The financial statements of Dobson Company is attached. Additional information:

Question

The financial statements of Dobson Company is attached.

Additional information:

a. Cash dividends of $9,000 were declared and paid in 2016.

b. Weighted-average number of shares of common stock outstanding during 2016 was 30,000 shares.

c. Market value of common stock on December 31, 2016, was $21 per share.

Instructions Using the financial statements and additional information, compute the following ratios for Dobson Company for 2016.

Show all computations. Computations

1. Current ratio _________.

2. Return on common stockholders' equity _________.

3. Price-earnings ratio _________.

4. Acid-test ratio _________.

5. Receivables turnover _________.

6. Times interest earned _________.

7. Profit margin _________.

8. Days in inventory _________.

9. Payout ratio _________.

10. Return on assets _________.

DOBSON COMPANY Comparative Balance Sheet December 31 2015 Assets Cash Short-term investments Accounts receivable (net) Inventory Property, plant and equipment (net) 2016 15,000 50,000 50,000 250,000 $ 40,000 60,000 30,000 70,000 300,000 $500.000 Total assets Liabilities and stockholders' equit Accounts payable Short-term notes payable Bonds payable Common stock Retained earnings S10,000 30,000 90,000 160,000 145,000 75,000 40,000 88,000 160,000 102,000 Total liabilities and stockholders' equity DOBSON COMPANY Income Statement For the Year Ended December 31, 2016 Net sales Cost of goods sold Gross profit Expenses $360,000 198,000 162,000 Interest expense Selling expenses Administrative expenses $12,000 40,000 59,000 111,000 51,000 15,000 Total expenses Income before income taxes Income tax expense Net income Additional information a. Cash dividends of $9,000 were declared and paid in 2016 b. Weighted-average number of shares of common stock outstanding during 2016 was 30,000 shares Market value of common stock on December 31, 2016, was $21 per share c.

Explanation / Answer

(1) Current ratio (CR) = Current assets (CA) / Current liabilities (CL)

CA ($) = Total assets - Property/plant/equipment = 400,000 - 250,000 = 150,000

CL ($) = Accounts payable + Short term notes payable = 10,000 + 40,000 = 50,000

CR = CA / CL = 150,000 / 50,000 = 3

(2) Return on equity = Net income / Average value of(Common stock + Retained earnings)

= $36,000 / $[(160,000 + 102,000) + (145,000 + 75,000)] / 2

= 36,000 / (482,000 / 2) = 36,000 / 241,000

= 0.1494 = 14.94%

(3) Price/earnings ratio (P/E) = Share price / (Net income / Average shares outstanding)

= $21 / ($36,000 / 30,000) = 21 / 1.2

= 17.5

(4) Acid test ratio = (CA - Inventory) / CL

= $(150,000 - 50,000) / $50,000 = 100,000 / 50,000 = 2

(5) Receivables turnover = Sales / Average accounts receivables

= $360,000 / $[(50,000 + 30,000) / 2] = $360,000 / ($80,000 / 2) = 360,000 / 40,000

= 9

(6) Times interest earned = (Income before income tax + Interest expense) / Interest expense

= $(51,000 + 12,000) / $12,000 = $63,000 / $12,000 = 5.25

(7) Profit margin = Net income / Sales = $36,000 / $360,000 = 0.1 = 10%

(8) Days in inventory = 365 x Average inventory / Cost of goods sold

= 365 x $[(50,000 + 70,000) / 2] / $198,000 = 365 x $60,000 / $198,000 = 110.61 days

(9) Payout ratio = Dividend paid / Net income = $9,000 / $36,000 = 0.25 = 25%

(10) Return on assets = Net income / Average total Assets

= $36,000 / [$(400,000 + 500,000) / 2] = $36,000 / $450,000 = 0.08 = 8%

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