Question

Sprague Company has been operating for several years, and on December 31, 2017, presented the following balance sheet. SPRAGUE COMPANY BALANCE SHEET DECEMBER 31, 2017 Cash $40,000 Accounts payable $80,000 Receivables 75,000 Mortgage payable 140,000 Inventory 95,000 Common stock ($1 par) 150,000 Plant assets (net) 220,000 Retained earnings 60,000 $430,000 $430,000 The net income for 2017 was $25,000. Assume that total assets are the same in 2016 and 2017. Compute each of the following ratios. (Round answers to 2 decimal places, e.g. 1.59 or 45.87%.) (a) Current ratio (b) Acid-test ratio (c) Debt to assets ratio % (d) Return on assets %

Answer 1

Current ratio=0.93

Acid-Test Ratio = 0.52

Debt to assets ratio= 1

ROA=0.06

Step-by-step explanation:

Data

Cash $40,000

Receivables 75,000

Inventory 95,000

Plant assets (net) 220,000

Total: $430,000

Accounts payable $80,000

Mortgage payable 140,000

stock ($1 par) 150,000

Retained earnings 60,000

Total: $430,000

(a) Current ratio

Current ratio=current assets/current liabilities:

current assets=Cash+Accounts Receivables+Inventory

current liabilities=Accounts payable+stock

Current ratio=($40,000 + $80,000+95,000)/($80,000+150,000 )

Current ratio=215000/230000

Current ratio=0.93

(b) Acid-test ratio

This ratio compares the short-term assets to its short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt.

Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities.

Acid-Test Ratio = (215000 – 95000) / 230000

Acid-Test Ratio = 120000 / 230000

Acid-Test Ratio = 120000 / 230000

Acid-Test Ratio = 0.52

(c) Debt to assets ratio %

Debt to assets ratio= Debts/ Assets=430000/430000

Debt to assets ratio= 1

(d) Return on assets % is calculated by dividing net income by average total assets

Return on assets (ROA)= net income/ total assets

ROA=$25,000/$430,000=

ROA=0.06