FINANCIAL ACCOUNTING (LOOSELEAF)
FINANCIAL ACCOUNTING (LOOSELEAF)
10th Edition
ISBN: 9781260481358
Author: Libby
Publisher: MCG
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Chapter 13, Problem 9P

1)

To determine

Compute the given ratios for Year 3 of Incorporation CPK.

1)

Expert Solution
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Answer to Problem 9P

Compute the given ratios for Year 3 of Incorporation CPK.

RatioFormulaCalculationResult
Return on Equity (ROE)NetIncomeAverageTotalStockholder'Equity$(406)($194,411+$189,250)(2.12)%
Net profit marginNetIncomeNet Sales Revenue$(406)$642,231(0.06)%
Inventory turnoverCost of Goods SoldAverage Inventory$528,285($5,827+$5,557)÷292.81 times
Current ratioCurrentAssetsCurrentLiabilities$49,625$93,1510.53 times
Quick ratioQuickAssetsCurrentLiabilities$21,230+$11,594$93,1510.35  times
Debt-to-equity ratioTotalLiabilitiesTotalStockholder'sEquity$93,151+$9,886+$33,177+$319$194,4117.02 times
Price/Earnings (P/E) ratioMarket Price per ShareEarningsper Share$1.12$0.02(56.00)  times

Table (1)

Explanation of Solution

Return on equity ratio:

Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.

Return on Equity=NetIncomeAverageTotalStockholder'Equity

Return on equity of the Incorporation CPK is (2.12) %.

Profit margin:

Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.

Net profit margin=NetIncomeNet Sales Revenue

Net profit margin of the Incorporation CPK is (0.06) %.

Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Inventory Turnover Ratio =Cost of Goods Sold Average Inventory

Inventory turnover ratio of the Incorporation CPK is 92.81%.

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio=CurrentAssetsCurrentLiabilities

Current ratio of the Incorporation CPK is 0.53 times.

Quick Ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.

Quick Ratio=QuickAssetsCurrentLiabilities

Quick ratio of the Incorporation CPK is 0.35 times.

Debt-equity ratio: The debt-to-equity ratio indicates that the company’s debt as a proportion of its stockholders’ equity.

Debt-equity ratio=TotalLiabilitiesTotalStockholder'sEquity

Debt-to-Equity ratio of the Incorporation CPK is 7.02 times.

Price/Earnings Ratio: It depicts the relation of market price of a share to earnings per share of that company. The price/earnings ratio presents the market value of the amount invested to earn $1 by a company. It is major tool to be used by investors before the decisions related to investments in a company.

Price/Earnings Ratio=Market Price per Share Earnings per Share

Price/Earnings ratio of the Incorporation CPK is (56.00) times.

2)

To determine

Identify that Whether the calculated inventory turnover for Incorporation CPK reasonable or not.

2)

Expert Solution
Check Mark

Explanation of Solution

Incorporation CPK is engaging the restaurant business. Inventory turnover ratio of the Incorporation CPK is 92.81 which is very high. It is due to the nature of the business that is Incorporation CPK is in a business where purchasing inventory, processing and selling food to customers is on daily basis.

Hence, the inventory turnover ratio of the Incorporation CPK is reasonable.

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Chapter 13 Solutions

FINANCIAL ACCOUNTING (LOOSELEAF)

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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