Question

RNA Inc. manufactures a variety of consumer products. The company’s founders have run the company for 30 years and are now interested in retiring. Consequently, they are seeking a purchaser who will continue its operations, and a group of investors, Morgan Inc., is looking into the acquisition of RNA. To evaluate its financial stability and operating efficiency, RNA was requested to provide the latest financial statements and selected financial ratios. Summary information provided by RNA is as follows.

RNA INC. INCOME STATEMENT FOR THE YEAR ENDED NOVEMBER 30, 2018 (IN THOUSANDS)
Sales (net)	\(30,500
Interest income	500
Total revenue	31,000
Costs and expenses
Cost of goods sold	17,600
Selling and administrative expenses	3,550
Depreciation and amortization expense	1,890
Interest expense	900
Total costs and expenses	23,940
Income before taxes	7,060
Income taxes	2,800
Net income	\) 4,260

RNA INC. BALANCE SHEET AS OF NOVEMBER 30 (IN THOUSANDS)
	2018	2017
Cash	\( 400	\) 500
Short-term investments (at cost)	300	200
Accounts receivable (net)	3,200	2,900
Inventory	6,000	5,400
Total current assets	9,900	9,000
Property, plant, & equipment (net)	7,100	7,000
Total assets	\(17,000	\)16,000
Accounts payable	\( 3,700	\) 3,400
Income taxes payable	900	800
Accrued expenses	1,700	1,400
Total current liabilities	6,300	5,600
Long-term debt	2,000	1,800
Total liabilities	8,300	7,400
Common stock (\(1 par value)	2,700	2,700
Paid-in capital in excess of par	1,000	1,000
Retained earnings	5,000	4,900
Total stockholders’ equity	8,700	8,600
Total liabilities and stockholders’ equity	\)17,000	$16,000

SELECTED FINANCIAL RATIOS
RNA INC
	2017	2016	Current Inventory Average
Current ratio	1.61	1.62	1.63
Acid-test ratio	0.64	0.63	0.68
Times interest earned	8.55	8.50	8.45
Profit margin on sales	13.2%	12.1%	13.0%
Asset turnover	1.84	1.83	1.84
Inventory turnover	3.17	3.21	3.18

Instructions

1. Calculate a new set of ratios for the fiscal year 2018 for RNA based on the financial statements presented.

Short answer

• Current ratio = 1.57
• Acid-test ratio=0.62
• Times Interest Earned = 8.84
• Profit margin on sales = 13.97%
• Asset turnover = 1.85 times
• Inventory turnover = 3.09 times

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 financial analysis since it allows for to assessment of a company's liquidity situation.

Calculating the new set of ratios for the fiscal year 2018 for RNA

Current ratio = 1.57

Working Notes:-

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$9,900}{\$6,300}\\ & =& 1.57\end{array}$

Acid-test Ratio = 0.62

Working Notes:-

$\begin{array}{rcl}\mathrm{Acid}\mathrm{test}\mathrm{ratio}& =& \frac{\mathrm{Cash}+\mathrm{Short}\mathrm{term}\mathrm{investment}-\mathrm{Net}\mathrm{receivables}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$3,900}{\$6,300}\\ & =& 0.62\end{array}$

Times Interest Earned = 8.84

Working Notes:-

$\begin{array}{rcl}\mathrm{Times}\mathrm{interest}\mathrm{earned}\mathrm{ratio}& =& \frac{\mathrm{Income}\mathrm{before}\mathrm{taxes}+\mathrm{interest}\mathrm{expense}}{\mathrm{Interest}\mathrm{expense}}\\ & =& \frac{\$7,060+\$900}{\$900}\\ & =& 8.84\end{array}$

Profit margin on Sales = 13.97%

Workingnotes:-

$\begin{array}{rcl}\mathrm{Profit}\mathrm{margin}\mathrm{on}\mathrm{sales}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Net}\mathrm{sales}}\\ & =& \frac{\$4,260}{\$30,500}\\ & =& 13.97\%\end{array}$

Asset turnover = 1.85 times

Working notes:-

$\begin{array}{rcl}\mathrm{Asset}\mathrm{turnover}& =& \frac{\mathrm{Net}\mathrm{sales}}{\mathrm{Average}\mathrm{total}\mathrm{assets}}\\ & =& \frac{\$30,500}{{\displaystyle \frac{\$17,000+\$16,000}{2}}}\\ & =& \frac{\$30,500}{\$16,500}\\ & =& 1.85\mathrm{Times}\end{array}$

Inventory turnover = 3.09 times

Working notes:-

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}& =& \frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Average}\mathrm{inventory}}\\ & =& \frac{\$17,600}{{\displaystyle \frac{\$6,000+\$5,400}{2}}}\\ & =& \frac{\$17,600}{\$5,400}\\ & =& 3.09\mathrm{times}\end{array}$