50. Using the financial statements below calculate each of the following ratios

Question

50. Using the financial statements below calculate each of the following ratios and briefly describe what the results of each indicate.

         

          (a.) Return on Investment

          (b.) Quick Ratio

          (c.) Debt to Equity Ratio

          (d.) Return on Owners' Equity

           (e.) Accounts Receivable Turnover

(f.) Inventory Turnover

Banner Corporation Balance Sheet December 31, 2008 Current Asset Cash Accounts Receivable Inventory Total Current Assets urrent Liabilities $ 20,000 Accounts Payable 100,000 Wages Payable 300,000 Total Current Liabilities 340,000 $420,000 $140,000 Long-Term Liabilities Long Term Notes Payable $1,000,00 0 $1,340,00 0 Property, Plant & Equipment Land $300,000 Total Liabilities Buildings Equipment Total Property Plant & 800,000 Owners' Equity $1190000 Total Liabilities and $1,610,000 Equipment Total Assets Owners' Equity $1,610,00 Total Assets 12/31/07 Total Owners' Equity 12/31/07 1,400,000 $250,000 Accts Pay 12/31/07 $75,000 $100,000 Accts Rec 12/31/07 Banner Corporation Income Statement For the year ended Dec 31, 2008 $4,200,00 Sales Cost of Goods Sold Gross Margin Operating Expenses Operating Income Tax Expense Net Income $2,400,00 600,000 420,000

Explanation / Answer

(a) Profit before Interest & Tax = Net Income + Tax Expenses

= 420000+180000 = 600000

Capital Employed = Owner's Equity + Long Term Liability

= 270000+1000000 = 1270000

Return on Investments = Income before Interest & Tax * 100 / Capital Employed = 600000*100/270000 = 47.24%

This percentage indicate that firm has enough profit to pay out it's finance cost & tax liability

(b) Current Assets = Cash + Accounts Receivables + Inventories

= 20000+100000+300000 = 420000

Quick Assets = Current Assets-Inventories

= 420000-300000 = 120000

Current Liabilities = Accounts Payable + Wages Payable

= 140000+200000 = 340000

Quick Ratio = Quick Assets / Current Liablities

= 0.35:1

The Ratio is less liquidate as it shows the poor capability to pay it's short term obligations

(c) Long Term Debts = Long Term Notes Payable = 1000000

Equity = Owner's Equity = 270000

Debt to Equity Ratio = Long Term Debts / Equity

= 1000000 / 270000 = 3.7:1

This ratio indicate the risk which may put the firm into difficulty in meeting it's obligations to outsider's as it's long term liability is higher than it's equity

(d) Net Income After Tax = 420000

Shareholder's Fund = Owner's Equity

= 270000

Return on Owner's equity = Net Income after Tax * 100 / Owner's Equity

= 420000 * 100 / 270000

= 156%

Net Income is considered good as it's a good sign of return on capital invested by the owner

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