The financial statements of Valerie’s Natural Foods include the following items:
Compute the following ratios for the current year:
Day’s sales in inventory
Day’s sales in receivables
Gross profit percentage
Cash Ratio = 0.26:1
Acid Test Ratio= 0.70:1
Inventory Turnover Ratio= 4.10 times
Days sales in Inventory= 89 days
Days sales in receivables= 58 days
Gross Profit % =34.45%
Current Ratio = Current Assets/Current Liabilities
Cash Ratio= Cash & Cash Equivalent /Current Liabilities
Cash & Cash Equivalent = Cash + Short term investment
Cash Ratio =0.26:1
Acid Test Ratio = Quick Assets/Current liabilities
Quick Assets: Total Current Assets- Prepaid Exp- Inventory
Quick Assets =$190,000 -$ 78,000 - $17,000
Acid Test Ratio = $95,000 / $136,000
Acid Test Ratio =0.70:1
Inventory Turnover Ratio= Cost of Goods Sold/ Average Inventory.
Average Inventory = Beginning Inventory + Ending Inventory / 2
=$78,000+ $74,000 /2
Average Inventory= $76,000
Inventory turnover ratio = $312,000/$76,000
= 4.10 times
Days Sales in Inventory = No of Days in Year/ Inventory Turnover Ratio
=365 / 4.10
= 89 days
Days Sales in Receivable = (Average Accounts Receivable / Total Credit Sales) x 365
Average Accounts Received = $60,000 + $92,000 / 2
Days Sales In Received = $76,000/ $476,000 x365
Days Sales In Received = 58 days
Gross Profit Percentage = (Gross Profit / Net Sales) x 100
Gross Profit = Sales- Cost of Goods Sold
= ($476.000 - $312,000)/$476,000
= 34.45 %
Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.
Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.
1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?
2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.
Using ratios to decide between two stock investments
Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Digitalized Corp. and Every Zone, Inc. and have assembled the following data.
Selected income statement data for the current year:
Net sales revenue (all on credit)
Cost of goods sold
Selected balance sheet and market price data at the end of the current year:
Accounts receivables, Net
Total current assets
Total current liabilities
$1 par (12,000 shares)
$1 par (17,000 shares)
Total stockholders equity
Market price per share of common stock
Dividend paid per common stock
Selected balance sheet data at the beginning of the current year:
Accounts Receivable, net
$1 par (12,000 shares)
$1 par (17,000 shares)
Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy.
Data for Connor, Inc. and Alto Corp. follow:
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
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?
Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.
Comparative Income StatementYears Ended December 31, 2019, and 2018
Dollars in thousands
Net Sales Revenue
Cost of Goods Sold
Selling and Administrative Expenses
Income Tax Expense
Common Stockholders’ Equity
Common Shares Outstanding During the Year
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