Question

QUESTION 32

1. Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. Understanding and evaluating such relationships is essential to the audit process. Each of the following represents a financial ratio that the auditor calculated during the prior year's audit. For each ratio, calculate the current year's ratio from the financial statements. Sales represent net credit sales. The total assets, receivables, and inventory balances at December 31, year 2 were the same as at December 31, year 1. Calculations should be rounded, if necessary, to the same number of places as the prior year's ratios. Select the answer from the list.
   

   Holiday Manufacturing Co.
   Balance Sheet
   December 31, Year 2

   Assets			Liabilities and Capital
   Cash	$ 240,000		Accounts payable	$ 160,000
   Receivables	400,000		Notes payable	100,000
   Inventory	600,000		Other current liabilities	140,000
   Total current assets	$ 1,240,000		Total current liabilities	400,000
   Plant and equipment-net	760,000		Long-term debt	350,000
   			Common stock	750,000
   			Retained earnings	500,000
   Total assets	$ 2,000,000		Total liabilities and capital	$ 2,000,000

   Holiday Manufacturing Co.
   Income Statement
   Year Ended December 31, Year 2

   Sales				$ 3,000,000
   Cost of goods sold
   Material		$ 800,000
   Labor		700,000
   Overhead		300,000		1,800,000
   Gross margin				$ 1,200,000
   Selling expenses		$ 240,000
   General and administrative expenses		300,000		540,000
   Operating income				$ 660,000
   Less interest expense				40,000
   Income before taxes				$ 620,000
   Less federal income taxes				220,000
   Net income				$    400,000

   1. Current ratio
2. Quick Ratio
3. Accounts receivable
4. inventory turnover
5. Total Asset turnover
6. Gross Margin Percentage
7. Net Operating margin percentage
8. Times interest earned
9. Total debt to equity percentage

Answer 1

Answer :

1. Current ratio :

Current ratio = Current assets / Current liabilities

= $1,240,000 / $400,000

= 3.1

2. Quick ratio :

Quick ratio = (Cash + Receivables) / Current liabilities

= ($240,000 + $400,000) / $400,000

= 1.6

3. Accounts Receivable Turnover ratio :

Accounts Receivable Turnover ratio = Net Credit sales / Average Accounts Receivable

Average Accounts Receivable = ($400,000 + $400,000) / 2 = $400,000

Accounts Receivable Turnover ratio

= $3,000,000 / $400,000

= 7.5 times

4. Total Asset turnover ratio :

Total Asset turnover = Net sales / Average Total assets

Average Total assets = ($2,000,000 + $2,000,000) / 2 = $2,000,000

Total Asset turnover ratio

= $3,000,000 / $2,000,000

= 1.5 times

5. Gross Margin Percentage :

Gross Margin Percentage =  Gross Margin / Net sales x 100

= $1,200,000 / $3,000,000 x 100

= 40%

6. Net Operating margin percentage :

Net Operating margin percentage = Operating profit / Net sales x 100

= $660,000 / $3,000,000 x 100

= 22%

7. Times interest earned :

Times interest earned ratio = Operating Income / Interest expense

= $660,000 / $40,000

= 16.5

8. Total debt to equity percentage :

Total debt to equity percentage = Total debt / Total Equity x 100

= (Total current liabilities + Long-term debt) / (Common stock + Retained earnings) x 100

= ($400,000 + $350,000) / ($750,000 + $500,000) x 100

= $750,000 / $1,250,000 x 100

= 60%