Chapter 3, Problem 16QP

a)

Summary Introduction

To calculate: The current ratio, quick ratio, cash ratio, debt-equity ratio and equity multiplier ratio, and total debt ratio.

Introduction:

The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the firm’s performance.

Answer to Problem 16QP

The current ratio for the year 2013 and 2014 are 0.62 times and 0.69 times respectively.

Formula to calculate the current ratio:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

Compute current ratio for the year 2013:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets }}{\text{Current liabilities }}\\ =\frac{\$194,755}{\$313,436}\\ =0.62\text{ times}\end{array}$

Compute current ratio for the year 2014:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets }}{\text{Current liabilities }}\\ =\frac{\$226,318}{\$326,988}\\ =0.69\text{ times}\end{array}$

Hence, the current ratio for the year 2013 and 2014 are 0.62 times and 0.69 times respectively.

Explanation of Solution

Given information:

• The total current assets (2013) are $194,755.
• The total current liabilities (2013) are $313,436.
• The total current assets (2014) are $226,318.
• The total current liabilities (2014) are $326,988.

b)

Summary Introduction

To calculate: The current ratio, quick ratio, cash ratio, debt-equity ratio and equity multiplier ratio, and total debt ratio.

Given information:

• The total current assets (2013) are $194,755.
• Inventory (2013) is $121,807.
• The total current liabilities (2013) are $313,436.
• The total current assets (2014) are $226,318.
• Inventory (2014) is $143,615.
• The total current liabilities (2014) are $326,988.

Answer to Problem 16QP

The quick ratio for the year 2013 and 2014 are 0.23 times and 0.25 times respectively.

Explanation of Solution

Formula to calculate the current ratio:

$\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}$

Compute quick ratio for the year 2013:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$194,755-\$121,807\right)}{\$313,436}\\ =0.23\text{ times}\end{array}$

Compute quick ratio for the year 2014:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\$226,318-\$143,615}{\$326,988}\\ =0.25\text{ times}\end{array}$

Hence, the quick ratio for the year 2013 and 2014 are 0.23 times and 0.25 times respectively.

c)

Summary Introduction

To calculate: The current ratio, quick ratio, cash ratio, debt-equity ratio and equity multiplier ratio, and total debt ratio.

Given information:

• Cash (2013) is $21,396.
• Total current liabilities (2013) are $313,436.
• Cash (2014) is $24,385.
• Total current liabilities (2014) are $326,988.

Answer to Problem 16QP

The cash ratio for the year 2013 and 2014 are 0.068 times and 0.075 times respectively.

Explanation of Solution

Formula to calculate the cash ratio:

$\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}$

Compute cash ratio for the year 2013:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$21,396}{\$313,436}\\ =0.068\text{ times}\end{array}$

Compute quick ratio for the year 2014:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$24,385}{\$326,988}\\ =0.075\text{ times}\end{array}$

Hence, the cash ratio for the year 2013 and 2014 are 0.068 times and 0.075 times respectively.

d)

Summary Introduction

To calculate: The current ratio, quick ratio, cash ratio, debt-equity ratio and equity multiplier ratio, and total debt ratio.

Given information:

• The total current liabilities (2013) are $313,436.
• The total long-term debt (2013) is $271,700.
• The total equity (2013) is $332,481.
• The total current liabilities (2014) are $326,988.
• The total long-term debt (2014) is $285,300.
• The total equity (2014) is $371,358.

Answer to Problem 16QP

The debt-equity ratio and equity multiplier ratio for the year 2013 and 2014 are 1.76 times and 1.65 times respectively and 2.76 times and 2.65 times respectively.

Explanation of Solution

Formula to calculate the total debt value:

$\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}$

Note: It is needed to compute the value of total debt to calculate the total debt ratio.

Compute the total debt value for the year 2013:

$\begin{array}{c}\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}\\ =\$313,436+\$271,700\\ =\$585,136\end{array}$

Compute the total debt value for the year 2014:

$\begin{array}{c}\text{Total debt}=\text{Total current liabilities}+\text{Long-term debt}\\ =\$326,988+\$285,300\\ =\$612,288\end{array}$

Hence, the total debt value for the year 2013 and 2014 are $516,590 and $540,090 respectively.

Formula to calculate the total debt ratio:

$\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}$

Compute the total debt ratio for the year 2013:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$585,136}{\$332,481}\\ =1.76\text{ times}\end{array}$

Compute the total debt ratio for the year 2014:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{\$612,288}{\$371,358}\\ =1.65\text{ times}\end{array}$

Hence, the total debt ratio for the year 2013 and 2014 are 1.76 times and 1.65 times respectively.

Formula to calculate the equity multiplier ratio:

$\text{Equity multiplier ratio}=1+\text{Debt-equity ratio}$

Compute the equity multiplier ratio for the year 2013:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{Debt-equity ratio}\\ =1+1.76\\ =2.76\text{ times}\end{array}$

Compute the equity multiplier ratio for the year 2014:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{Debt-equity ratio}\\ =1+1.65\\ =2.65\text{ times}\end{array}$

Hence, the equity multiplier ratio for the year 2013 and 2014 are 2.76 times and 2.65 times respectively.

e)

Summary Introduction

To calculate: The current ratio, quick ratio, cash ratio, debt-equity ratio and equity multiplier ratio, and total debt ratio.

Given information:

• The total asset (2013) is $917,617.
• The total equity (2013) is $332,481.
• The total long-term debt (2013) is $271,700.
• The total asset (2014) is $983,646.
• The total equity (2014) is $371,358.
• The total long-term debt (2014) is $285,300.

Answer to Problem 16QP

The total debt ratio for the year 2013 and 2014 are 0.64 times and 0.62 times respectively.

Explanation of Solution

Formula to calculate the total debt ratio:

$\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}$

Compute the total debt ratio for the year 2013:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}\\ =\frac{\$917,617-\$332,481}{\$917,617}\\ =0.64\text{ times}\end{array}$

Compute the total debt ratio for the year 2014:

$\begin{array}{c}\text{Total debt ratio}=\frac{\text{Total assets}-\text{Total equity}}{\text{Total assets}}\\ =\frac{\$983,646-\$371,358}{\$983,646}\\ =0.62\text{ times}\end{array}$

Hence, the total debt ratio for the year 2013 and 2014 are 0.64 times and 0.62 times respectively