ACC 205 Week 5 Individual Study Guide Financial Ratios
TUTORIAL: This tutorial includes 6 pages with solutions. A+++ WORK!
- Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edison Stagg Thornton
Cash $4,000 $2,500 $1,000
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
- 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?
- Suppose Thornton is using FIFO for inventory valuation and Edison is using LIFO. Comment on the comparability of information between these two companies.
- If all short-term notes payable are due on July 11 at 8 a.m., comment on each company’s ability to settle its obligation in a timely manner.
- Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:
Net credit sales $832,000 $760,000
Cost of goods sold 440,000 350,000
Cash, Dec. 31 125,000 110,000
Accounts receivable, Dec. 31 180,000 140,000
Inventory, Dec. 31 70,000 50,000
Accounts payable, Dec. 31 115,000 108,000
The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs.
- Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.
- Study the ratios from part (a) and comment on the company’s ability to repay a bank loan in 90 days.
- Suppose that Alaska’s major line of business involves the processing and distribution of fresh and frozen fish throughout the United States. Do you have any concerns about the company’s inventory turnover ratio? Briefly discuss.
- Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 19X7:
Net sales $1,500,000
Interest expense 120,000
Income tax expense 80,000
Preferred dividends 25,000
Net income 130,000
Average assets 1,100,000
Average common stockholders’ equity 400,000
- Compute the profit margin on sales and the rates of return on assets and common stockholders’ equity, rounding calculations to two decimal places.
- Does the firm have positive or negative financial leverage? Briefly explain.
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