Required: Calculate the following ratios for 2016. The 2015 results are given fo

Question

Required: Calculate the following ratios for 2016. The 2015 results are given for comparative purposes. Round answers to one (1) decimal place. Use 365 days in a year.

2015 2016 Sales Revenue $920,000 $840,000 Cost of Goods Sold 575,000 545,000 Interest Expense 20,000 20,000 Income Tax Expense 27,000 30,000 Net Income 61,000 52,000 Cash Flow from Operations 65,000 55,000 Capital Expenditures 65,000 55,000 Acc Receivable (net) 31 Dec 126,000 120,000 Inventory 31 Dec 196,000 160,000 Stockholders' Equity 31 Dec 450,000 400,000 Total Assets 31 Dec 750,000 675,000

Explanation / Answer

Calculation of ratios for 2016

a) Accounts Receivable Turnover = Sales Revenue/Average Accounts Receivables

Average Accounts Receivable = (Opening Accts Receivable+Closing Accts. Receivable)/2

= ($126,000+$120,000)/2 = $123,000

Accounts Receivable Turnover = $840,000/$123,000 = 6.8

b) Average collection period = 365 days/Accounts Receivable Turnover

= 365 days/6.8 = 53.7 days

c) Inventory Turnover = Cost of goods sold/Average Inventory

Average Inventory = (Opening Inventory+Closing Inventory)/2

= ($196,000+$160,000)/2 = $178,000

Inventory Turnover = $545,000/$178,000 = 3.06

d) Times-interest-earned Ratio = Earning Before Interest and tax/Interest Expense

Earning before interest and tax = Net income+Interest Expense+Income tax expense

= $52,000+20,000+30,000 = $102,000

Interest Expense = $20,000

Times-interest-earned Ratio = $102,000/$20,000 = 5.10

e) Operating-cash-flow-to-capital-expenditures Ratio = Cash flow from operations/Capital expenditures

= $55,000/$55,000 = 1.0

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