Financial Accounting
Financial Accounting
10th Edition
ISBN: 9781260481563
Author: Libby, Robert
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 13, Problem 4AP

1.

To determine

Compute the turnover, liquidity, and solvency ratios for the current year of Company T.

1.

Expert Solution
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Answer to Problem 4AP

Turnover, liquidity, and solvency ratios for the current year of Company T are as follows:

Ratios or percentagesResult
Turnover Ratios
Total asset turnover0.55
Fixed asset turnover1.10
Receivable turnover ratio1.59
Inventory turnover ratio1.65
Liquidity Ratios
Current ratio2.59
Quick ratio2.01
Cash ratio1.15
Solvency Ratios
Debt-to-equity ratio0.67
Cash coverage ratio3.84
Times interest earned ratio5.50

Table (1)

Explanation of Solution

Determine the ratios of Company T as given below:

RatiosFormulaCalculationResult
Turnover Ratios
Total asset turnoverNet Sales RevenueAverage total assets$110,000$199,750(1)0.55
Fixed asset turnoverNet Sales RevenueAverage net fixed assets$110,000$100,000(2)1.10
Receivable turnover ratioNet credit sales Average net receivables$55,000(3)$34,500(4)1.59
Inventory turnover ratioCost of goods soldAverage inventory$52,000$31,500(5)1.65
Liquidity Ratios
Current ratioCurrent assetsCurrent liabilities$111,500(6)$43,000(7)2.59
Quick ratio(Cash and  equivalents)+(Accounts receivable)Current liabilities$86,500(8)$43,000(7)2.01
Cash ratioCash and Cash EquivalentsCurrent liabilities$49,500$43,000(7)1.15
Solvency Ratios
Debt-to-equity ratioTotal liabilitiesTotal  stockholders' equity$83,000(9)$123,500(10)0.67
Cash coverage ratioCash coverage ratio }=(Cash flows from operating activities )Interest  paid$14,600(Given)$3,800(Given)3.84
Times interest earned ratioNet income+Interest expense+Tax expenseInterest expense$12,600+$4,000+$5,400$4,000(Given)5.50

Table (2)

Working Note 1: Determine the amount of average total assets:

Average total assets=(Ending total assets)+(Beginning total assets)2=$206,500+$193,0002=$399,5002=$199,750

Working Note 2: Determine the amount of average net fixed assets.

Average net fixed assets=(Ending net fixed assets)+(Beginning net fixed assets)2=$95,000+$105,0002=$200,0002=$100,000

Working Note 3: Determine the amount of net credit sales.

Net credit sales=Total sales revenue×12(Given)=$110,000×12=$55,000

Working Note 4: Determine the amount of average net receivables.

Average net receivables=(Ending accounts receivable)+(Beginning accounts receivable)2=$37,000+$32,0002=$69,0002=$34,500

Working Note 5: Determine the amount of average inventory.

Average net receivables=(Ending inventory)+(Beginning inventory)2=$25,000+$38,0002=$63,0002=$31,500

Working Note 6: Determine the amount of current assets.

Current assets=Cash+(Accounts receivable)+Inventories=$49,500+$37,000+$25,000=$111,500

Working Note 7: Determine the amount of current liabilities.

Current liabilities=Accounts payable+Income taxes payable=$42,000+$1,000=$43,000

Working Note 8: Determine the amount of quick assets.

Quick assets=Cash+Accounts receivable=$49,500+$37,000=$86,500

Working Note 9: Determine the amount of total liabilities.

Total liabilities=(Accounts payable)+(Income taxes payable)+(Note payable, long-term)=$42,000+$1,000+$40,000=$83,000

Working Note 10: Determine the amount of total stockholders’ equity.

Total stckholders' equity=Capital stock+Retained earnings=$90,000+$33,500=$123,500

2.

To determine

Write a comment on the turnover ratios for the current year of Company T.

2.

Expert Solution
Check Mark

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 (365 days1.59) to collect its receivable and 221.21 days (365 days1.65) to sell its inventory. These ratios reveal that the Company T is very inefficient in managing receivables and maintaining inventory levels. The management of Company T needs to improve the inventory levels and the collection of receivables. The total asset turnover and fixed asset turnover ratio is quite satisfactory.

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Chapter 13 Solutions

Financial Accounting

Ch. 13 - Prob. 11QCh. 13 - 12. Explain how a company’s accounting policy...Ch. 13 - 13. Explain why rapid growth in total sales might...Ch. 13 - 1. A company has total assets of $500,000 and...Ch. 13 - Prob. 2MCQCh. 13 - 3. Which of the following ratios is used to...Ch. 13 - The two components of the return on asset ratio...Ch. 13 - Which of the following ratios is required by...Ch. 13 - 6. A company has quick assets of $300,000 and...Ch. 13 - 7. The inventory turnover ratio for Natural Foods...Ch. 13 - 8. Given the following ratios for four companies,...Ch. 13 - 9. A decrease in selling and administrative...Ch. 13 - 10. A creditor is least likely to use what ratio...Ch. 13 - M13-1 Inferring Financial Information Using...Ch. 13 - Inferring Financial Information Using Component...Ch. 13 - Computing the Return on Equity Ratio Compute the...Ch. 13 - Computing the Return on Asset Ratio Compute the...Ch. 13 - Analyzing the Inventory Turnover Ratio A...Ch. 13 - Prob. 6MECh. 13 - Analyzing Financial Relationships Ramesh Company...Ch. 13 - Prob. 8MECh. 13 - Inferring Financial Information Using a Ratio...Ch. 13 - Analyzing the Impact of Accounting...Ch. 13 - E13-1 Using Financial Information to Identify...Ch. 13 - E13-2 Using Financial Information to Identify...Ch. 13 - E13-2 Using Financial Information to Identify...Ch. 13 - Using Financial Information to Identify...Ch. 13 - Prob. 5ECh. 13 - Matching Each Ratio with Its Computational...Ch. 13 - Computing Turnover Ratios Procter & Gamble is a...Ch. 13 - Computing Turnover Ratios | Sales for the year for...Ch. 13 - Analyzing the Impact of Selected Transactions on...Ch. 13 - Analyzing the Impact of Selected Transactions on...Ch. 13 - Inferring Financial Information from Ratios Dollar...Ch. 13 - Prob. 12ECh. 13 - Prob. 13ECh. 13 - Analyzing Ratios Company X and Company Y are two...Ch. 13 - Analyzing an Investment by Comparing Selected...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Computing Comparative Financial Statements and ROA...Ch. 13 - Prob. 7PCh. 13 - Analyzing the Impact of Alternative Inventory...Ch. 13 - Prob. 9PCh. 13 - Coca-Cola and PepsiCo are well-known international...Ch. 13 - Prob. 2APCh. 13 - Calculating Profitability, Turnover, Liquidity,...Ch. 13 - Prob. 4APCh. 13 - Prob. 5APCh. 13 - Computing Comparative Financial Statements and ROA...Ch. 13 - Prob. 1CPCh. 13 - Prob. 2CPCh. 13 - Prob. 3CPCh. 13 - Prob. 4CPCh. 13 - Inferring Information from the Two Components of...Ch. 13 - Prob. 6CP
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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License