Question

The condensed financial statements of Marks Company for the years 2017-2018 are presented below: Marks Company Comparative Balance Sheets As of December 31, 2017 and 2018 2018 2017 Cash $404,000 $155,000 Accounts receivable (net) 356,000 300,000 Inventories 375,000 339,000 Plant and equipment 1,830,000 1,121,000 Accumulated depreciation (260,000 ) (193,000 ) $2,705,000 $1,722,000 Accounts payable $339,000 $164,000 Dividends payable -0- 45,000 Bonds payable 405,000 -0- Common stock ($10 par) 1,521,000 1,230,000 Retained earnings 440,000 283,000 $2,705,000 $1,722,000 Additional data: Market value of stock at 12/31/18 is $80 per share. Marks sold 30,000 shares of common stock at par on July 1, 2018. Marks Company Condensed Income Statement For the Year Ended December 31, 2018 Sales revenue $2,420,000 Cost of goods sold 1,642,000 Gross profit 778,000 Administrative and selling expenses 500,000 Net income $278,000 Compute the following financial ratios by placing the proper amounts for numerators and denominators. (Round per unit answers to 2 decimal places, e.g. 52.75.) (a) Current ratio at 12/31/18 $ $ (b) Acid test ratio at 12/31/18 $ $ (c) Accounts receivable turnover in 2018 $ $ (d) Inventory turnover in 2018 $ $ (e) Profit margin on sales in 2018 $ $ (f) Earnings per share in 2018 $ (g) Return on common stock holders’ equity in 2018 $ $ (h) Price earnings ratio at 12/31/18 $ $ (i) Debt to assets at 12/31/18 $ $ (j) Book value per share at 12/31/18

Answer 1

Marks Company

Computation of Financial Ratios:

(a) Current ratio at 12/31/18 = Current Assets/Current Liabilities = $1,1350,000/$339,000 = 3.35

(b) Acid test ratio at 12/31/18 = (Current Assets - Inventory)/Current Liabilities = $760,000/$339,000 = 2.24

(c) Accounts receivable turnover in 2018 = Net Credit Sales/Average Accounts Receivable = $2,420,000/$328,000 = 7.37 times

(d) Inventory turnover in 2018 = Sales/Average Inventory = $2,420,000/$357,000 = 6.77 times or every 54 days.

(e) Profit margin on sales in 2018:

i) Gross Profit Margin = Gross Profit/Sales x 100 = $778,000/$2,420,000 x 100 = 32%

ii) Net Profit Margin = Net Income/Sales x 100 = $278,000/$2,420,000 x 100 = 11.49%

(f) Earnings per share in 2018 = Earnings or Net Income divided by outstanding number of shares = $278,000/152,100 = $1.82

(g) Return on common stockholders’ equity in 2018 = Net Income divided by Common Equity = $278,000/$1,961,000 x 100 = 14.18%

(h) Price earnings ratio at 12/31/18 = Market price per share divided by earnings per share = $80/$1.82 = $43.95

(i) Debt to assets at 12/31/18 = Total Debts/Total Assets = $744,000/$2,705,000 x 100 = 27%

(j) Book value per share at 12/31/18 = Shareholders' Equity divided by number of outstanding shares = $1,961,00/152,100 = $12.89

Step-by-step explanation:

a) Current Ratio = Current Assets/Current Liabilities

Current Assets for 2018:

Cash $404,000

Accounts Receivable $356,000

Inventories $375,000

Total = $1,135,000

Current Liabilities for 2018:

Accounts Payable $339,000

Dividends Payable $0

Total = $339,000

This liquidity ratio measures the entity's ability to pay off its current obligations with its liquid assets. Current assets are assets that can easily be turned to cash within the calendar year.

b) Acid Test Ratio is also a liquidity ratio that evaluates an entity's ability to pay off its current obligations with current assets when inventory is excluded. Inventory is not regarded as very liquid, especially given the longer time it may take to turn it over to cash.

c) Accounts Receivable Turnover measures the effectiveness of the company to collect its receivables resulting from the credit sales. It shows how sales on credit are managed by evaluating the credit policy, collection process, and customers' creditworthiness. In quantitative terms, it measures how many times receivables are converted to cash in a period.

d) Inventory Turnover measures the number of times average inventory was turned over to sales within a period. The average inventory is the beginning and ending inventories divided by 2. It is very useful in inventory decisions, especially pricing, production or purchase, etc.

e) Profit margin on sales is the gross profit or net income expressed as a percentage of sales. The Gross profit margin measures the ability of management to create profit from its sales revenue when compared with the costs of sales. The net profit margin measures the ability of the management to create value for the stockholders after deducting all expenses for running the business.

f) Earnings per share: This is a profitability ratio that compares the net income to the number of outstanding shares.

g) Return on common stockholders’ equity: This ratio measures the company's ability to generate returns for common stockholders. It is measured as net income for common equity divided by the common stockholders' equity.

h) Price earnings ratio: This ratio expresses the dollar amount which an investor can invest in a company in order to earn a dollar income. It is used to value investment in a company.

i) Debts to Assets: This is a financial leverage ratio that tells the percentage of assets or a company's resources that is financed by creditors.

j) Book value per share: This is a market value measure that shows the value of net assets (equity) divided by the outstanding shares. It is not the same as the market value per share, which reflects investors sentiments. The book value per share compares the book value of equity with the number of shares. It is used by investors to gauge if a stock is undervalued or not.