Asked by Sofiya Hoyda on Jul 03, 2024
Verified
Financial statements for Praeger Corporation appear below: Dividends during Year 2 totaled $45 thousand.The market price of a share of common stock on December 31, Year 2 was $30.
Required:
Compute the following for Year 2:
a.Return on total assets.
b.Working capital.
c.Current ratio.
d.Acid-test (quick)ratio.
e.Accounts receivable turnover.
f.Average collection period.
g.Inventory turnover.
h.Average sale period.
i.Times interest earned ratio.
j.Debt-to-equity ratio.
Acid-test Ratio
A liquidity ratio that measures a company's ability to pay off its current liabilities with its quick assets (cash, marketable securities, and accounts receivable).
Debt-to-equity Ratio
A financial indicator showing how much of a company's assets are financed by debt compared to shareholders' equity.
Receivable Turnover
A financial ratio that measures how efficiently a company collects its outstanding credit sales, typically calculated annually.
- Calculate and understand various financial ratios and their importance.
- Analyze a company's liquidity position using working capital, current ratio, and acid-test (quick) ratio.
- Evaluate a company's efficiency through accounts receivable turnover, inventory turnover, and the operating cycle.
Verified Answer
= $140 ÷ $2,445 = 5.73%
*Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $105 + [$50 × (1 - 0.30)] = $140
**Average total assets = ($2,460 + $2,430)÷ 2 = $2,445
b.Working capital = Current assets - Current liabilities
= $440 - $310 = $130
c.Current ratio = Current assets ÷ Current liabilities
= $440 ÷ $310 = 1.42
d.Acid-test ratio = Quick assets* ÷ Current liabilities
= $270 ÷ $310 = 0.87
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $100 + $170 = $270
e.Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,100 ÷ $170 = 6.47
*Average accounts receivable = ($170 + $170)÷ 2 = $170
f.Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 6.47 = 56.4 days
*See above
g.Inventory turnover = Cost of goods sold ÷ Average inventory balance*
= $770 ÷ $110 = 7.00
*Average inventory balance = ($110 + $110)÷ 2 = $110
h.Average sale period = 365 days ÷ Inventory turnover*
= 365 ÷7.00 = 52.1 days
*See above
i.Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $200 ÷ $50 = 4.00
j.Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $810 ÷ $1,650 = 0.49
Learning Objectives
- Calculate and understand various financial ratios and their importance.
- Analyze a company's liquidity position using working capital, current ratio, and acid-test (quick) ratio.
- Evaluate a company's efficiency through accounts receivable turnover, inventory turnover, and the operating cycle.
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