# Principles of Accounting week 5 assignment

inancial 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

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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

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:

20X5 20X4 Net credit sales \$832,000 \$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 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

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

20X2 20X1 Current Assets \$86,000 \$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

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

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

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

LONE PINE COMPANY

Comparative Balance Sheets

December 31, 20X2 and 20X1 (\$000 Omitted)

20X2 20X1

Assets

Current Assets

Cash and Short-Term Investments \$400

\$600

Accounts Receivable (net) 3,000

2,400

Inventories 3,000

2,300

Total Current Assets \$6,400

\$5,300

Property, Plant, and Equipment

Land \$1,700

\$500

Buildings and Equipment (net) 1,500

1,000

Total Property, Plant, and Equipment \$3,200

\$1,500

Total Assets \$9,600

\$6,800

Liabilities and Stockholders Equity

Current Liabilities

Accounts Payable \$2,800

\$1,700

Notes Payable 1,100

1,900

Total Current Liabilities \$3,900

\$3,600

Long-Term Liabilities

Bonds Payable 4,100

2,100

Total Liabilities \$8,000

\$5,700

Stockholders Equity

Common Stock \$200

\$200

Retained Earnings 1,400

900

Total Stockholders Equity \$1,600

\$1,100 Total Liabilities and Stockholders Equity \$9,600

\$6,800

LONE PINE COMPANY

Statement of Income and Retained Earnings

For the Year Ending December 31,20X2 (\$000 Omitted)

Net Sales*

\$36,000

Less: Cost of Goods Sold \$20,000

Selling Expense 6,000

Interest Expense 400

Income Tax Expense 2,000 32,400

Net Income

\$3,600

Retained Earnings, Jan. 1

900

Ending Retained Earnings

\$4,500

Cash Dividends Declared and Paid

3,100

Retained Earnings, Dec. 31

\$1,400
All sales are on account.

Instructions Compute the following items for Lone Pine Company for 20X2, rounding all calcu­lations to two decimal places when necessary: a. Quick ratio b. Current ratio c. Inventory-turnover ratio d. Accounts-receivable-turnover ratio e. Return-on-assets ratio f. Net-profit-margin ratio g. Return-on-common-stockholders equity h. Debt-to-total assets i. Number of times that interest is earned

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