Case 5-23

Net income 16000

Short term note 5000

Bonds interest rate 0.08

Cash balance 15000

Profit margin on sales 0.05

Return on assets 0.075

Gross profit margin 0.4

Inventory turnover ratio 6

Receivables turnover ratio 25

Acid test ratio 0.9

Current ratio 2

Return on shareholders equity 0.1

Debt to equity ratio 0.33

Times interest earned 12

Integrating Case 5-23

Balance Sheet

Assets

     Cash                                                          $ 15,000
     Accounts receivable (net)                                            (e)
     Inventory                                                                     (d)
     Prepaid expenses and other current assets                  (i)
     Current assets                                                               (h)
     Property, plant, and equipment (net)                          (j)
                                                                                    $   (b)
        Liabilities and Shareholders’ Equity
     Accounts payable                                                $    (g)
     Short-term notes                                             5,000
     Current liabilities                                                          (f)
     Bonds payable                                                            (l)
     Shareholders’ equity                                                   (k)
                                                                                    $   (b)

Income Statement

     Sales                                                                             (a)
     Cost of goods sold                                                       (c)
        Gross profit                                                               (c)
     Operating expenses                                                      (o)
     Interest expense                                                            (m)
     Tax expense                                                                 (n)
        Net income                                                                                                     $

Case 5-23 (concluded)

Calculations ($ in 000s):

a. Profit margin on sales = Net income ÷ Sales = 5%

For example:

Net income = 17000

17000/X = .05

Cross multiply

17000

_____ =.05

17000 = .05X

Divide both sides by .05

X = 17000/.05

X = 340,000

b. Return on assets = Net income ÷ Total assets = 7.5%

For example:

Net income = 17000

17000/X = .075

Cross multiply

17000 = .075X

Divide both sides by .075

X = 17000/.075

X = 226,666

c. Gross profit margin = Gross profit ÷ Sales = 40%
Cost of goods sold = Sales – Gross profit =

d. Inventory turnover ratio = Cost of goods sold ÷ Inventory = 6

e. Receivables turnover ratio = Sales ÷ Accounts receivable = 25

f. Acid-test ratio = Cash + AR + ST Investments ÷ Current liabilities = .9

g. Accounts payable = Current liabilities – Short-term notes = $

h. Current ratio = Currentassets ÷ Currentliabilities = 2

i. Prepaid expenses and other current assets =
Current assets – (Cash + AR + Inventory) = $

j. Property, plant, and equipment = Total assets – Current assets =

k. Return on shareholders’ equity = Net income ÷ Shareholders’ equity =10%

l. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity =
Bonds payable = Total liabilities – Current liabilities =

m. Interest expense = 8% x (Short-term notes + Bonds )
Interest expense =

n   Times interest earned ratio = (Net income + Interest +Taxes) ÷ Interest = 12
Times interest earned ratio =
Times interest earned ratio =
Tax expense = $

o. Operating expenses = (Sales – Cost of goods sold – Interest expense – Tax expense) – Net income =

10 years ago

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Case 5-23

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