Question

Consider the data for Ryan Company in Exhibit 12-15. Assume all sales are on credit.

    Compute the following ratios for the years 20X2 and 20X3:

        Percentage of net income to stockholders’ equity (ROE)

        Gross profit rate

       Percent of net income to sales

        Ratio of total debt to stockholders’ equity (define total debt as total liabilities)

        Inventory turnover

        Current ratio

        Average collection period for accounts receivable

    EXHIBIT 12-15 Ryan Company

    Balance Sheets and Income Statements ($ in thousands)

            December 31

                                                                                                                                     20X3 20X2        20X1

Cash                                                                                                                            $ 30     $ 25     $ 20

    Accounts receivable            90        70        50

    Merchandise inventory       80        70        60

    Prepaid expenses    10        10        10

    Land            30        30        30

    Building       70        75        80

    Equipment 60        50        40

    Total assets             $370    $330    $290

    Accounts payable    $ 50     $ 40     $ 30

    Taxes payable         20        15        10

    Accrued expenses payable 15        10        5

    Long-term debt       45        45        45

    Paid-in capital         150      150      150

    Retained earnings 90        70        50

    Total liabilities and stockholders’ equity    $370    $330    $290

            Year Ended December 31

            20X3    20X2

    Sales (all on credit)             $800    $750

    Cost of goods sold 435      410

    Operating expenses            305      295

    Pretax income         60        45

    Income taxes           20        15

    Net income $ 40     $ 30

    For each of the following items, indicate whether the change from 20X2 to 20X3 for Ryan Company seems to be favorable or unfavorable, and identify the ratios you computed previously that most directly support your answer. The first two items that follow are given as an example.

        Return to owners, favorable, a

        Gross profit rate basically unchanged, b (increased from 45.3% to 45.6%, could answer favorable)

        Ability to pay current debts on time

        Collectibility of receivables

        Risks of insolvency

        Salability of merchandise

        Return on sales

        Overall accomplishment

        Coordination of buying and selling functions

        Screening of risks in granting credit to customers

Answer 1

Refer the below images for the above asked questions in a detailed way of solution.
solution & computation of following ratios for the years 2012 & 20x3 = a) Net income to Stock holders equity: Net income Shareholder's eaquity 20x2 : $30 ($ 150+ 450+ $150+ $70) * •5 4.34 - $210 20x3 : $40 ($150 + $70 + $150 + $90)x • 5 $40 $ 330 - 1741 goods sold b) Gross profit » Sales - cost of rate = Gross profit troo Net Sales $750 - $410 = $340 20x2 : $7.50 $ 750 45.3.1. 2013 : $800-$435 - $ 365 $800 $ 800 = 45.6%

- income to Sales - Net income Net Sales xoo Roxa : $30 = 47- $750 2013 : a 5% $40 & 800 d Total debt-to- equity = Debt equity 20x2 : $40 + $ 15+ $ 10+ $45 $ 150+ $70 = $ 110 = 50%. $ 220 20x3 : $50 + $20+ $15+ $45 $ 150t 890 $ 13054*. $240 e Inventory turnover cost of goods sold Average Inventory $ 410 = $ 410 20X2: $ 60+ $70) x 5 965 = 6-3 times $435 2013 : = $ 435 (970+ $80) x 5 $75 - 5.8 times

current ratio & corrent Assets current liabilities 20x2 : $25+ $70 + 470 + $ 10 $40+$ 15+ $ 10 = $ 175 & 65 +2.7 to 1 20x3: $ 210 $30 + $ 90 + $ 80 + $ 10 $50 + $ 20+ $15 $85 = 2.5 to 1 g) Average collection period of receivables = Days in period x Average Accounts receivables per day. sales credit Average 20x2 : 365 * [650 + $ 70) 5] $7.50 365 * $ 60 $ 21900 $750 1750 = 29.2 days 2013 : 365 x [($70 + $90) 4.5] $800 - 365 x $ 80 $ 29 200 $800 $ 800 = 36.5 days

Yoav (a) Return to owners : favorable: (a) (6) Gross profit rate : almost unchanged (6) (c) Ability to pay corrent debts on time : unfavorable (7) collectability of receivables : unfavorable : (g) Risks of insolvency : on favorable :(d) Salability of merchandise : unfavorable (e) (9) Retorn on sales : favorable & (C) overall accomplishment favorable: (a) i coordination of buying & selling fonctions & unfavorable :(e) (j) screening of risks in granting credit to costomers : on favorable ; (g)