Question

Markus Company’s common stock sold for $1.50 per share at the end of this year. The company paid a common stock dividend of $0.39 per share this year. It also provided the following data excerpts from this year’s financial statements:     

	Ending Balance		Beginning Balance
Cash	$	24,500	$	40,800
Accounts receivable	$	42,000	$	38,800
Inventory	$	42,400	$	42,000
Current assets	$	108,900	$	121,600
Total assets	$	302,000	$	242,800
Current liabilities	$	46,500	$	31,500
Total liabilities	$	92,000	$	82,800
Common stock, $1 par value	$	107,000	$	107,000
Total stockholders’ equity	$	210,000	$	160,000
Total liabilities and stockholders’ equity	$	302,000	$	242,800

     

	This Year
Sales (all on account)	$	480,000
Cost of goods sold	$	278,400
Gross margin	$	201,600
Net operating income	$	32,500
Interest expense	$	2,000
Net income	$	21,350

1-1. What is the acid-test ratio at the end of this year?

1-2. What is the accounts receivable turnover and the average collection period?

1-3. What is the inventory turnover and the average sale period?

1-4. What is the company’s operating cycle?

1-5. What is the total asset turnover?

1-6. What is the times interest earned ratio?

2. What is the debt-to-equity ratio at the end of this year?

3. What is the equity multiplier?

Answer 1

1-1. Acid test ratio = Current assets - inventories / current liabilities

Acid test ratio = $108,900-42,400 / 46,500 = 1.43

1-2. Accounts receivable turnover = Credit sales / Average accounts receivable

Average accounts receivable = $38,800+42,000 / 2 = $40,400

Accounts receivable turnover = $480,000 / 40,400 = 11.88

Average collection period = 365 days / Accounts receivable turnover

Average collection period = 365 days / 11.88 = 30.72 days

1-3. Inventory turnover ratio = Cost of goods sold / Average inventory

Average inventory = $42,000+42,400 / 2 = $42,200

Inventory turnover ratio = $278,400 / 42,200 = 6.597

Average sale period = 365 days / Inventory turnover ratio

Average sale period = 365 days / 6.597 = 55.33 days

1-4. Operating cycle = 55.33 days + 30.72 days = 86.05 days

1-5. Total asset turnover = Sales / Average total asset

Average total asset = $242,800+302,000 / 2 = $272,400

Total asset turnover = $480,000 / 272,400 = 1.76

1-6. Times interest earned ratio = Earnings before interest and tax / interest expense

Times interest earned ratio = $32,500 / 2,000 = 16.25

2. Debt to equity ratio = Total liabilities / Total stockholders equity

Debt to equity ratio = $92,000 / 210,000 = 0.44

3. Equity multiplier = Average total assets / Average total stockholders equity

Average total stockholders equity = $160,000+210,000 / 2 = $185,000

Equity multiplier = $272,400 / 185,000 = 1.47