Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	23,000
Accounts receivable, net		160,000
Merchandise inventory		340,000
Prepaid expenses		8,000
Total current assets		531,000
Property and equipment, net		880,000
Total assets	$	1,411,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	250,000
Bonds payable, 8%		320,000
Total liabilities		570,000
Stockholders’ equity:
Common stock, $5 par value	$	170,000
Retained earnings		671,000
Total stockholders’ equity		841,000
Total liabilities and stockholders’ equity	$	1,411,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	3,060,000
Cost of goods sold		1,147,000
Gross margin		1,913,000
Selling and administrative expenses		640,000
Net operating income		1,273,000
Interest expense		25,600
Net income before taxes		1,247,400
Income taxes (30%)		374,220
Net income	$	873,180

Account balances at the beginning of the year were: accounts receivable, $180,000; and inventory, $280,000. All sales were on account.

Required:

Compute the following financial data and ratios:

1. Working capital.

2. Current ratio. (Round your answer to 1 decimal place.)

3. Acid-test ratio. (Round your answer to 2 decimal places.)

4. Debt-to-equity ratio. (Round your answer to 2 decimal places.)

5. Times interest earned ratio. (Round your answer to 2 decimal places.)

6. Average collection period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

7. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

8. Operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

Answer 1

Ans. 1	Working capital =     Total current assets - Total current liabilities
	$531,000 - $250,000
	$281,000
Ans. 2	Current ratio   =   Total current assets / Total current liabilities
	$531,000 / $250,000
	2.1 : 1
Ans. 3	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	($531,000 - $340,000 - $8,000) / $250,000
	$183,000 / $250,000
	0.73 : 1
Ans. 4	Debt to equity ratio   =   Total liabilities / Total stockholder's equity
	$570,000 / $841,000
	0.68
Ans. 5	Time interest earned = Net operating income / Interest expenses
	$1,273,000 / $25,600
	49.73 times
Ans. 6	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	365 / $3,060,000 * $170,000
	20.3	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	($180,000 + $160,000) / 2
	$170,000
Ans. 7	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
	365 / $1,147,000 * $310,000
	98.6	days
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	($280,000 + $340,000) / 2
	$310,000
Ans. 8	Operating cycle = Average collection period + Average sales period
	20.3 + 98.6
	118.9   days