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Week Five Exercise Assignment WITH DQ ASHFORD THIS IS FOR MARTIN
Question Detail:

Week Five Exercise Assignment

Financial Ratios

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

 Edison Stagg Thornton Cash \$6,000 \$5,000 \$4,000 Short-term investments 3,000 2,500 2,000 Accounts receivable 2,000 2,500 3,000 Inventory 1,000 2,500 4,000 Prepaid expenses 800 800 800 Accounts payable 200 200 200 Notes payable: short-term 3,100 3,100 3,100 Accrued payables 300 300 300 Long-term liabilities 3,800 3,800 3,800

a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid Why?

 2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc: 20X5 20X4 Net credit sales \$832,000 \$760,000 Cost of goods sold 530,000 400,000 Cash, Dec. 31 125,000 110,000 Average Accounts receivable 205,000 156,000 Average Inventory 70,000 50,000 Accounts payable, Dec. 31 115,000 108,000 Instructions a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:

 Net sales \$1,750,000 Interest expense 120,000 Income tax expense 80,000 Preferred dividends 25,000 Net income 130,000 Average assets 1,200,000 Average common stockholders’ equity 500,000

a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.

b. Does the firm have positive or negative financial leverage Briefly explain.

 4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. 20X2 20X1 Current Assets \$86,000 \$80,000 Property, Plant, and Equipment (net) 99,000 90,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 153,000 160,000 Stockholders Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 322,500 350,000 Operating Expenses 93,500 85,000 a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 20X2 20X1 Current Assets \$86,000 \$80,000 Property, Plant, and Equipment (net) 99,000 80,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 153,000 150,000 Stockholders Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 322,500 350,000 Operating Expenses 93,500 85,000

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

 6. Ratio computation. The financial statements of the Lone Pine Company follow. LONE PINE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1 (\$000 Omitted) 20X2 20X1 Assets Current Assets Cash and Short-Term Investments \$400 \$600 Accounts Receivable (net) 3,000 2,400 Inventories 3,000 2,300 Total Current Assets \$6,400 \$5,300 Property, Plant, and Equipment Land \$1,700 \$500 Buildings and Equipment (net) 1,500 1,000 Total Property, Plant, and Equipment \$3,200 \$1,500 Total Assets \$9,600 \$6,800 Liabilities and Stockholders Equity Current Liabilities Accounts Payable \$2,800 \$1,700 Notes Payable 1,100 1,900 Total Current Liabilities \$3,900 \$3,600 Long-Term Liabilities Bonds Payable 4,100 2,100 Total Liabilities \$8,000 \$5,700 Stockholders Equity Common Stock \$200 \$200 Retained Earnings 1,400 900 Total Stockholders Equity \$1,600 \$1,100 Total Liabilities and Stockholders Equity \$9,600 \$6,800 LONE PINE COMPANY Statement of Income and Retained Earnings For the Year Ending December 31,20X2 (\$000 Omitted) Net Sales* \$36,000 Less: Cost of Goods Sold \$20,000 Selling Expense 6,000 Administrative Expense 4,000 Interest Expense 400 Income Tax Expense 2,000 32,400 Net Income \$3,600 Retained Earnings, Jan. 1 900 Ending Retained Earnings \$4,500 Cash Dividends Declared and Paid 3,100 Retained Earnings, Dec. 31 \$1,400 *All sales are on account.

Instructions

Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:

a. Quick ratio

b. Current ratio

c. Inventory-turnover ratio

d. Accounts-receivable-turnover ratio

e. Return-on-assets ratio

f. Net-profit-margin ratio

g. Return-on-common-stockholders equity

h. Debt-to-total assets

i. Number of times that interest is earned

DQ’S

1. Ratios

Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story How could liquidity ratios be used by investors to determine whether or not to invest in a company

Guided Response:
Let at least two of your peers know how debt service ratios can be used by a lender in determining whether or not to lend money to a company.

2. Profit Margin
 Year Ending December 2012 Year Ending December 2011 Year Ending December 2010 Revenues 40,000 35,000 33,000 Operating Expenses Salaries 15,000 10,000 9,000 Maintenance and Repairs 6,000 9,000 10,000 Rental Expense 2,500 2,500 2,500 Depreciation 2,000 2,000 2,000 Fuel 4,000 3,500 2,500 Total Operating Expenses 29,500 27,000 26,000 Operating Income 10,500 8,000 7,000 Sales and Administrative Expenses 6,000 4,000 3,000 Interest Expense 2,500 2,000 1,000 Net Income 2,000 2,000 3,000

Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend.