}{Weighted average number of shares outstanding} \\ = \frac{$ 68, 000 - $ 0}{20, 000} \\ = $ 3 .40 per share \end{matrix}$

b. Borrowed $127,000 on a long-term note payable

Compute the current ratio of the or Company ST

$\begin{matrix} Current ratio = \frac{Current asset}{Current liabilities} \\ = \frac{$ 289, 000 + $ 127, 000}{$ 187, 000} \\ = \frac{$ 416, 000}{$ 187, 000} \\ = 2 .22 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} Debt ratio = \frac{Total liabilities}{Total assets} \\ = \frac{$ 411, 000 + $ 127, 000}{$ 635, 000 + $ 127, 000} \\ = \frac{$ 538, 000}{$ 762, 000} \\ = . 70 \end{matrix}$

Compute the earning per ratio for Company ST

$\begin{matrix} Earning per share = \frac{Net income - Preferred share}{Weighted average number of shares outstanding} \\ = \frac{$ 68, 000 - $ 0}{20, 000} \\ = $ 3 .40 per share \end{matrix}$

c. Issued 2,000 shares of common stock, receiving cash of $107,000

Compute the current ratio of the or Company ST

$\begin{matrix} Current ratio = \frac{Current asset}{Current liabilities} \\ = \frac{$ 289, 000 + $ 107, 000}{$ 187, 000} \\ = 2 .12 \end{matrix}$

Compute the debt ratio for Company ST

$\begin{matrix} Debt ratio = \frac{Total liabilities}{Total assets} \\ = \frac{$ 411, 000}{$ 635, 000 + $ 107, 000} \\ = . 55 \end{matrix}$

Compute the earning per ratio for Company ST

$\begin{matrix} Earning per share = \frac{Net income - Preferred share}{Weighted average number of shares outstanding} \\ = \frac{$ 68, 000 - $ 0}{20, 000 + 2, 000} \\ = $ 3 .09 per share \end{matrix}$

d. Received cash on account, $5,000

Compute the current ratio of the or Company ST

$\begin{matrix} Current ratio = \frac{Current asset}{Current liabilities} \\ = \frac{$ 289, 000}{$ 187, 000} \\ = 1 .54 \end{matrix}$

Note: Received $5,000 cash on account increases the cash balance and decreases the accounts receivable by $5000. Cash and accounts receivable are current assets, so this transaction's effect is NIL on current assets.

Compute the debt ratio for Company ST

$\begin{matrix} Debt ratio = \frac{Total liabilities}{Total assets} \\ = \frac{$ 411, 000}{$ 635, 000} \\ = 0 .65 \end{matrix}$

Compute the earning per ratio for Company ST

$\begin{matrix} Earning per share = \frac{Net income - Preferred share}{Weighted average number of shares outstanding} \\ = \frac{$ 68, 000 - $ 0}{20, 000} \\ = $ 3 .40 per share \end{matrix}$

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

XYZ ATHLETIC SUPPLY, INC.
Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2016
Net sales revenue	\(275,000	\)222,000	\(199,000	\)171,000	131,000
Net Sales Revenue Increase	24%	12%	16%	31%	17%
Domestic Comparative Store Sales Increase	6%	6%	5%	8%	10%
Other Income—Net	2,090	1,780	1,770	1,700	1,310
Cost of Goods Sold	208,725	169,386	154,822	134,235	103,883
Selling and Administrative Expenses	41,280	36,340	31,670	27,450	22,540
Interest:
Interest Expense	(1,070)	(1,370)	(1,330)	(1,100)	(800)
Interest Income	140	155	150	230	140
Income Tax Expense	4,420	3,900	3,610	3,390	2,730
Net Income	21,735	12,939	9,488	6,755	2,497
Per Share of Common Stock:
Net Income	1.10	0.80	0.70	0.50	0.28
Dividends	0.45	0.43	0.39	0.35	0.31
Financial Position
Current Assets, Excluding Merchandise Inventory	\(30,900	\)27,200	\(26,800	\)24,400	$21,800
Merchandise Inventory	24,700	22,400	21,600	19,300	17,000	16,800
Property, Plant, and Equipment, Net	51,600	46,200	40,500	35,000	25,200
Total Assets	107,200	95,800	88,900	78,700	64,000
Current Liabilities	32,600	27,800	28,800	25,600	17,000
Long-term Debt	23,000	21,200	16,800	18,600	12,900
Stockholders’ Equity	51,600	46,800	43,300	35,500	34,100
Financial Ratios
Acid-Test Ratio	0.9	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	22.5%	15.5%	12.8%	10.9%	9.9%
Rate of Return on Common Stockholders’ Equity	44.2%	28.7%	24.1%	19.4%	18.9%

Short Answer

Step by step solution

Meaning of Current Ratio

(1) Computing various ratios

(2) Computing three ratios considering the effect in each transaction

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Change Management

Corporate Finance

Project Planning & Management

Business Data Analytics

Business Operations

Strategic Direction

Study anywhere. Anytime. Across all devices.

Company

Product

Help

Cash	\( 23,000
Accounts Receivable, Net	81,000
Merchandise Inventory	185,000
Total Assets	635,000
Accounts Payable	99,000
Accrued Liabilities	37,000
Short-term Notes Payable	51,000
Long-term Liabilities	224,000
Net Income	68,000
Common Shares Outstanding	20,000 shares