1.
Compute the turnover, liquidity, and solvency ratios for the current year of Company T.
1.
Answer to Problem 13.4AP
Turnover, liquidity, and solvency ratios for the current year of Company T are as follows:
Ratios or percentages | Result |
Turnover Ratios | |
Total asset turnover | 0.55 |
Fixed asset turnover | 1.10 |
Receivable turnover ratio | 1.59 |
Inventory turnover ratio | 1.65 |
2.59 | |
Quick ratio | 2.01 |
Cash ratio | 1.15 |
Solvency Ratios | |
Debt-to-equity ratio | 0.67 |
Cash coverage ratio | 3.84 |
Times interest earned ratio | 5.50 |
Table (1)
Explanation of Solution
Turnover ratios: Following are the types of turnover ratios:
- Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total assets.
- Fixed Asset turnover: Fixed asset turnover is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets.
- Receivables turnover ratio: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return.
- Inventory Turnover Ratio: This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period.
Liquidity Ratios: Liquidity explains the extent of cash’s nearness to assets and liabilities. It explains how easily assets can be converted into cash. Following are the types of ratios that help to find liquidity position of a company.
- Current ratio: Current ratio is one of the liquidity ratios, which measures the capacity of the company to meet its short-term obligations using its current assets.
- Quick ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets. Liquid assets such as cash and cash equivalents, marketable securities and net account receivables.
- Cash ratio: This ratio is used to measure the adequacy of the cash in the business. It is determined by dividing cash equivalents and current liabilities.
Solvency ratio: Solvency ratio measures the capacity of a company to sustain over a long period of time. Solvency ratios are debt to assets ratio, time interest earned ratio, and debt to equity ratio, and more.
- Debt-equity ratio: The debt-to-equity ratio indicates that the company’s debt as a proportion of its
stockholders’ equity . - Cash coverage ratio: This ratio indicates the relationship between the cash flows from operating activities and the interest payments.
- Times interest earned ratio: Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.
Determine the ratios of Company T as given below:
Ratios or percentages | Formula | Calculation | Result |
Turnover Ratios | |||
Total asset turnover | 0.55 | ||
Fixed asset turnover | 1.10 | ||
Receivable turnover ratio | 1.59 | ||
Inventory turnover ratio | 1.65 | ||
Liquidity Ratios | |||
Current ratio | 2.59 | ||
Quick ratio | 2.01 | ||
Cash ratio | 1.15 | ||
Solvency Ratios | |||
Debt-to-equity ratio | 0.67 | ||
Cash coverage ratio | 3.84 | ||
Times interest earned ratio | 5.50 |
Table (2)
Working Note:
Determine the amount of average total assets:
Determine the amount of average net fixed assets.
Determine the amount of net credit sales.
Determine the amount of average net receivables.
Determine the amount of average inventory.
Determine the amount of current assets.
Determine the amount of current liabilities.
Determine the amount of quick assets.
Determine the amount of total liabilities.
Determine the amount of total stockholders’ equity.
2.
To write: A comment on the turnover ratios for the current year of Company T.
2.
Explanation of Solution
From Table (1), the results reveal that the average collection period and the average days to sell inventory is very long. Company T takes 229.56 days
Want to see more full solutions like this?
Chapter 13 Solutions
Connect Access Card for Financial Accounting
- The following selected information is taken from the financial statements of Arnn Company for its most recent year of operations: During the year, Arnn had net sales of 2.45 million. The cost of goods sold was 1.3 million. Required: Note: Round all answers to two decimal places. 1. Compute the current ratio. 2. Compute the quick or acid-test ratio. 3. Compute the accounts receivable turnover ratio. 4. Compute the accounts receivable turnover in days. 5. Compute the inventory turnover ratio. 6. Compute the inventory turnover in days.arrow_forwardJuroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: 1. Calculate the return on sales. (Note: Round the percent to two decimal places.) 2. CONCEPTUAL CONNECTION Briefly explain the meaning of the return on sales ratio, and comment on whether Juroes return on sales ratio appears appropriate.arrow_forwardThe following information is available for Cooke Company for the current year: The gross margin is 40% of net sales. What is the cost of goods available for sale? a. 5840,000 b. 960,000 c. 1,200,000 d. 1,220,000arrow_forward
- Last year, Nikkola Company had net sales of 2,299,500,000 and cost of goods sold of 1,755,000,000. Nikkola had the following balances: Refer to the information for Nikkola Company above. Required: Note: Round answers to one decimal place. 1. Calculate the average inventory. 2. Calculate the inventory turnover ratio. 3. Calculate the inventory turnover in days. 4. CONCEPTUAL CONNECTION Based on these ratios, does Nikkola appear to be performing well or poorly?arrow_forwardJuroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: Note: Round answers to two decimal places. 1. Calculate the times-interest-earned ratio. 2. Calculate the debt ratio. 3. Calculate the debt-to-equity ratio.arrow_forwardFINANCIAL RATIOS Based on the financial statements for Jackson Enterprises (income statement, statement of owners equity, and balance sheet) shown on pages 596597, prepare the following financial ratios. All sales are credit sales. The Accounts Receivable balance on January 1, 20--, was 21,600. 1. Working capital 2. Current ratio 3. Quick ratio 4. Return on owners equity 5. Accounts receivable turnover and average number of days required to collect receivables 6. Inventory turnover and average number of days required to sell inventoryarrow_forward
- Cuneo Companys income statements for the last 3 years are as follows: Refer to the information for Cuneo Company above. Required: 1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.) 2. Prepare a common-size income statement for Year 2 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.) 3. Prepare a common-size income statement for Year 3 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.)arrow_forwardSundahl Companys income statements for the past 2 years are as follows: Refer to the information for Sundahl Company above. Required: 1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.) 2. Prepare a common-size income statement for Year 2 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.)arrow_forwardOn January 1, Pope Enterprises inventory was 625,000. Pope made 950,000 of net purchases during the year. On its year-end income statement, Pope reported cost of goods sold of 1,025,000. Calculate Popes December 31 ending inventory.arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning