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Horngren'S Financial And Managerial Accounting
Found in: Page 844

Short Answer

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.

S. no.

Current Ratio

Debt ratio

Earnings per share

1

1.54

.64

$3.40

2a

1.43

.67

$3.40

2b

2.22

.70

$3.40

2c

2.12

.55

$3.09

2d

1.55

.65

$3.40

See the step by step solution

Step by Step Solution

Step 1: Meaning of Current Ratio

The current ratio is the ratio that determines the efficiency of a business. The current ratio is one of the most helpful liquidity ratios in the financial analysis since it allows for assessing a company's liquidity situation.

Step 2: (1) Computing various ratios

Preparing extract of Balance sheet

Company ST
Extract of balance sheet

Assets

Amount ($)

Liabilities

Amount ($)

Current asset:

Current liabilities:

Cash

23,000

Accounts payable

99,000

Account receivable

81,000

Accrued liabilities

37,000

Merchandise inventory

185,000

Short term payable

51,000

Total current asset

289,000

Total current liabilities

187,000

Long term liabilities

224,000

Total liabilities

411,000

Compute the current ratio for Company ST

Compute the debt ratio for Company ST

Compute the earnings per share for Company ST

Step 3: (2) Computing three ratios considering the effect in each transaction

a. Purchased merchandise inventory of $49,000 on the account.

Compute the current ratio of the or Company ST

Compute the debt ratio for Company ST

Compute the earning per ratio for Company ST

b. Borrowed $127,000 on a long-term note payable

Compute the current ratio of the or Company ST

Compute the debt ratio for Company ST

Compute the earning per ratio for Company ST

c. Issued 2,000 shares of common stock, receiving cash of $107,000

Compute the current ratio of the or Company ST

Compute the debt ratio for Company ST

Compute the earning per ratio for Company ST

d. Received cash on account, $5,000

Compute the current ratio of the or Company ST

Note: Received $5,000 cash on account increases the cash balance and decreases the accounts receivable by $5000. Cash and accounts receivable are current assets, so this transaction's effect is NIL on current assets.

Compute the debt ratio for Company ST

Compute the earning per ratio for Company ST

Most popular questions for Business-studies Textbooks

Using ratios to evaluate a stock investment

Comparative financial statement data of Sanfield, Inc. follow:

SANFIELD, INC.

Comparative Income Statement

Years Ended December 31, 2018, and 2017

2018

2017

Net Sales Revenue

$ 462,000

$ 430,000

Cost of Goods Sold

236,000

213,000

Gross Profit

226,000

217,000

Operating Expense

135,000

133,000

Income from Operations

91,000

84,000

Interest Expense

8,000

12,000

Income Before Income Tax

83,000

72,000

Income Tax Expense

18,000

22,000

Net Income

$ 65,000

$ 50,000

SANFIELD, INC.

Comparative Balance Sheet

December 31, 2018, and 2017

2018

2017

2016

Asset

Current Assets:

Cash

$ 99,000

$ 97,000

Accounts Receivable, Net

109,000

117,000

$ 100,000

Merchandise Inventory

142,000

164,000

207,000

Prepaid Expenses

15,000

5,000

Total Current Assets

365,000

383,000

Property, Plant, and Equipment, Net

215,000

177,000

Total Assets

$ 580,000

$ 560,000

$ 599,000

Liabilities

Total Current Liabilities

$ 222,000

$ 244,000

Long-term Liabilities

113,000

92,000

Total Liabilities

335,000

336,000

Stockholders’ Equity

Preferred Stock, 4%

92,000

92,000

Common Stockholders’ Equity, no par

153,000

132,000

85,000

Total Liabilities and Stockholders’ Equity

$ 580,000

$ 560,000

1. Market price of Sanfield’s common stock: $51.48 at December 31, 2018, and $37.08 at December 31, 2017.

2. Common shares outstanding: 16,000 on December 31, 2018 and 15,000 on December 31, 2017 and 2016.

3. All sales are on credit.

Requirements

1. Compute the following ratios for 2018 and 2017:

  1. Current ratio
  2. Cash ratio
  3. Times-interest-earned ratio
  4. Inventory turnover
  5. Gross profit percentage
  6. Debt to equity ratio
  7. Rate of return on common stockholders’ equity
  8. Earnings per share of common stock
  9. Price/earnings ratio

2. Decide (a) whether Sanfield’s ability to pay debts and sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.

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