Question

Ayayai Inc. manufactures a variety of consumer products. The company’s founders have run the company for 30 years and are now interested in retiring. Consequently, they are seeking a purchaser who will continue its operations, and a group of investors, Morgan Inc., is looking into the acquisition of Ayayai. To evaluate its financial stability and operating efficiency, Ayayai was requested to provide the latest financial statements and selected financial ratios. Summary information provided by Ayayai is as follows.

Ayayai Inc. Income Statement For the Year Ended November 30, 2021 (in thousands)
Sales (net)		$	30,590
Interest income			590
Total revenue			31,180
Costs and expenses
Cost of goods sold			17,690
Selling and administrative expenses			3,640
Depreciation and amortization expense			1,980
Interest expense			990
Total costs and expenses			24,300
Income before taxes			6,880
Income taxes			2,752
Net income		$	4,128

Ayayai Inc. Balance Sheet As of November 30 (in thousands)
			2021			2020
Cash		$	490		$	590
Short-term investments (at cost)			390			290
Accounts receivable (net)			3,290			2,990
Inventory			6,090			5,490
Total current assets			10,260			9,360
Property, plant, & equipment (net)			7,190			7,090
Total assets		$	17,450		$	16,450
Accounts payable		$	3,790		$	3,490
Income taxes payable			990			890
Accrued expenses			1,790			1,490
Total current liabilities			6,570			5,870
Long-term debt			2,090			1,890
Total liabilities			8,660			7,760
Common stock ($1 par value)			2,790			2,790
Paid-in capital in excess of par			1,090			1,090
Retained earnings			4,910			4,810
Total stockholders’ equity			8,790			8,690
Total liabilities and stockholders’ equity		$	17,450		$	16,450

Selected Financial Ratios
		Ayayai Inc.						Current Industry Average
		2020			2019
Current ratio		1.59			1.60			1.72
Acid-test ratio		0.66			0.59			0.82
Times interest earned		8.64			8.59			8.54
Profit margin on sales		13.29	%		12.19	%		13.09	%
Asset turnover		1.93			1.92			1.93
Inventory turnover		3.26			3.3			3.27

(a)

Calculate a new set of ratios for the fiscal year 2021 for Ayayai based on the financial statements presented. (Round answers to 2 decimal places, e.g. 52.75 or 52.75%.)

Current ratio			: 1
Acid-test ratio			: 1
Times interest earned
Profit margin on sales			%
Asset turnover			times
Inventory turnover			times

Answer 1

Current Ratio = Current Assets / Current Liabilities
= $10260 / 6570 = 1.56 : 1

Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities
= ($10260 - 6090) / 6570 = 0.63 : 1

Times Interest Earned = (Income before taxes + Interest Expense) / Interest Expense
= ($6880+990) / 990 = 7.95 times

Profit Margin on Sales = Net Income / Sales
= $4128 / 30590 = 13.49%

Asset Turnover = Sales / Average Total Assets
= $30590 / 16950 = 1.80 times

Inventory Turnover = Cost of Goods Sold / Average Inventory
= $17690 / 5790 = 3.06 times

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