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Chapter 15: Q33PGB (page 849)

Determining the effects of business transactions on selected ratios

Financial statement data of Modern Traveler’s Magazine include the following items:

Cash

\(19,000

Accounts Receivable, Net

82,000

Merchandise Inventory

183,000

Total Assets

638,000

Accounts Payable

102,000

Accrued Liabilities

35,000

Short-term Notes Payable

50,000

Long-term Liabilities

221,000

Net Income

69,000

Common Shares Outstanding

50,000 shares

Requirements

  1. Compute Modern Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:

Current ratio

Debt ratio

Earnings per share

2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.

a. Purchased merchandise inventory of \)42,000 on account.

b. Borrowed \(121,000 on a long-term note payable.

c. Issued 5,000 shares of common stock, receiving cash of \)103,000.

d. Received cash on account, $5,000.

Short Answer

Expert verified
  1. Financial ratios

Current ratio

Debt ratio

Earnings per share

1.52 times

0.64 times

1.38 per share

2. Effect of each transaction on financial ratios:

Transaction

Current ratio

Debt Ratio

Earnings per share

a

1.42

0.66

1.38

b

1.52

0.70

1.38

c

2.07

0.55

1.25

d

1.59

0.63

1.38

Step by step solution

01

Definition of Financial Ratios

The figures that are calculated by comparing various line items of the financial statement to arrive at a conclusive decision regarding liquidity, solvency, and profitability are known as financial ratios.

02

Calculation of financial ratios:

Current ratio

Debt ratio

Earnings per share

Currentratio=CurrentassetsCurrentliabilities=$19,000+$82,000+$183,000$102,000+$35,000+$50,000=$284,000$187,000=1.52 times

Debtratio=TotaldebtTotalassets=$102,000+$35,000+$50,000+$221,000$638,000=$408,000$638,000=0.64times

Earningspershare=NetincomeCommonsharesoutstanding=$69,00050,000=1.38 pershare

03

Ratios after effect of transactions:

a. Purchased merchandise inventory of $42,000 on account.

Current ratio

Debt ratio

Earnings per share

Currentratio=CurrentassetsCurrentliabilities=$19,000+$82,000+$183,000+$42,000$102,000+$35,000+$50,000+$42,000=$326,000$229,000=1.42 times

Debtratio=TotaldebtTotalassets=$102,000+$35,000+$50,000+$221,000+$42,000$638,000+$42,000=$450,000$680,000=0.66times

Earningspershare=NetincomeCommonsharesoutstanding=$69,00050,000=1.38 pershare

b. Borrowed $121,000 on a long-term note payable.

Current ratio

Debt ratio

Earnings per share

Currentratio=CurrentassetsCurrentliabilities=$19,000+$82,000+$183,000$102,000+$35,000+$50,000=$284,000$187,000=1.52 times

Debtratio=TotaldebtTotalassets=$102,000+$35,000+$50,000+$221,000+$121,000$638,000+$121,000=$529,000$759,000=0.70times

Earningspershare=NetincomeCommonsharesoutstanding=$69,00050,000=1.38 pershare

c. Issued 5,000 shares of common stock, receiving cash of $103,000.

Current ratio

Debt ratio

Earnings per share

Currentratio=CurrentassetsCurrentliabilities=$19,000+$82,000+$183,000+$103,000$102,000+$35,000+$50,000=$387,000$187,000=2.07 times

Debtratio=TotaldebtTotalassets=$102,000+$35,000+$50,000+$221,000$638,000+$103,000=$408,000$741,000=0.55times

Earningspershare=NetincomeCommonsharesoutstanding=$69,00050,000+5,000=1.25 pershare

d. Received cash on account, $5,000.

Current ratio

Debt ratio

Earnings per share

Currentratio=CurrentassetsCurrentliabilities=$19,000+$82,000+$183,000+$5,000$102,000+$35,000+$50,000-$5,000=$289,000$182,000=1.59 times

Debtratio=TotaldebtTotalassets=$102,000+$35,000+$50,000+$221,000-$5,000$638,000+$5,000=$403,000$643,000=0.63times

Earningspershare=NetincomeCommonsharesoutstanding=$69,00050,000=1.38 pershare

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Most popular questions from this chapter

Determining the effects of business transactions on selected ratios Financial statement data of Style Traveler Magazine include the following items:

Cash

\( 23,000

Accounts Receivable, Net

81,000

Merchandise Inventory

185,000

Total Assets

635,000

Accounts Payable

99,000

Accrued Liabilities

37,000

Short-term Notes Payable

51,000

Long-term Liabilities

224,000

Net Income

68,000

Common Shares Outstanding

20,000 shares

Requirements

  1. Compute Style Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:

Current Ratio Debt Ratio Earnings per Share

2.Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately

  1. Purchased merchandise inventory of \)49,000 on the account.
  2. Borrowed \(127,000 on a long-term note payable.
  3. Issued 2,000 shares of common stock, receiving cash of \)107,000.
  4. Received cash on account, $5,000.

Explaining financial statements

Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?

Data for Connor, Inc. and Alto Corp. follow:

Connor Alto

Net Sales Revenue \( 13,000 \) 22,000

Cost of Goods Sold 7,917 15,730

Other Expenses 4,342 5,170

Net Income \( 741 \) 1,100

Requirements

1. Prepare common-size income statements.

2. Which company earns more net income?

3. Which company’s net income is a higher percentage of its net sales revenue?

Preparing common-size statements, analysis of profitability and financial position, comparison with the industry, and using ratios to evaluate a company

Consider the data for Randall Department Stores presented in Problem P15-31B.

Requirements

  1. Prepare a common-size income statement and balance sheet for Randall. The first column of each statement should present Randall’s common-size statement, and the second column, the industry averages.
  2. For the profitability analysis, compute Randall’s (a) gross profit percentage and (b) profit margin ratio. Compare these figures with the industry averages. Is Randall’s profit performance better or worse than the industry average?
  3. For the analysis of financial position, compute Randall’s (a) current ratio and (b) debt to equity ratio. Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47, and the debt to equity industry average is 1.83. Is Randall’s financial position better or worse than the industry averages?

The financial statements of Ion Corporation include the following items:

Current Year Preceding Year

Balance Sheet:

Cash \( 6,000 \) 8,000

Short-term Investments 4,400 10,700

Net Accounts Receivable 21,600 29,200

Merchandise Inventory 30,800 27,600

Prepaid Expenses 6,000 3,600

Total Current Assets 68,800 79,100

Total Current Liabilities 53,200 37,200

Income Statement:

Net Sales Revenue $ 184,800

Cost of Goods Sold 126,000

Compute the following ratios for the current year:

7. Current ratio

8. Acid-test ratio

9. Inventory turnover

10. Gross profit percentage
See all solutions

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