Week Five Exercise Assignment Financial Ratios

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  1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edison Stagg Thornton
Cash $6,000 $5,000 $4,000
Short-term investments 3,000 2,500 2,000
Accounts receivable 2,000 2,500 3,000
Inventory 1,000 2,500 4,000
Prepaid expenses 800 800 800
Accounts payable 200 200 200
Notes payable: short-term 3,100 3,100 3,100
Accrued payables 300 300 300
Long-term liabilities 3,800 3,800 3,800

a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

Net credit sales 20X5

$832,000

20X4

$760,000

Cost of goods sold 530,000 400,000
Cash, Dec. 31 125,000 110,000
Average Accounts receivable 205,000 156,000
Average Inventory 70,000 50,000
Accounts payable, Dec. 31 115,000 108,000

Instructions

a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:

Net sales $1,750,000
Interest expense 120,000
Income tax expense 80,000
Preferred dividends 25,000
Net income 130,000
Average assets 1,200,000
Average common stockholders’ equity 500,000

a.   Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.

b. Does the firm have positive or negative financial leverage? Briefly explain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

Current Assets 20X2

$86,000

20X1

$80,000

Property, Plant, and Equipment (net) 99,000 90,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000
Long-Term Liabilities 153,000 160,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000

a.   Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the

20X1 and 20X2 financial statements follow.

20X2 20X1
Current Assets $86,000 $80,000
Property, Plant, and Equipment (net) 99,000 80,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000
Long-Term Liabilities 153,000 150,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

  1. Ratio computation. The financial statements of the Lone Pine Company follow.

LONE PINE COMPANY Comparative Balance Sheets

Assets

Current Assets

Cash and Short-Term Investments

20X2

$400

20X1

$600

Accounts Receivable (net) 3,000 2,400
Inventories 3,000 2,300
Total Current Assets

Property, Plant, and Equipment

Land

$6,400

$1,700

$5,300

$500

Buildings and Equipment (net) 1,500 1,000
Total Property, Plant, and Equipment $3,200 $1,500
Total Assets

Liabilities and Stockholders’ Equity

Current Liabilities

Accounts Payable

$9,600

$2,800

$6,800

$1,700

Notes Payable 1,100 1,900
Total Current Liabilities Long-Term Liabilities Bonds Payable $3,900

4,100

$3,600

2,100

Total Liabilities

Stockholders’ Equity

$8,000 $5,700
Common Stock                                                        $200 $200
Retained Earnings                                                     1,400 900
Total Stockholders’ Equity                                        $1,600 $1,100
Total Liabilities and Stockholders’

ity                                                                                $9,600

$6,800

December 31, 20X2 and 20X1 ($000 Omitted) Equitems for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:

Calculate ratios

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