Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	18,000
Accounts receivable, net		170,000
Merchandise inventory		390,000
Prepaid expenses		12,000
Total current assets		590,000
Property and equipment, net		830,000
Total assets	$	1,420,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	220,000
Bonds payable, 10%		310,000
Total liabilities		530,000
Stockholders’ equity:
Common stock, $5 par value	$	150,000
Retained earnings		740,000
Total stockholders’ equity		890,000
Total liabilities and stockholders’ equity	$	1,420,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,560,000
Cost of goods sold		1,340,000
Gross margin		1,220,000
Selling and administrative expenses		580,000
Net operating income		640,000
Interest expense		31,000
Net income before taxes		609,000
Income taxes (30%)		182,700
Net income	$	426,300

Account balances at the beginning of the year were: accounts receivable, $150,000; 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
		$590,000 - $220,000
		$370,000
Ans. 2	Current ratio   =   Total current assets / Total current liabilities
		$590,000 / $220,000
		2.7 : 1
Ans. 3	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
		($590,000 - $390,000 - $12,000) / $220,000
		$188,000 / $220,000
		0.85 : 1
Ans. 4	Debt to equity ratio   =   Total liabilities / Total stockholder's equity
		$530,000 / $890,000
		0.60
Ans. 5	Time interest earned = Net operating income / Interest expenses
		$640,000 / $31,000
		20.65	times
Ans. 6	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
		365 / $2,560,000 * $160,000
		22.8	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
		($150,000 + $170,000) / 2
		$160,000
Ans. 7	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
		365 / $1,340,000 * $335,000
		91.3	days
	*Average inventory = (Beginning inventory + Ending inventory) / 2
		($280,000 + $390,000) / 2
		$335,000
Ans. 8	Operating cycle = Average collection period + Average sales period
		22.8 + 91.3
		114.1	days