Chapter 15: Q6SE (page 837)
Evaluating current ratio
Requirements
1. Compute Accel’s Companies’ current ratio at May 31, 2018 and 2017.
2. Did Accel’s Companies’ current ratio improve, deteriorate, or hold steady during 2018?
Answer
Decreasing Current ratio Over a year
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The Randall Department Stores, Inc. chief executive officer (CEO) has asked you to compare the company’s profit performance and financial position with the averages for the industry. The CEO has given you the company’s income statement and balance sheet as well as the industry average data for retailers.
RANDALL DEPARTMENT STORES, INC. Income Statement Compared with Industry Average Year Ended December 31, 2018 | ||
Randall | Industry Average | |
Net Sales Revenue | \( 783,000 | 100.0% |
Cost of Goods Sold | 527,742 | 65.8 |
Gross Profit | 255,258 | 34.2 |
Operating Expenses | 163,647 | 19.7 |
Operating Income | 91,611 | 14.5 |
Other Expenses | 6,264 | 0.4 |
Net Income | \) 85,347 | 14.1% |
RANDALL DEPARTMENT STORES, INC. Balance Sheet Compared with Industry Average December 31, 2018 | ||
Randall | Industry Average | |
Current Assets | \( 310,040 | 70.9% |
Property, Plant, and Equipment, Net | 119,600 | 23.6 |
Intangible Assets, Net | 7,360 | 0.8 |
Other Assets | 23,000 | 4.7 |
Total Assets | \) 460,000 | 100.0% |
Current Liabilities | \( 210,680 | 48.1% |
Long-term Liabilities | 103,960 | 16.6 |
Total Liabilities | 314,640 | 64.7 |
Stockholders’ Equity | 145,360 | 35.3 |
Total Liabilities and Stockholders’ Equity | \) 460,000 | 100.0% |
Requirements
Compare the company’s profit performance and financial position with the average for the industry
Measuring profitability
Requirements
1. Compute the profit margin ratio for Accel’s Companies for 2018.
2. Compute the rate of return on total assets for 2018.
3. Compute the asset turnover ratio for 2018.
4. Compute the rate of return on common stockholders’ equity for 2018.
5. Are these rates of return strong or weak? Explain your reasoning.
Briefly describe the ratios that can be used to evaluate a company’s ability to paycurrent liabilities.
Big Beautiful Photo Shop has asked you to determine whether the company’s ability to pay current liabilities and total liabilities improved or deteriorated during 2018. To answer this question, you gather the following data:
2018 | 2017 | |
Cash | \(58,000 | \)47,000 |
Short-term Investments | 34,000 | 0 |
Net Accounts Receivable | 140,000 | 124,000 |
Merchandise Inventory | 217,000 | 272,000 |
Total Assets | 530,000 | 565,000 |
Total Current Liabilities | 288,000 | 205,000 |
Long-term Notes Payable | 40,000 | 50,000 |
Income from Operations | 165,000 | 158,000 |
Interest Expense | 55,000 | 41,000 |
Compute the following ratios for 2018 and 2017, and evaluate the company’s ability to pay its current liabilities and total liabilities:
a. Current ratio
b. Cash ratio
c. Acid-test ratio
d. Debt ratio
e. Debt to equity ratio
Net sales revenue, net income, and commonA stockholders’ equity for Azbel Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.
Requirements
1.Compute trend analyses for each item for 2017–2019. Use 2016 as the base year,and round to the nearest whole percent.
2.Compute the rate of return on common stockholders’ equity for 2017–2019, rounding to three decimal places.
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