Year 2 Year 1 Current assets: Cash and marketable securities Accounts receivable

Question

Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders' equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in
capital common stock
Retained earnings
Total stockholders' equity
Total liabilities &
stockholders' equity
$100
60
90
250


480
730

120
180

240
840
1,380

$2,110
$130
60
120
310


500
810

120
180

240
660
1,200

$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315






Larkins Company's return on total assets for Year 2 was closest to

A. 16.0%.

B. 15.3%.

C. 13.6%.

D. 17.0%.

Explanation / Answer

Price earning ratio on December 31, Year 2 was : C. 8.57 Working: Price Earning Ratio = Market price of the share / Earning per share Earning per share = Total income / No of shares Number of shares = Common stock / Each one cost = 180000 /10 = 18000 Net income = $315,000 Earning per share = 315000 / 18000 = $17.5 Market Price of Share = $150 Price Earning Ratio = 150 / 17.5 = 8.57 Price Earning Ratio = Market price of the share / Earning per share Earning per share = Total income / No of shares Number of shares = Common stock / Each one cost = 180000 /10 = 18000 Net income = $315,000 Earning per share = 315000 / 18000 = $17.5 Market Price of Share = $150 Price Earning Ratio = 150 / 17.5 = 8.57
Thank you.... Price Earning Ratio = Market price of the share / Earning per share Earning per share = Total income / No of shares Number of shares = Common stock / Each one cost = 180000 /10 = 18000 Net income = $315,000 Earning per share = 315000 / 18000 = $17.5 Market Price of Share = $150 Price Earning Ratio = 150 / 17.5 = 8.57

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